What’s one reason new entrepreneurs should be considering their exit strategy at the beginning of their startup’s life?
The following answers are provided by members of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
1. You Won’t Waste Time and Effort
Pursuing a dream that’s infeasible into the ground wastes your valuable time, effort and money. With an exit strategy in place, you’ll recognize when the time comes to cut your losses and move on to your next stage or chapter in life. The longer you hold onto an unsuccessful business proposition, the further away you’ll be from what really works.
2. You Should Maintain Your Runway
Your initial business plan should always include a runway. If your business hasn’t taken off by the time you reach the end of the runway, you don’t keep driving. Knowing when to potentially call it quits will not only help you avoid massive debt, but will keep you aware of the cash flow and spending needed to maintain your firm’s success.
3. You Can Focus on Strong Fundamentals
By having an exit strategy in place early on in the process, you will build strong fundamentals for your business along the way. Having seen people building businesses “to sell,” they focus much more on making sure their financials are in order, accounting is competent and legal structure is correct. These things should always occur, but having the “exit” in mind supports it.
4. You Can Get the Best Possible Payoff
Every startup is a dream, and dreams can fail you sometimes. To face that heartbreak after years of sacrifice and struggle will only lead you deeper into the loss. Instead, a solid exit strategy lets you plan an early exit, so you can leave at the highest point of your value growth after meeting reasonable expectations.
5. You Can Influence Company Culture
Knowing when and how you want your company to exit from the concept stage will almost certainly drive the company’s culture. Your company’s culture directly influences major aspects of your business, such as who you hire and why, how you market, and how and where you spend.
6. You Can Gain Flexibility
As someone who has helped hundreds of entrepreneurs exit their business, I’ve seen first-hand how life can change your plans in a hurry. I’ve had entrepreneurs exit to pursue better business opportunities. I’ve also helped entrepreneurs who were faced with major life issues, like a loved one being terminally ill. The fact is, having an exit strategy from the beginning gives you real freedom.
7. You Will Be Prepared to Cut Your Losses and Move On
Let’s face it: Starting a new business is risky business. Not everything may go the way you originally envisioned. It’s a hard fact to face, but the sooner you prepare for it, the better you will fare should such a time come. By having a pre-planned exit strategy, you can cut your losses and move on. It’s better to have a life raft to get onto instead of going down with the ship.
8. You Can Better Understand Your Competition and Potential Buyers
If you’re planning on selling your company, it’s most likely to a competitor of yours that can benefit from the merger or acquisition. By learning who your competition is at the beginning of the startup’s life, you will already have an idea of who you’re not only competing against, but also understand who your potential buyers may be further down the road.
9. You Will Be Ready for a Buyout
To look the most attractive to potential buyers, you’ll want to have processes in place for a transition. It’s never too early to start thinking about how that will be done. Even from the earliest days of your startup, you should be thinking about how operations can be passed off and management structures shifted for a future change in leadership.
10. You Can Pitch to the Right Investors
Investors want to know what they will get out of the relationship, including when and how much return they will receive. Giving them this information requires that you plan your exit strategy in advance so you can include this information in pitches to investors. This way, you will more likely be matched with an investor who shares the same vision for timing and exit.
11. You Shouldn’t Focus on the End Game
Spend the time you would have spent creating an exit strategy creating an entrance strategy. Focus on growing your business and not on the eventual outcome if your startup succeeds. Want to get acquired? Build something worth acquiring. Want to sell out? Build something worth selling. Want to turn your startup into a lifestyle business? Build something worth doing for the rest of your life.
12. You Can Start Building Relationships Early
If you identify your most likely acquirers early on, you can start building relationships with the key decision-makers at those companies. The trust and familiarity that’s formed over the ensuing years will make an acquisition more likely to close if a strategic fit develops down the road. These relationships will also help you understand which acquirers will be good fits for your business.
13. You Need to Know Where You Are Headed
It’s like the Chesire Cat said, (though I am paraphrasing): If you don’t know where you are headed, how will you know where to go, and how to go about doing it? An exit strategy, no matter how vague, is the eye on the prize that can keep you level-headed during even the toughest times. Your team will feel that there is a plan at work.