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Which Exit Strategy Is Best for Your Startup: IPO vs M&A

exit strategy

Are you planning an exit strategy for your startup? If so, congratulations! We know first-hand how difficult it is to build a business from the ground up and sell it. There are numerous routes founders can take when exiting their companies, with M&A and IPO being popular options. Determining which strategy is best for your company relies heavily on the current state of your startup and your future goals. Here’s what you need to know.

The Differences Between IPOs and M&As

There are some key differences between an IPO and M&A, and they may help you understand which exit strategy is best for you and your company.

  1. M&A represents an ending for your company while an IPO is a beginning of sorts. If you opt to sell your company to another organization, you are essentially turning your company over to the buyer. With an IPO, you’re selling public shares based on the idea that you and your team will continue to run the company.
  2. Acquisitions tend to generate more revenue than IPOs. The reason is that with an acquisition, you’re usually selling your business for a multiple of its revenue. IPOs are valued more conservatively. If you need to earn enough money to pay back your angel investors, then an acquisition is probably better than an IPO.
  3. With an acquisition, you may have working capital left after repaying your investors to fund your next venture. That’s a big plus for a lot of founders who already have their sights on their next big idea.
  4. As a rule, acquisitions require far less work than IPOs. With M&A, you’re negotiating with a buyer privately, meaning that you will have minimal requirements beyond registering the sale and paying your taxes. IPOs are public transactions and as such, they are heavily regulated. You should expect to jump through a lot of hoops with an IPO. And, IPOs are usually more expensive than acquisitions.
  5. In addition to having ongoing responsibilities to your company after an IPO, you’ll also have the ability to generate additional funds and liquidity by releasing additional shares at a later date. By contrast, an M&A is a one-and-done transaction.

We would sum up the differences between IPOs and acquisitions like this. Acquisitions are clean, finite, and usually more profitable than IPOs. IPOs are more speculative than acquisitions and you’ll need to continue in your position at your company for a while after the initial public offering is complete.

Tips for Deciding on an Exit Strategy

We’re M&A experts, so it won’t surprise you to know that we think that in most cases, an acquisition is a better exit strategy than an IPO. However, we also recognize that not all founders are the same. If you’re on the fence, here are some pointers to help you decide on the exit strategy that’s right for you.

  1. Ask yourself if you want to be involved in your company or product going forward. If the answer is yes, you may want to choose an IPO -- although you should also keep in mind that you can negotiate continued employment or an advisory role as part of a M&A transaction.
  2. Evaluate what you owe to investors and decide if you’re willing to take the risks associated with an IPO. What will happen if your IPO doesn’t generate as much excitement and income as you’d hoped? And on a related note, what will happen if your business is valued lower than you’d hoped and you can’t get the price you want for it in an acquisition?
  3. Do you have another venture you want to finance? An acquisition is a more reliable way to raise capital than an IPO.
  4. Are you prepared to cope with the regulatory requirements and scrutiny that come with an IPO? In addition to the paperwork involved, you’ll also need to be prepared for intense public attention on you and your officers.
  5. If you do want to stay around after an acquisition, ask yourself if you can deal with the potential uncertainty surrounding your position. It’s not uncommon for acquiring companies to shut down the businesses they acquire or change plans dramatically after an acquisition.

The tips we’ve listed here can help you evaluate the pros and cons of each exit strategy to help you decide which one is best for you and your company. If you go the M&A route, we recommend getting an M&A advisor to work with you on selling your company. Our advisors at Northstar Venture Partners have been through the process of exiting their own startups, and are here to help you get the best deal possible. Click here to learn more about working with us.

Julien Meyer

Written by Julien Meyer

NorthStar Venture Partners is led by Julien Meyer, MBA. A veteran of the tech community, Meyer is a 3x startup founder with 2 exits, a published author, a Harvard Business School Leading with Finance Alum and a Top Rated Startup Consultant (UpWork, 2018). Meyer advised on over 50 successful transactions before starting NorthStar. His experience has helped him understand the unique challenges that founders experience when trying to exit their ventures.