# Business exit strategies Authors: Victor Klein, Jackie Ammon \| Read time: 5 minutes Published date: December 22, 2023 An exit strategy outlines how and when a founder, CEO, or investor plans to liquidate a company. Learn more about IPOs, M&As, liquidations, and buyouts. ## What is an exit strategy in business? An exit strategy is a business plan that outlines how and when a founder, CEO, investor, or other stakeholder will liquidate a company. There are several types of [liquidity events](/content/learn/equity/liquidity-events/index.html) you may plan for, including: 1. Public offerings 2. Mergers 3. Acquisitions 4. Liquidations ## Types of exit strategies Below is a basic overview of the most common exit strategies available for private companies. We recommend consulting with your [startup lawyer](/content/learn/startups/founding-team/law-firms/index.html) or other [advisor](/content/learn/startups/founding-team/advisor/index.html) to help comb through the different options—and to help you weigh potential buyers. ### IPO Going public via an [IPO](/content/learn/startups/exit-strategies/ipo/index.html) is the ultimate dream for most entrepreneurs and business owners. But a traditional IPO isn’t for everyone—and in fact, most private companies don't exit through an IPO. A company can also list its shares publicly through a [direct public offering](/content/learn/startups/exit-strategies/ipo/direct-listings/index.html) or a [SPAC (special purpose acquisition company)](/content/learn/startups/exit-strategies/ipo/spac/index.html). Depending on your goals, such as price-per-share, avoiding lock up periods, or keeping a set business valuation, one type of public offering will be more beneficial. #### Get your company ready for a successful public offering with Carta's free IPO readiness guide: **→** [**Learn more about the differences between traditional IPOs, direct listings, and SPACs**](/content/learn/startups/exit-strategies/ipo/readiness/index.html) ### Merger A [merger](/content/learn/startups/exit-strategies/mergers-acquisitions/index.html) is when two or more companies combine to become one (they might adopt a new name in the process). In a reverse triangular merger (the most common merger structure), the buyer forms a new subsidiary that merges with the target company, resulting in the target becoming a subsidiary of the buyer. ### Acquisition The biggest prep work needed for an [acquisition](/content/learn/startups/exit-strategies/mergers-acquisitions/index.html) is determining the deal structure. There are two common structures for acquisitions: 1. **Stock sale:** This happens when the target company’s stockholders sell their stock to the buyer, such that the target company becomes a wholly owned subsidiary of the buyer. In some cases, a stock sale could involve the buyer absorbing the target so the target ceases to become a distinct entity. 2. **Asset sale:** This happens when the target company sells all or most of its assets to the buyer, then dissolves and pays the proceeds of the sale to the stockholders in the company's wind-down process. **→** [**Learn more about asset sales and stock sales**](/content/learn/startups/exit-strategies/mergers-acquisitions/asset-sale-vs-stock-sale/index.html) #### Private equity acquisition Private equity buyers acquire business across the financing landscape— [bootstrapped](/content/learn/startups/fundraising/bootstrapping/index.html), venture capital backed, private equity backed, carveouts (public and private), among others. [Leveraged buyouts (LBO)](/content/learn/startups/exit-strategies/mergers-acquisitions/leveraged-buyout/index.html) are the most common private equity investment strategy. In an LBO, the [private equity firm](/content/learn/private-funds/private-equity/index.html) acquires a majority stake in the company, using [equity](/content/learn/equity/index.html) and [debt](/content/learn/startups/fundraising/debt-financing/index.html). This capital typically buys out existing stakeholders, and goes on the company’s balance sheet to fund growth. The [portfolio company](/content/learn/private-funds/structures/portfolio-company/index.html) is then responsible for paying back that debt and interest through cash resulting from the operational improvements made during the private equity firm’s ownership tenure. Not all private equity firms use debt. [Growth equity](/content/learn/private-funds/private-equity/strategies/growth-equity/index.html) or growth buyout firms may fund transactions with minimal to no leverage, allowing the company to continue investing in growth. ### Liquidations Liquidation is a conversion of assets to cash or cash equivalents by selling to a consumer. This is typically an option if your business is insolvent and isn't able to pay its creditors. The liquidation process also can help with negotiating the debt down with those creditors as well as help to avoid filing for