Step 17: Exit Strategy For An Investor
An exit strategy is actually a plan to get oneself out of a specific situation. Exit strategy is frequently applied to military engagements and investment in business. An exit strategy is said to be important to assist in bringing about a positive conclusion to a business.
An exit strategy in a business is generally decided at the beginning of the business modelling. A great business plan will integrate an exit strategy for investors, thus showing them that the model will result in benefits and profits for them, no matter what happens. An exit strategy can have various forms, depending on the investment, the general climate and the business. An exit strategy is usually laid out as a bail-out option, in the situation the organization starts losing money or the future does not appear as healthy and bright as predicted.
The most ideal exit strategy for a business, from the point of view of an investor perhaps is simply to sell off the whole project. A takeover can have a good return on investment, can occur within a comparatively short span of time and involves less confusion. If the organization has been successful and prosperous and the marketplace is right for their product/service then selling an equity spot can provide a great yield.
If a firm does not want to sell off wholly, then they could recapitalize as an exit strategy rather. This would permit them to pay off to their existing set of investors, thus allowing them to get out from their investment, but would allow the organization to remain under its present ownership and thus carry on to function.
If you need an investment from outside, then you need to have to have an exit strategy in place. Investors do not make cash on your healthy firm unless it sells wholly or even a part of it.
Investors will shy off from ventures that don’t have an exit strategy as this may be an indicator that the entrepreneur is keener in constructing, building and running a lifestyle enterprise instead of building a possible high-growth venture.
Investors know that billions of people start new businesses ventures each year. They also know that the apt exit strategy attracts valuable employees, defends wealth and ensures a smooth transition. A wrong exit strategy could mean financial downfall.
Forming or Creating your Exit Strategy
Creating an exit strategy should never begin at a very early stage.
Firstly, you ought to determine the personal goals of the head entrepreneur and the venturing team. See, for the each of them, what determines success for this venture activity. Next, you should research and understand all the available options and try and plan to fit the options to the venture and similarly, the venture to the options.
Then, you should consider the situations that would set off an exit and the conditions that will prevent an exit. You need to remember that success comes to those who are trained and prepared and can promptly be placed to spot and respond to sparking events when they happen. Next, with a crisp and clear vision which will get you through the challenging situations that lie ahead, you can go build and grow the venture and make things happen. You ought to be patient as well, because it would take a minimum of 5 years and can go up to 7 years as well.
At regular intervals, conduct a formal and a realistic valuation of the business, which would include a brushed up list of strategic partners, investors, potential buyers as well as professional service providers. This would not only just help you have a full focus as to what all is going around you, but it would also show you the various checkpoints for your destination 'exit'.
It is also crucial to look out for professional help or advice when making your exit strategy. It would be a tough task to find an objective advisor who can assist you not only form and develop an exit strategy but also keep checks on your valuation. E.g. professional service providers like brokers or investment bankers who deal only on a commission basis would be searching out for a quick deal and might not be able to help the early stage start-ups with their exit strategy.
The 3 most classic and basic exit strategies are:
- Develop the firm to a level that it will be taken over by a larger organization sometime in the future.
- Take the firm public with an initial public offering (IPO) of stock.
- The managers who wish to stay in the business take over the investors with replacement capital from other sources of investment or from the business’s profits.
The Other Kinds of Exit Strategies:
- Raising the free cash flows and tapping them – With venture-backed deals it is paying dividends; with small businesses it’s retained earnings and with corporate entrepreneurship, it’s enhancing the earnings of the shareholder.
- Private sale for debt, cash, and/or equity to the management team – Often through a leveraged management buyout or management buyout.
- Private sale for debt, cash and/or equity to the staff – This is generally in the form of an employee stock option plan. More often, these plans are used as a method to take over a retiring owner.
- Transferring to family members and other heirs; this is more like a personal exit strategy.
- Partial liquidation or sales of the assets.
- Imposed bankruptcy, liquidation and reorganization – The owner ship and management would be out of the control of the actual investors and the venturing team.
- Marketing to a financial buyer – To a private equity group or a venture capital organization, either to be reconstituted and merged with one of their portfolio firms and sometimes to be operated as a stand alone.
- Merger or acquisition – Organization from other parts of the world could buy the venture.
- Initial public offering – This has been for long regarded the benchmark for venture-backed deals.
Your exit strategy effects various directions which you might choose in helping your business grow. Not looking at your exit strategy during an early stage might limit your options for the future. This isn’t a matter of whether you would sell or else dispose of, your keenness in the business. Your basic decisions should be how and when.