Conventional wisdom is that you don’t go into business without an exit strategy. That’s common sense when startups have an 80% failure rate. A lot of very large companies have gone under, too. Though most people go into business with a dream that it will grow and prosper, having an exit strategy is simply being realistic. Like everything though, it is better to know your options upfront if just to avoid being forced into taking the least favorable option. Mobile-first companies, however, have at least one profound option most other types of businesses don’t.
What is a Business Exit Strategy?
A business exit strategy concerns how one monetizes the change of ownership or closure of a company.At the risk of some complexity, there are at least three perspectives on exit plans deserving mention:
- For founders, an exit strategy is a plan to remove yourself as the owner or principal partner of a business on the most mutually favorable terms possible.
- A business is usually a legal entity, so an exit strategy is a contingency plan for its continuation in some form, often by another business.
- Investors in a business have an exit strategy for cashing out their share in a business.
The simple goal of an exit strategy is, ideally, to make even the closure of a business profitable or at least recover a portion of the time, effort and money you invested into it. The three most common exits include outright selling a company, a merger with another company, and most unfavorably, closing your business – shutting it down can involve a lot of effort.
Who Needs an Exit Strategy?
Life has a way of throwing curve balls. Priorities may change over time. The day may come when you wake up and decide to:
- Spend more time with your family.
- Address a serious medical issue or take care of a loved one.
- Retire to Margaritaville and search for your lost shaker of salt.
- Tell the President, “Yes, I’d be happy to be the Ambassador to the… Caribbean.”
- Take a Trip to Mars.
- Invest in a new technology to reap even greater rewards.
Most people start a business with the intention of seeing it be their livelihood, that it will grow and prosper. An exit strategy is the last thing on their mind. It’s the failure rate of startups that warrants everyone going into business having one. When it’s just you manning all stations, no one else cares if you have an exit strategy or not, but it’s still useful to have one unless you like throwing your own time, effort and money away..
Serial entrepreneurs have the intention of starting businesses that they can easily and rapidly flip. Serial entrepreneurs often build their business around their exit strategy.
Once you bring in partners, employees, investors and customers who rely upon your business, the need for an exit strategy grows. At this point, you are not the only one with a vested interest in your business.
All, partnership agreements and articles of incorporation should include a section detailing the obligations, process, and terms whereby a partner can exit, or be removed, from the business. The larger your business gets, the more legal obligations you incur, too. For instance, state and federal laws may stipulate that you must provide a certain minimum advance notice to employees of layoffs and pink slips..
Extra Perspective for Mobile-First Companies
What happens to dead apps? This has bothered me for years – all the effort that goes into the development and design of hundreds of thousands of mobile apps being relegated to a dead pile… Google Play’s and the App Store’s “Trash Bin.” But, I don’t find it surprising either. While some are ingenious, many tech companies are terrible when it comes to business models and marketing strategies.
Let’s back up a little bit though. Most US businesses cannot afford to invest in a mobile app. Figure the cost to develop a decent entry level custom app is likely to run in the ballpark of $150k. That’s more than most of the 25 million microbusinesses can afford. It’s likely more than half of the 5.4 million small businesses with fewer than 20 employees can afford, too. In most cases they have insufficient scalability to take advantage of a mobile app in the first place. While they might be able to afford an app, they’d likely achieve a better ROI much faster spending that $150k on marketing and sales campaigns.
This should provide some extra perspective if you actually have a custom-made mobile app for your business. Whatever your business is, you are in part – a software company. Your mobile app, is or at least could be, a product or service unto itself. Indeed, your app could be your most valuable asset.
A Unique Exit Strategy for Mobile-First Companies
Many mobile-first business owners really don’t see the big picture. They don’t try to factor their relative advantage into their business model at all. They still think ownership is everything. Business today turns 4,000 years of conventional business wisdom on its head, the mantra of the On-Demand Economy being, Access is better than Ownership. You don’t need to even try to be the next AirBnB, Uber, or Spotify to take advantage of that. Understanding the principles of how they work… well that can be very, very useful.
What Uber goes to show is that, essentially one App is capable of supporting operations globally – billions of customers in thousands of cities. More than that, each of its individual drivers, their service providers or independent contractors are essentially businesses unto themselves. Almost none of them could afford to develop an app like Uber – if they could, they wouldn’t be driving. Odds are they wouldn’t be using an app like Uber either, unless it was helping them to make more money than they would without it.
Replicate the same concept across the “other 27.5 million businesses” – just in the United States and you can begin to appreciate the value of your mobile-first investment.
The White Label Strategy
Let’s say you live in Arkansas. You only want to do business in Arkansas. You don’t care about Missouri, or Kansas, or New York. You can have Arkansas – and generate additional revenue from other businesses who want to use your app in Missouri, Kansas and New York, plus all of the other states. You could even generate additional revenue from businesses in the EU, Southeast Asia, or even, Equatorial Guinea.
