Plan Your Exit Path from the Start of Your Startup

This article is a contributed piece by Chris Shipferling, Managing Partner at Global Wired Advisors. The views expressed are solely those of the author.

The pandemic has fueled an online shopping boom and a new wave of e-commerce entrepreneurship. In the first half of 2020, U.S. consumer online spending increased by $88 billion compared to the same period in 2019, partly due to a large number of new users trying online shopping for the first time. Brick-and-mortar retailers are concerned: will some customers never return to physical stores?

Startups are following this trend. The number of e-commerce businesses in the U.S. has now reached 1.3 million and is still growing.

If you are part of an e-commerce startup team, you should start thinking about your exit now. Waiting until the company achieves solid year-over-year growth or reaches a milestone is often too late. While you must remain flexible to adapt to market changes, you should work toward your exit goal from the very first day of the company.

M&A, IPO, and Family Succession: Three Exit Paths

For e-commerce business owners, the following three exit strategies are the most common.

Mergers and Acquisitions (M&A)

The exit method founders most often aspire to is having another company acquire your business—whether to expand their product line or to unlock business potential that your own resources cannot leverage. In the eyes of the acquirer, you have planted the seed of a great company; with capital injection and a new management team, they can scale the business you started.

A recent acquisition of a well-known children's products company is a case in point. The company was co-founded by a former industry executive and a partner, initially intended as a retirement project for an older founder. When the business grew beyond what the two-person team could handle, they decided not to build their own expansion infrastructure but instead proactively sought a buyer who could lead the company into its next growth phase. The deal allowed both founders to exit satisfactorily, with the older founder staying on as an advisor.

Initial Public Offering (IPO)

Depending on the growth of your business, you may set your sights on an IPO. This path is generally more suitable for larger companies and is more difficult for smaller ones. Choosing this route can yield substantial rewards for founders, but getting the company to the right size and completing the listing requires a great deal of upfront work. Compared to other strategies, if the team intends to go public, planning must start as early as possible in the company's life.

Task management software companyAsanaCompleted its IPO via a direct listing just a few weeks ago. Its stock opened at $27, valuing the company at over $4 billion, an increase of more than $2.5 billion over its previous private valuation of $1.5 billion. This success highlights the importance of early planning—like all exit methods, IPO success depends on timing and preparation. If Asana had gone public during a loss-making phase rather than during a period of rapid, sustainable growth, it would likely not have achieved such a positive result.

Family Succession

If your business is a family business and you want to keep it family-owned, then you should aim for a "succession exit"—handing the business over to family members to run. In this approach, you are less likely to receive a one-time cash payout, but you leave behind a sustainable business for the family. Generational succession is not uncommon in family brands. The largest furniture store in North Carolina,Furnitureland Southhas been owned by the same family since its founding in 1969. Darrel Harris and his wife Stella ran it for decades before stepping down and transferring ownership to their son.

Make a Plan, Stay Flexible

When you have a rough timeline for when you want to exit, you have essentially drawn a blueprint for success. The world changes rapidly, and clinging to an exit strategy formulated six years ago that is now outdated is not wise. But guiding strategic decisions with an exit mindset helps you clarify benchmarks for business success, set goals, and schedule a timeline for growth.

Often, it is only when a company is considering a sale that founders truly understand what makes the business attractive to investors. Consider the analogy of buying a house: are you buying it to live in, or to flip for profit? If the latter, what features would you add that could spark a bidding war?

Identify Value Drivers

From an investor's perspective, the key is to identify what adds value to your business. Investors who spot value typically make offers based on a multiple of annual net profit. For example, if your annual profit is $1 million, they might offer 2 to 20 times that, i.e., $2 million to $20 million. The multiple depends on how you leverage value drivers. Therefore, identifying and maximizing these factors from the start is crucial.

In most e-commerce businesses, value drivers include:

• High profit margins.Not all businesses pursue huge profits, but those that do not tend to be less attractive to investors for acquisition. If you have low operating costs, high margins, and year-over-year growth, investors will take notice.
• Strong brand.In today's digital age, not all businesses need to be profitable to attract investors. Companies like Facebook were valued in the billions before turning a profit because millions of users registered daily, and investors saw the potential of a network with accounts held by nearly half the world's population. If you have built a popular brand with rapidly growing users, you may still find a buyer even if revenue is modest.
• Management team.Any successful entrepreneur will tell you that successful businesses are built on teams. Investors typically want key members who played a critical role in the company's success to stay on after the acquisition, while also bringing in new people who can lead the next phase of growth.
• Strong position in a high-growth sector.Who would have thought that running a toilet paper business or producing masks would become "liquid gold"? Markets change rapidly, and investors are constantly predicting which businesses will thrive in the future. If you have a manufacturing business that allows customers to buy masks directly from your website but has not yet built a strong brand or management team, investors will understand that with a new team and capital, they can scale up to seize the current surge in demand.

Draw Your Blueprint

Having a clear endpoint, identifying value drivers, and timing your sale is often the difference between successful entrepreneurs and those who struggle. Without a blueprint, a business can stagnate. Many serial entrepreneurs deliberately build businesses for just a few years before selling, allowing them to cash out and move on to new projects.

For e-commerce, now is the best time to start a business, but you must keep your exit in mind from day one.