How to Prepare Your Startup for Exit (Even If You’re Not Ready to Sell Yet)

It’s never too early to start thinking about your exit strategy. Whether you’re planning to sell your company in the next few weeks, months, or years, preparing for an exit now can help you maximize your startup’s value and position it for future success.

Does this mean you need to look for buyers from day one? No. But preparing for an exit years ahead can make your company more attractive to buyers or investors and ensure a smooth transition when you want to sell. Here’s how to lay the groundwork for a future exit.

1. Keep it Lean

A lean company minimizes waste, excess inventory, and unnecessary expenses – it’s all about keeping your expenses low and revenue high. While spending money is important to your startup’s survival, inefficient spending and overspending can kill it. 

The Benefits of Keeping Your Startup Lean for a Future Exit

• Increased profit margins: If you run a lean business, your profit margins are higher, which makes you more attractive to buyers and investors.
• Better valuation: Buyers often value lean companies using a higher multiple because they can generate higher returns.  
• More flexibility: Lean companies have more cash on hand, which buyers can use to invest in growth, expand into new markets or industries, or pivot the business model. 
• Lower risk: A lean company can weather economic downturns or market fluctuations due to higher cash flow. And buyers are willing to pay a premium for a low-risk company.

The most straightforward strategy for building a lean company is to bootstrap, where you grow without outside funding (such as venture capital). Bootstrapping forces you to focus on building a sustainable business model and generating early revenue with limited funds. You also maintain control of your company and avoid diluting your equity early on, leaving more in your pocket when it’s time to sell. 

For example, when Acquire.com’s founder Andrew Gazdecki started Bizness Apps in 2010, he started thinking about his exit immediately. He knew that bootstrapping Bizness Apps would allow him to accept any offer he wanted at any time. 

“As soon as you touch venture capital, you’re committing to climbing a much higher mountain and having to sell your company at a much higher price – making it less likely to happen. That’s because the larger the asset you build, the smaller the buyer pool,” Andrew says.

In other words, the more money your startup raises, the larger its exit must be to provide satisfactory returns. Eight years after launching Bizness Apps, Andrew sold his company for a life-changing (eight-figure) price. 

While not every startup can bootstrap, every founder can benefit from a bootstrapping mindset. On average, it takes a startup between three and four years to become profitable, so keeping your company lean can reduce your cash burn rate to reach profitability faster. And a healthy balance sheet could result in some attractive acquisition offers later.

2. Hire a Strong Management Team

Without the right people at the top, you’ll struggle to get your business off the ground. Your startup’s management team is one of its most important assets, especially since 60 percent of new ventures fail due to problems with the team. Plus, potential buyers will be interested in your team’s ability to lead the company and continue driving growth after your exit – if they decide to stay on, that is.

A good management team brings expertise, experience, and strong leadership skills. It can help  you navigate complex challenges and identify new opportunities for growth such as executing your business strategy, building a scalable product, and attracting top talent. Technical, operational, marketing, and sales skills are all essential for your startup’s success.

Where do you even start to grow your lean, mean startup team? Once you’ve found product-market fit, you’ll likely need to hire these specialists: 

• A Chief Operating Officer (COO) coordinates your business. If your startup is rapidly growing, you’ll need someone to manage your resources and operations effectively. 
• A Chief Financial Officer (CFO) tracks your company’s income, expenses, and taxes. If you want to sell your business later on, you need someone to keep an eye on the books. 
• A Chief Technical Officer (CTO) brings deep technical knowledge and expertise, overseeing your product and ensuring devs work to realistic timelines and roadmaps. 
• A Human Resource Manager helps you build a strong, engaged, and productive workforce while complying with employment laws and regulations. This role can also create a positive company culture that attracts and retains top talent.
• A Sales Manager helps you develop a strong sales strategy, generate new leads, improve your sales process, and manage your sales team effectively, all of which contribute directly to the success of your startup.
• A Marketing Manager helps your startup establish and grow its brand, identify and reach its target audience, and measure the effectiveness of your marketing efforts.

But finding the right people to build your management team is easier said than done. Seventy-six percent of hiring managers admit that attracting the right candidates is their greatest challenge. To recruit and retain top talent, consider the following tips:

1. Develop a strong company culture: A strong company culture can help attract and retain top talent. Create a positive work environment, offer competitive compensation and benefits (once budget permits), and provide opportunities for professional growth.
2. Network: Build relationships with top performers in your industry and network with potential candidates to identify and recruit talent.
3. Provide training: Invest in training and development programs to help your management team enhance their skills and stay up-to-date with the latest industry trends.
4. Offer equity: Offer equity or stock options to top talent to incentivize them to stay with your startup and work towards its success.