bankruptcy. When your business is liquidated, any remaining assets are paid to creditors and shareholders. Although not as common, liquidation can also be a voluntary option. Liquidation is also an alternative to (and in most instances, is easier than) attempting to sell your business. The sale of a business requires the buyer to purchase all assets, which can become a more difficult and complex sale. #### Liquidation vs. dissolution Liquidation is part of the process of ending a business. However, if your business entity is an [LLC or corporation](/content/learn/startups/private-companies/c-corp-vs-llc/index.html), it will continue to exist after a liquidation and will still be subject to obligations such as [annual filings and taxation requirements](/content/learn/startups/tax-planning/business-tax-deadlines/index.html). [Dissolution](/content/learn/startups/exit-strategies/dissolution/index.html) is the process of terminating a legal business entity. When the business is dissolved, it will no longer have compliance obligations within the state in which it was [incorporated](/content/learn/startups/private-companies/incorporation/index.html) or registered. ## How to plan a successful exit Once you’ve determined which exit option is right for you, here are some general steps you can take to prepare. Carta can help support you during this process when it comes to deal modeling, due diligence, IPO preparation, liquidity solutions, and tax planning. ### Organize your financial statements Ahead of [term sheet](/content/learn/startups/fundraising/term-sheets/index.html) negotiations, it’s important to understand your company’s anticipated returns based on deal size and other factors so you can in turn understand your breakeven valuation. Settle any debts and address any other outstanding obligations. Forecast with confidence Visualize expected payouts by shareholder or share class based on exit value, expected non-convertible debt, and preferential payment terms to any preferred stock. [Learn more](/content/equity-management/cap-table/scenario-modeling/?ir=blog-exit-strategy-end1/index.html) ### Due diligence preparation You can prepare your company for an M&A deal by familiarizing yourself with what sorts of documents will be requested by the buyer and what happens during their due diligence. The [due diligence process](/content/learn/private-funds/management/deal-flow/due-diligence/index.html) may involve sharing disclosures with potential buyers, additional financial audits and reporting, and negotiation conversations between management teams. Some due diligence processes take a couple of weeks, while others take months. **→** [**See an example of a M&A due diligence request list, provided by one of Carta’s partner law firms, and a leader in the M&A space, Goodwin**](/content/wp-content/uploads/2023/03/Sample-due-diligence-request-list.pdf) ### Communicate with investors and stakeholders Investor communications are always important, but especially leading up to an exit event. Your [investors](/content/learn/startups/fundraising/investors/index.html), [board members](/content/learn/startups/private-companies/board-of-directors/index.html), and other key stakeholders want to know how they’ll be paid out and what their expected ROI is. If you have employee owners, you may want to inform them at this time, ahead of customers. ### Communicate with employees and customers Depending on the size and scope of your company, you may also want to share your exit plans with employees and customers ahead of time to ensure a smooth transition. This should only be done after due diligence, board approval, and other key steps are completed. ## Secondary transactions before an exit Companies can run structured [secondary transactions](/content/learn/equity/liquidity-events/secondary-transactions/index.html) to allow for liquidity in their shares for their stockholders at any time, but there are strategic opportunities to do so—for example, within 90 days of a [primary funding round](/content/learn/startups/fundraising/index.html) or when a cohort of early employees [fully vest](/content/learn/equity/stock-options/vesting/index.html) in their initial stock grants. If an exit is still far away, you may choose to use secondary transactions— like [tender offers](/content/learn/equity/liquidity-events/tender-offer/index.html)— as a tool to clean up your [cap table](/content/learn/startups/equity-management/cap-table/index.html) by consolidating your stockholder base. In addition, private secondary transactions can offer shareholders an opportunity to liquidate some or all of their shares while the company is still private. Liquidity can allow early investors to secure a return on their investment and can give employees the chance to cash in their [equity compensation](/content/learn/equity/compensation/index.html). Tailored liquidity solutions, from tender offers to IPO.