Not every entrepreneur starts a business has to plan or must exit but surely can be a great way to cash out. Here’s another of Inner Circle‘s Alejandro Cremades’ piece we are sharing on the network for our members. Let us know if you agree with this article and do share your opinion:
What options do entrepreneurs have to cash out of their startups?
Building a startup takes a lot of work and often a lot of sacrifice. It’s become far easier to launch new startups and small businesses today.
The big question many entrepreneurs wind up encountering then is how to cash out and recapture the value that has been created. This is something that I always ask guests of the DealMakers podcast where I interview some of the most successful entrepreneurs.
How Much Money You Need to Launch a Startup
Timing a profitable exit from a startup can relate to what you put into it. Not unlike a home that has gone up a lot in value, there can be a time when you want to withdraw some of that built up equity and make it a tangible and not just paper gain. Though everyone including the investors and early founders wants a good return on their investment.
The past few years of new technology developments and lean startup trends mean that it has become easier than ever to launch a new business idea. Inflation is always a factor, yet, with some great creativity, a healthy dose of resourcefulness, smart growth hacking and knowledge of fundraising, it doesn’t have to cost much to get started.
According to Business News Daily and the SBA it may only cost around $3,000 to start a micro business, and $2,000 to $5,000 for the average home based franchise. Many of today’s biggest successes like Facebook were started for as little as $1,000. Of course, most entrepreneurs are going to find they need substantially more. Some may even need in excess of $400,000 if they are developing expensive hardware. Entrepreneur offers this free startup costs calculator to help get a little more clarity if you are still at this stage.
Don’t forget to factor your time investment too. You may be leaving a high paying salary job or putting in a lot of extra hours without pay to get this new venture going. Time is money. Assign a value to it.
Your options for cashing out as an entrepreneur are going to depend a lot on the traction of your business and your data. Some of the strategic options that lead to cashing out might also be expected by potential investors and something that founders could include as part of their pitch deck.
In this regard, below you will be able to find some of the strategies you could use to cash out as an entrepreneur.
Sell Off Your Assets
The WSJ’s guide to cashing out a small business highlights the option to simply sell off your assets. This may become the only option for some who find their business plans ran into a wall, they’ve just become tired and want to call it quits or are trying to exit in difficult economic times.
That can include selling off equipment, real estate, and even intellectual property assets, accounts receivable and contracts.
For a long time the traditional path to the big money from launching a startup business was to take it public with an IPO. Harvard Business Review points out that the conventional algorithm for this exit was that “ a company needs around $100 million of annualized revenue and a couple of consecutive profitable quarters.”
Of course, the tech era and recent string of big startups that have gone public while still losing massive amounts of money has changed those principles. At least temporarily. More and more investors and founders are also seeking alternative exits and strategies.
Sell the Company
An increasingly likely exit today is to be bought out and acquired by a larger company. This may be a part of their growth strategy to improve their own number, like Facebook has done with Instagram. Or it could be to another startup who is bundling multiple companies together for a larger acquisition. You may have the option to stay on as an executive or consultant to help ensure there is a smooth transition.
This can be a lengthy process which can take months and involve intensive due diligence.
Another alternative to the traditional sale is to sell the company to the employees, or to sell out your stake to your founding partners.
Another option is to sell some of your equity ownership to new investors in a subsequent round of equity financing at an agreed price. Some founders incentivize new investors to acquire their stock by giving a discount on their shares.
This option is becoming increasingly popular in the venture space. Especially for financing cycles that range from Series B to Series D rounds.
Some entrepreneurs who have already cashed out using the above methods are now trying to reverse engineer the process. They don’t see the company they cared so much about going in the right direction anymore. They want to bring it back.
So, you can potentially raise debt financing and buy back the shares of your company, regain ownership and control, and get back to the mission that inspired you in the first place. Often without the exterior pressures which may have sacrificed what is most dear to you.
Turn a Profit
While most businesses are focused on hyper-growth today, the alternative is to simply prioritize profit. Start generating real revenues, and real net profits each quarter. Then give yourself a raise, and perhaps some nice end of year bonuses.
With any reasonable sized operation, most entrepreneurs today will find that they can relatively easily recoup and cash out any initial investment they made. Recapitalize, pay off those credit cards, take your first supporters out to dinner, and keep pushing the company forward while retaining more control.
It may not be the conventional approach today, but you may actually find it puts you in a much better position to attract investment and buyout offers. Especially as the dynamics of the market changes.
There are a variety of ways to cash out as an entrepreneur. The earlier you plan for your exit, the more prepared and more profitable it will be. Listen into the DealMakers Podcast to hear how today’s most successful entrepreneurs have cashed out, and what advice they’d give their younger selves if they had to do it over again.