Hiring a capable management team helps increase your valuation when it’s time to exit – even if it doesn’t stay on after the acquisition. Why? If your startup has a capable team at its helm, it’s more likely to run efficiently and have established a positive and solution-led culture.

Your management team can also provide tons of value during the acquisition process. For example, they could provide useful insights into your company’s operations and help the buyer with the integration process. Overall, a well-managed company can command a higher price or better terms in an acquisition.

3. Build a Scalable Startup 

A scalable business model is essential if you’re looking to achieve long-term success and a profitable exit. By focusing on scalability, you can increase your company’s valuation, attract investors, and maintain a competitive advantage in the market. 

However, 70 percent of startups fail due to scaling too quickly. According to Startup Genome, “Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves. Startups can prematurely scale their team, their customer acquisition strategies or overbuild the product.”

Building a scalable startup requires careful planning and execution to avoid these pitfalls. But with a scalable business model and repeatable processes, growth of your business can skyrocket (even after you exit the company). 

Use a Scalable Business Model

Scalable business models help companies quickly grow their revenue and profits without adding commensurate costs. Higher margins and profitability attract potential buyers. 

Some of the most scalable business models include:

1. Software as a Service (SaaS): The SaaS business model allows you to deliver software applications online through a subscription-based service. SaaS companies can scale easily, accommodating more users without significant infrastructure changes or additional costs. 
2. Marketplace: A marketplace business model connects buyers and sellers in a centralized platform. Marketplaces can scale easily by leveraging network effects, meaning the more buyers and sellers that use the marketplace, the more valuable the platform becomes to each user.
3. Ecommerce: Ecommerce businesses sell products or services online, eliminating the need for expensive and physical stores. By automating their supply chain, ecommerce businesses can quickly scale their infrastructure and easily handle increased traffic and sales.

Create and Document Repeatable Processes

Developing easily replicable systems and procedures can also help you scale. Bottlenecks are common when onboarding large cohorts of customers unless you’ve systemized your operations and deployed technology and documentation to assist your teams. 

Ensure repeatable processes are in place for everything from onboarding new employees and providing customer support to reporting on your finances. Once you’ve pinpointed which internal procedures are crucial to scaling your business, document them to maintain consistency. 

Follow these steps to set up your company’s repeatable processes: 

1. Identify the key steps: Start by analyzing the process and how to complete it. Break it into smaller, manageable chunks that are easy to understand and follow.
   
   Let’s say you’re a SaaS company that wants to establish a consistent process for code reviews. You can break down the process into steps, such as identifying the appropriate reviewer, scheduling a review, preparing the code for review, conducting the review, and following up on any issues that were identified.

2. Create clear and concise instructions: After identifying the key phases in the process, create step-by-step instructions that clearly explain how to perform each task. Use simple language and avoid technical jargon that may confuse employees (and potential buyers) unfamiliar with the process.
   
   Using the example above, you might create instructions for each of the steps, such as: “To identify the appropriate reviewer, consult the project manager or lead developer to determine who has the relevant expertise.” 

3. Provide examples and templates: If possible, provide examples and templates to help employees understand how to perform the task more effectively. Use screenshots, videos, and other visual aids to help illustrate the process.
   
   For the code review process, you could provide templates for documenting issues and providing feedback. To help employees understand how to perform code reviews more effectively, you might share examples of past code that was well-written and reviewed.

4. Keep the documentation up-to-date: Regularly review your documentation to ensure it reflects the current state of your business. That way you know employees are following the most recent and effective procedures.

5. Store the documentation in a centralized location: Ensure the documentation is easily accessible to all employees who need it. Store it in a centralized location, such as a shared drive, and ensure everyone knows where to find it.

By following these steps, your company can create a set of standardized processes that employees can easily repeat. This will improve efficiency, reduce errors, and optimize operations, making it easier for your company to achieve scale. When buyers see how your company can continue scaling post-purchase, it’ll look more attractive than ever. 

4. Get Your Finances Under Control

When you start a business, it’s normal to focus on the exciting parts like developing the product, coming up with cool marketing campaigns, and getting your first customers. However, it’s easy to neglect accounting, taxes, and budgeting in all that chaos. For a while, you might get away with putting off these financial tasks. But ultimately, it can cost you in the long run.

For example, if you don’t keep track of your company’s expenses and revenues, you can’t accurately project its cash flow, which can lead to serious financial problems. Eighty-two percent of startups fail due to cash flow problems. 

Similarly, if you ignore your tax obligations, your company may incur penalties and fines that can add up quickly.

