Why startup founders should already have an exit plan before they start

Many entrepreneurs have big plans for launching their business, but too few think about an exit strategy before they start.

This is a fatal mistake. With 90% of startups doomed to failure, founders can’t afford to overlook this most important element to their company’s long-term viability.

An exit strategy not only helps founders and investors recoup the money they invested in the company, it also lays the foundation for the company’s future success. Without an endpoint in mind, founders will struggle to formulate a strategy clear enough to grow their business.

Smart founders know that all things must come to an end and plan for this opportunity by appointing the right people to take over when their knowledge and skills no longer serve the company they worked so hard for.

In the case of a buyout or acquisition, planning an exit means founders have time to get their finances in order, properly assess the value of the company, find the right buyer and negotiate the sale at the moment of their choice instead of the sale was forced upon them under less favorable circumstances.

Why are founders so reluctant to consider their exit plan?

It should come as no surprise that founders are notoriously reluctant to consider the terms of their exit from the startup they’ve struggled to get off the ground for so long. This is reported by UBS Investor Watch report48% of entrepreneurs who want to sell do not have an exit strategy, because they think the exit point is so far in the future that it is not even necessary to think about it.

Most worryingly, the UBS report points out that most business owners don’t have a full understanding of what happens when selling a business, with 75% of owners believing they can sell their business in a year or less on top of the 58% who have never had their company formally appraised.

Then there’s the perception that founders are less committed to the startup’s success as they plan their exit. Because it requires close collaboration with key stakeholders, including senior leadership, board members, and major investors, planning an exit strategy is often thrown into the “too difficult” basket, to the detriment of all involved.

Exit plans as a business strategy

It is clear that a company’s strategy is determined by the exit strategy chosen by the founder. Takeovers can take years to materialise, just like with other exit plans. Only by considering a realistic exit plan can founders hope to establish a reasonable timeline for what they hope to achieve during their time at the helm of their startup.

Research shows that 20% of small businesses fail in the first year, 50% within five years, and about 60% within ten years. With such a varied timeline, planning an exit strategy also creates more stability and certainty for the company and gives it the best chance of survival.

Factors influencing how the startup is performed in the current time can further include:

Contrary to popular belief, creating an exit plan does not equate to a lack of commitment to the company’s success.

Planning for contingencies and establishing what kind of goals the founders want the company to achieve will imbue the startup with the ability to stick to the founder’s original vision. Exit planning also provides contingencies and milestones for the founder to phase themselves out of the startup and ensure it is led by designated personnel.

Making the company autonomous makes it attractive to investors and makes it more resilient. Founders must maintain processes that ensure the company can be run as smoothly as possible and delegate functions to those in the best position to perform them.

Whether preparing for an acquisition, an IPO, a management buyout, a family succession or a merger, key systems are essential to maintaining the company’s character and purpose.

If founders plan to be acquired from the start, they can spend time trying to stay attractive to companies at all times. On the other hand, founders who are focused on building a legacy may invest more time in permanently embedding the company’s culture, goals, and vision.

Success by planning backwards

In the interest of transparency and stability, it is critical that business owners have a plan for every possible eventuality.

Founders should ask themselves whether their exit strategy adequately reflects their goals and company values.

They should consider how their exit strategy will affect the short- and long-term future of their company. Finally, it doesn’t hurt to think about what sales amount the founder would like to walk away with when the time comes.

The bottom line is that it’s never too early or too late for founders to plan their exit strategy. While they may not be achieved on an exact timeline, milestones are an important indicator of progress that will serve founders well as they strive for maximum value within the company.

Only by understanding who can create the most value for the end user and engaging them at key moments can entrepreneurs help their startups reach their full potential.

  • Iain Salteri is the founder of KttiPay