Exit Scenarios Guide

Plan Your Exit: Learn how to model different exit strategies, understand liquidation waterfalls, and analyze how proceeds flow to stakeholders.
Estimated Reading Time: 25 minutes
Advanced Exit Planning Liquidation

Types of Exit Strategies

Understanding different exit paths and their implications for stakeholders.

Strategic Acquisition

Buyer: Larger company in same/related industry

Typical Multiple: 3-10x revenue

Timeline: 3-9 months

Characteristics:
  • Synergy-driven valuations
  • Often all-cash deals
  • Integration into larger company
  • Possible earn-outs
  • Employee retention packages
Best For: Companies with strong market position and complementary technology
Initial Public Offering (IPO)

Market: Public stock exchange

Typical Multiple: 5-15x revenue

Timeline: 6-18 months

Characteristics:
  • High growth and revenue required
  • Continued public company operations
  • Ongoing regulatory compliance
  • Lockup periods for insiders
  • Market-driven valuation
Best For: High-growth companies with $100M+ revenue
Financial Buyer (PE/LBO)

Buyer: Private equity firms

Typical Multiple: 4-8x EBITDA

Timeline: 2-6 months

Characteristics:
  • Cash flow focused
  • Leverage used in purchase
  • Management often stays
  • Operational improvements focus
  • Eventual re-sale planned
Best For: Profitable companies with predictable cash flows
Management Buyout

Buyer: Existing management team

Typical Multiple: 3-6x EBITDA

Timeline: 3-6 months

Characteristics:
  • Management-led transaction
  • Often financed with debt
  • Continuity of operations
  • Lower valuations typically
  • Employee-friendly terms
Best For: Stable businesses with strong management teams

Understanding Liquidation Waterfalls

The liquidation waterfall determines who gets paid first and how much in an exit event.

Typical Waterfall Order:
  1. Debt & Liabilities: Bank loans, trade creditors
  2. Liquidation Preferences: Preferred shareholders (by seniority)
  3. Participating Preferred: Additional participation if applicable
  4. Common Shareholders: Founders, employees, common stock
Important

The waterfall can dramatically affect payouts. A founder with 30% ownership might get 0% of proceeds if liquidation preferences consume all value.

Example Preferences

Series B: 2x preference

Series A: 1x preference

Seed: 1x preference

Common: No preference

Sample Liquidation Waterfall Analysis
Exit Value $20M $50M $100M $200M
Series B (2x pref, $10M) $20M $20M $20M $40M
Series A (1x pref, $5M) $0 $5M $5M $10M
Seed (1x pref, $1M) $0 $1M $1M $2M
Common (60% ownership) $0 $24M $74M $148M
Founders (30% of common) $0 $7.2M $22.2M $44.4M
Key Insight

Notice how founders get nothing in a $20M exit despite owning 30% of the company. This shows why understanding liquidation preferences is crucial for exit planning.

How to Model Exit Scenarios in Model My Exit

Create comprehensive exit models to understand potential outcomes for all stakeholders.

Set Up Your Current Cap Table
  • Enter all stakeholders and their current holdings
  • Include all liquidation preferences and terms
  • Verify vesting schedules and exercise prices
  • Document any participating preferences
Create Exit Scenarios
  • Navigate to "Scenarios" → "Exit Modeling"
  • Set exit valuation range (low, medium, high)
  • Choose exit type (acquisition, IPO, etc.)
  • Account for transaction costs and taxes
Analyze Results
  • Waterfall Analysis: See exact payout order
  • Stakeholder Summary: Individual returns
  • Scenario Comparison: Side-by-side analysis
  • Sensitivity Analysis: Impact of valuation changes
Export & Present
  • Generate investor presentation materials
  • Create employee communication summaries
  • Export detailed analysis for advisors
  • Share scenarios with stakeholders
Pro Tip

Model multiple scenarios with different exit values and timing to understand the range of possible outcomes. This helps in strategic planning and stakeholder communication.

Exit Valuation Methods

Different exit types use different valuation methodologies:

Revenue Multiples
Industry Multiple Range
SaaS Software 5-15x ARR
E-commerce 2-6x Revenue
Marketplace 3-8x Revenue
Fintech 4-12x Revenue
Healthcare Tech 3-10x Revenue
EBITDA Multiples
Company Size Multiple Range
$1-5M EBITDA 3-6x
$5-15M EBITDA 4-8x
$15-50M EBITDA 6-12x
$50M+ EBITDA 8-15x
Growth Premium

High-growth companies (>50% YoY) typically command premium multiples, sometimes 2-3x higher than mature businesses.

Market Conditions

Multiples vary significantly based on market conditions, interest rates, and industry trends.

Tax Implications of Exits

Understanding tax implications can significantly impact net proceeds from an exit.

Capital Gains Treatment
  • Short-term: Ordinary income rates (up to 37%)
  • Long-term: Capital gains rates (0%, 15%, 20%)
  • QSBS: Potential $10M or 10x exclusion
  • Section 1202: Qualified Small Business Stock benefits
QSBS Benefits: Holding qualifying stock for 5+ years can provide massive tax savings on exit proceeds.
Stock Options
  • ISO Exercise: Potential AMT implications
  • NSO Exercise: Ordinary income on spread
  • Early Exercise: 83(b) election benefits
  • Cashless Exercise: Immediate sale implications
Planning Required: Option exercise timing can significantly impact tax liability.
Sample Tax Impact Analysis
Stakeholder Gross Proceeds Tax Rate Tax Liability Net Proceeds
Founder (QSBS) $10M 0% $0 $10M
Founder (Non-QSBS) $10M 20% $2M $8M
Employee (ISOs) $1M 20% $200K $800K
Employee (NSOs) $1M 37% $370K $630K

Exit Planning Best Practices

Strategic Planning
  • Model exits early and regularly
  • Understand your liquidation stack
  • Plan for tax optimization (QSBS, etc.)
  • Consider multiple exit paths
  • Build relationships with potential acquirers
  • Keep financial records clean and audit-ready
Stakeholder Communication
  • Share exit scenarios with key team members
  • Explain liquidation preferences impact
  • Manage expectations around timing
  • Communicate tax planning opportunities
Common Mistakes
  • Not modeling early enough
  • Ignoring liquidation preference impact
  • Poor timing of option exercises
  • Not optimizing for tax benefits
  • Unrealistic valuation expectations
  • Inadequate due diligence preparation
Timing Considerations
  • Market conditions and industry trends
  • Company performance and growth trajectory
  • Competitive landscape changes
  • Tax law changes and planning windows

Ready to Model Your Exit?

Use Model My Exit to create detailed exit scenarios and understand potential outcomes for all stakeholders.

Exit Modeling Features:
  • Multiple Scenarios: Model different exit values and types
  • Liquidation Waterfall: See exact payout order and amounts
  • Tax Analysis: Include tax implications in calculations
  • Sensitivity Analysis: Understand impact of valuation changes
  • Stakeholder Reports: Generate individual payout summaries
  • Export Tools: Create presentations and reports
Model Your Exit Financing Rounds Cap Table Basics
In This Guide
Types of Exits Liquidation Waterfall Modeling Exits Valuation Methods Tax Implications Best Practices
Quick Exit Calculator
Related Tutorials
Financing Rounds Cap Table Basics Stakeholder Management Getting Started