What’s an exit plan and why do I need one for my startup?
When you board a plane to go on holiday, you’re probably thinking about your sunny destination, not where the plane’s emergency exit is.
Of course, it’s helpful to know where the emergency exits and safety features are, but they’re hardly at the forefront of your mind.
The same is often true for startups; when you found a brand-new company, you’re thinking about all the excitement yet to come, not your future exit. Although it’s much more fun to think about the fun stuff, it’s also important to plan for the future.
And that’s why every entrepreneur needs to be aware of exit plans and the necessity of having one for their startup. So, let’s take a look at the key things you need to know.
What is an exit plan?
Put simply, an exit strategy is a plan for how you will transfer ownership of your business to a third party. Founders and investors may need exit plans for a wide variety of reasons including the following:
- You plan to sell your company
- Your company is merging with another
- Another company is buying yours out
- Your company has experienced a major shift in control
Learn more about what's classed as an exit event.
Exiting doesn’t have to be inherently stressful or problematic but it can be if you neglect to plan in advance.
What do you need in an exit plan?
1. Measurable goals
Designing your exit strategy long before you ever need it is a great way to plan for success. And one of the best ways to guarantee that success is to set realistic, measurable goals well in advance.
What do you want to get out of a successful exit? What do you want for yourself or your employees? When you’re looking ahead at an exit that seems forever away, it’s easy to characterise that exit in vague, nebulous terms.
But pinning your goals down and outlining them in plain and simple English is one of the best and most helpful things you can do.
When crafting your exit strategy, it’s important to start with a sense of clarity. What do you want to happen when you transfer the ownership of your company? Are you primarily concerned with the profit or legacy?
When you exit and look back at everything you accomplished with your startup, what will indicate success to you? Be clear about your future goals and plan for the success you want to see.
3. Impact assessment
Many companies grow to take on a life of their own; they become the shared babies of their co-founders, their dedicated employees, and their investors. But sometimes a business is characterised by its founder.
In practice, this might mean that the company depends on its founder to navigate incredibly essential functions. Without them at the helm, the company’s value might plummet and the company itself could effectively cease to exist.
And if that’s the case with your startup, you need to be aware of that impact if you’re the founder. What happens to your company when you leave? Will it simply fall apart or morph into something else entirely?
What will your exit mean for your future? For your employees? For the future of your company? Is your team capable of running the business in your absence? Are they willing to do so? Identifying all these things in the early stages of your exit plan is crucial.
Is the value of your company likely to rise or fall at certain times or in response to transactional activity in your market? If this is the case, it may be worth tweaking your exit strategy accordingly so that you can leave sooner or later depending on the best outcome.
If you've set up (or plan to set up) a company share scheme, know that the future value of your business will affect the profit shareholders make if/when they sell their shares or exercise their options.
See how easy it could be to manage your share scheme!
Book a free discovery call today.
When that day comes depends on whether you've designed an exit-only or an exercisable agreement. See how other people set up their schemes.
Now's the time to prepare for the future
When your startup is in its infancy, you’re probably not looking ahead to the day that you will ultimately transfer ownership of your company and walk into the next chapter of your life.
And if that day comes sooner than you expect, you don't want to be blindsided by a reality you didn’t plan for. So, although it may seem like the least important thing on your mind right now, planning your future exit strategy is crucial.
Having a plan in place will save you from unexpected negative consequences and empower you to approach the future with confidence and clarity.