You may be wondering how you can do this. It’s actually fairly simple, though it does involve some work. Your app’s design is customized for you and utilizes your own customer and business databases.
With White Label, you make it easy to change the design and databases for each participating business. They can add their own policies, prices, and other company info for their customers. You may also want to include geofencing for the territory of each participating business, and to protect your customer base in Arkansas.
The best part is that if you outsourced development of your app in the first place, your development agency can take care of all of this for you.
Under a White Label Strategy, you can:
- Sell the app outright like premium software.
- Sell licenses for fixed term use.
- Charge a royalty fee for each transaction conducted by a participating business.
- Forego geofencing and make it into a “Platform as a Service.”
- Forego the White Label Strategy and jump into On-Demand.
White Label provides you many more options that could be better than most conventional exit strategies.
An Example of the White Label Strategy
Former stock broker, Rick Rome, started WashClub in New York City. Washclub is an On-Demand laundry and dry cleaning service that promises to pick up, clean and return people’s laundry within 24 hours. Like many brick-n-mortar businesses, WashClub has its own employees, a fleet of vehicles, laundry machines and facilities. That’s different from many On-Demand companies who often rely on independent contractors. But, it can still work.
Rick’s investment in developing a mobile app improved his logistics and order management adding scalability most businesses don’t have. He was able to offer the use of his app as a white label service to other laundry services across the country. In our last check, WashClub was operating in 32 cities across 16 states with at least 20 operators paying him 5% in royalties.
Seven Conventional Exit Strategies
A white label approach may not satisfy your objective or work for every business. Exit strategies can range from wanting to get out now to preferring to not get out at all. So, you still have a lot of options.
Initial Public Offering (IPO):
Some consider an IPO an exit strategy, though it is the longest, hardest, but (potentially) the most lucrative exit strategy of all. With an IPO, founders intend to stay at the helm for the long-term. An IPO typically involves going through several rounds of funding, each of which can take two years or more, as discussed in Planning Your Series A, B, C Funding Runway.
Mergers and Acquisitions:
The main objective of the serial entrepreneur involves startups that larger companies would love to get their hands on. Mergers and acquisitions often start with strategic partnerships. Alphabet alone can boast of 230 acquisitions; Amazon over 100; Facebook 79 and counting. Our client Looksery was purchased by SnapChat for $150 million practically right out of the starting gate. Forbes details How to Get Your Business Acquired.
Find a New CEO:
Not having the right team is the #3 reason according to CBI Insights why startups fail, and sometimes that can start with the CEO (as Uber discovered). You know your business could do better if someone with more experience, business acumen, and tolerance for stress was leading the way. You can become a silent or nearly silent partner and continue to share in any profits.
Selling Your Business:
Similar to selling a house though you may be asked to be available to answer questions for the new owner for a term of 30-90 days. In many cases, the only thing about the business that changes is the owner. There are many issues to address in selling your business, so these tips and this checklist will smooth the way for you. Have fun calculating the right price to sell your business, but don’t be surprised if experts recommend a price much lower than you expect.
The Cash Cow Option:
Your business is making a profit, but you realize it will never be The Next Big Thing. You’ve also assessed there’s an insignificant ROI on trying to grow your business, but it’s more valuable to you than trying to sell it off. So, you let it continue as is, perhaps promoting your most responsible employee to general manager. You remain involved, but perhaps just a few hours each week. You let the money keep coming in, focusing on preserving your existing customer base.
The “Know When to Hold ‘Em” Option:
In poker, you have to play the hand you’ve got. In business, there’s no law saying you have to play your hand now. It’s not always best to be first to market. It could be that you ran out of funds to finance the development of your business. That doesn’t preclude you from acquiring the funds later to pick up where you left off. If you’re generating any revenue at all, or the cost to keep your business alive is nominal – put it on life support, save your office furniture, website and business cards. This is especially the case if you are passionate about having a business of your own. Your old comic books and sports cards could have been worth a lot of seed money… if you held on to them.
Closing Your Business:
This is your last and probably least favorable option. You don’t have the money, the interest or will to continue, or maybe have a family emergency to deal with. Either way, you want out as fast as you can get out. Your exit strategy here might be how to get the best price for your office furniture. You may still have some obligations to address, first. If you can’t cover all of your financial obligations, you may be forced into filing for bankruptcy – obviously not a desirable outcome.
Final… or First Thoughts
Hopefully, you’re reading this article before you are on the brink of having to shut down your business. Preparing exit options can take some time. Knowing that eventually you may be forced to exit a business upfront when you start a business affords you the best chance of recovering your investment. If you are just starting out, then Planning Your Series A, B, C Runway may provide you insight on major issues to address so that you are never “forced” to exit. But, in either case, it never hurts to talk with an expert in the mobile arena – if you’d like to talk, we’d love to hear from you!