Accounting Firm Tips: Why You Need an Exit Strategy for Your Startup

In the past few years, Nashville has cemented its status as a startup capital. The city’s startup ecosystem is ranked 63rd globally and 25th in the United States, with many startups engaged in the health, leisure, and marketing and sales industries.

If you’re building your own startup in Nashville, it’s important to work with an accounting firm you can rely on, not only to provide fundamental services, such as bookkeeping and payroll, but to give you expert guidance on planning and strategizing as well.

One of the things you need to work out with your CPA is your exit strategy. Here’s a look at this startup fundamental, why it’s important, and the options you can consider.

What is an exit strategy and why is it important?

An exit strategy is a road map that shows you and your investors when and how they can “exit” your business or withdraw all or part of their investment along with any profits that may have been gained. If you’re trying to attract investors to your venture, you will need to present your exit strategy to foster their confidence.

As such, an exit strategy is also important in setting directions for your venture. It sets a timeline and benchmarks or KPIs (key performance indicators), which serve as shorter term goals that should propel you forward.

An exit strategy is also useful in planning how you can protect your and your investors’ assets in case your venture fails to take off or you find the financial uncertainty to be too much to handle. It also helps you to prepare for unfavorable eventualities, such as a major financial crash or market fluctuations.

What are your exit strategy options?

The most common exit strategies for startups are the following:

1. Merger and acquisition

Through a merger of equals, startups are able to align their businesses and achieve a larger share of the market. An acquisition between a larger and a smaller company allows both businesses to benefit from each other’s strengths. For example, a small company can get access to a bigger company’s technical infrastructure, while the larger company can acquire the smaller business’s products that complement theirs.

2. Initial Public Offering (IPO)

Startups can attract investors with IPO plans. When a small business achieves sufficient success, it may opt to go public and sell shares of stock to a wider range of investors. This often means a large infusion of capital, which gives investors confidence about the business’s future profitability.

3. Liquidation

Liquidation is the process of selling off the business’s assets when the owner feels it’s time to shut down the venture due to losses or other circumstances. This is not a recommended strategy, however, as it often implies distress, which could cost the company its brand name and reputation.

4. Selling the owner’s stakes

The business owner and investors may opt to sell all or part of their stakes on the venture for monetary considerations. The new owner then has the responsibility of scaling the business and managing its growth.

5. Management and employee buyouts

The business owner may sell equity to the company’s employees so they can have a larger share of the business before it is sold. The employees may also decide to keep the business going and manage it themselves, which can be a good move since they are already intimately familiar with it.

In planning your exit strategy, get guidance from your CPA. They will not only be around during the initial stages of your venture, but will also provide invaluable support in implementing your business plans.

Sources:

The Importance of the “Exit Strategy” for Startups, Hackquarters.co
How can startups “exit” and investors make money?, StartupExplore.com