From a strictly legal perspective, an “exit” refers to what’s commonly called a “change of control transaction”– one where a majority stake in the ownership, or in the voting rights, of a business is transferred to a third party. But from a business perspective, an exit could also refer to a broader set of situations – such as when key assets are sold, when a significant liquidation event like an I.P.O. occurs, or when a founder exits the operations of the business, but still retains significant equity and even voting control. 

An exit “strategy” is simply an actionable plan that outlines a realistic series of steps a founder can take to go from where they are at a given point in time, to closing their ideal exit. 

A well-defined exit strategy puts a founder in position to drive their own entrepreneurial journey, and to align their business and financial goals with their broader life goals. 

Benefits of a good exit strategy for a founder include:

  • Ensuring that the type of exit, and the terms of the exit, actually help achieve a founder’s life and business goals;
  • Extracting the most net value (i.e. post-tax, transaction costs, etc.) from the business;
  • Ensuring that the owner can pursue the lifestyle and opportunities they desire after the exit;
  • Ensuring the business ends up in the right hands, and is in line with the owner’s desired legacy and long-term life planning;

    What Defines a High-Quality Exit Strategy?

    A high-quality exit strategy must start by satisfying two basic tests: 

    1. It must serve the founder’s life goals. 

    A good exit strategy should always be founder-centric. This seems self-evident, but so often, a founder’s life goals are ill-defined, and when they embark in “execution mode”, these goals can get further muddled by the requirements of the transaction. Furthermore, an exit that delivers on what a third party wants but leaves a founder making significant compromises on their goals (consciously or unconsciously) is hardly high quality from a founder’s perspective. Of course, an exit can never be only founder-centric. An exit must also satisfy who we call the Key Exit Player driving the exit (third-party buyer, partner, key employees, family etc.). Only in rare cases do founders have enough leverage to impose their terms on a key exit player without strongly considering what they deeply want. 

    Defining the founder’s broader life goals, and understanding why they want to exit, is critical to designing an exit strategy that actually accomplishes as many of these goals as possible. By the time the exit starts materializing, the agency problem kicks in – experienced players will start pulling in the direction of their own interests (your key exit player, their professionals, your professionals, etc.). This is just a reality. Understanding the key aspects of the exit from the founder’s standpoint is absolutely essential to steering the ship and making sure the owner’s ultimate ends are met. This is a version of Stephen Covey’s famous rule, “start with the end in mind.”

    2. It must be realistic.

    Second, a quality exit strategy should be realistic from every perspective – financially, operationally, and from a human perspective. Every industry has its own peculiarities, and every business has its own specific set of circumstances. An exit strategy that looks and feels great on paper but isn’t really feasible in real life is not high quality. It’s just that – a nice piece of paper, perhaps a vision that can aspired to one day. But not a realistic plan a founder can start executing against. 

    Even a decent rough draft of an exit strategy designed in the early days can put founders in a better position to take advantage of at least some of the benefits of a quality exit strategy. However, a thoughtful, carefully articulated strategy, reviewed and vetted by the right professionals, will yield the most long-term value, and acts as a focal point for your entrepreneurial journey. Without one, even strong execution and the best-laid business plans could end up in a suboptimal exit. 

    As management thinker Henry Mintzberg once wrote, “strategy is not the consequence of planning, but the opposite: it’s starting point.”

    Now, in the hustle and bustle of life as a founder, when should an exit strategy be designed?