Setting up financial processes, including the ones below, can help you manage your cash flow effectively and avoid financial crises: 

• Financial reporting: Develop processes for preparing and distributing financial statements and reports, including balance sheets, income statements, and cash flow statements.
• Accounts payable and receivable: Set up processes for managing accounts payable and receivable, including invoicing, payment processing, and collections.
• Budgeting and forecasting: Establish processes for developing and monitoring budgets and forecasts to ensure your startup is on track to achieve its financial goals.
• Cash management: Implement processes for managing cash flow, including monitoring cash inflows and outflows, managing working capital, and optimizing cash reserves.

The first step in establishing a robust financial infrastructure is to keep accurate and up-to-date records – of everything! Maintain a well-organized system for bookkeeping, financial reporting, and tax compliance. Clear and detailed financial records help you make informed decisions about your future.

Tips to Build a Strong Financial Infrastructure

1. Develop a financial plan: Start by developing a financial plan that outlines your startup’s financial goals, forecasts, and budgets. Use the plan as a roadmap for managing your finances and helping you decide how to allocate resources.
2. Use accounting software: Using accounting software to manage your finances will help you automate tasks, reduce errors, and provide real-time insights into your company’s financial performance.
3. Implement financial controls: Financial controls such as segregation of duties, regular audits, and clear financial policies ensure your finances are properly managed and prevent fraud.  
4. Maintain accurate records: Keep accurate, up-to-date financial records. This will make it easier to track your financial performance, put together financial statements, and prepare your financials to sell your business. 
5. Seek professional advice: Consider seeking professional advice from a financial advisor or accountant to help you establish and maintain solid financial processes. They can offer insights into best practices, help you stay up-to-date with regulations, and guide financial planning and forecasting.

Most importantly, identify any liabilities that could negatively impact your company’s value. For example, check that your tax liabilities are up-to-date and that your cap table (the ownership structure of your company, including who owns what percentage of equity) is free from any complicated structures. Also ensure that your outstanding debts are manageable and that you haven’t borrowed too much money.

If handling all these financial tasks scares you, hire a financial expert as soon as possible – or a CFO if it’s within your company’s budget. Even if you never want to sell your business, having your financial ducks in a row comes in handy when you want to fundraise, form a partnership, or spin off a subsidiary in the future. 

5. Build Connections And Relationships 

You understand the value of developing connections when starting and growing a startup, but have you considered cultivating relationships when selling your company? 

Prospective buyers are the most obvious relationship to build. By networking with potential buyers at industry events and conferences, you can put your startup on their radar and increase the likelihood that they will consider acquiring it later. Potential buyers can include competitors, strategic partners, and other companies in your industry.

However, relationship-building goes beyond potential acquirers. Consider the other players in the acquisition process – how can those connections benefit you? Some of those professionals include: 

• Lawyers and accountants: A good lawyer and accountant are crucial when selling your startup. These professionals can provide valuable advice and guidance throughout the acquisition process, so it’s important to have existing relationships with them.
• Venture capitalists and angel investors: If you’ve raised funding from venture capitalists or angel investors, it’s important to maintain relationships with them even after the funding round is over. These investors can often provide valuable introductions and advice when selling your startup.
• Industry experts and influencers: Building relationships with industry experts and influencers can help raise your startup’s profile and increase its visibility. If you operate in a crowded market, it can help you to stand out from the competition.

Nurture your relationships. For example, send out regular updates about your startup to keep potential buyers in the loop about your progress. 

When Andrew was running Bizness Apps, he sent email updates to potential buyers summarizing Bizness Apps’ growth every quarter. By the time he was ready to sell, he’d already built relationships with the right people.

Another example of the power of networking comes from Hosam Hassan, the founder of SupportOps. Hosam had an active voice in the LinkedIn community, offering advice and expertise for free when he first started his company. When the founder was ready to sell SupportOps, one of Hosam’s LinkedIn followers acquired it. 

Remember that networking shouldn’t just be about what you can get out of it, but also about what you can offer and how you can help others. A strong professional relationship is mutually beneficial. 

Have You Already Started Prepping Your Startup for an Exit?

By keeping your startup lean, building a strong management team, creating a scalable business,  getting your finances under control, and building connections, you can make your startup more attractive to future buyers. Start preparation early to maximize your return on investment and achieve a successful exit when the time is right. 

These strategies aren’t just beneficial when it comes to selling your company. They will also help you make informed decisions about resource allocation and growth opportunities, which can help you achieve your business goals. So, don’t wait until it’s too late – prepare your startup for exit right now.

To help, explore our blog articles on preparing your business for acquisition:

• How to Prepare Your Financials to Sell
• How to Increase The Value of Your Business 
• What You Must Do to Make Your Acquisition Go Smoothly
• Why Your Business Isn’t Selling

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The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.