Exit Strategy
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Why is an Exit Strategy Important?
When you are pitching your venture to potential investors, one of the most important aspects of your presentation will be your exit strategy; this essentially ensures investors that as your business grows they will be able to get their money back (ideally with a significant profit on their investment) when they pull out of your company. Your exit strategy will also encourage you to consider and outline the long-term plans for your business realistically.
Rob McLeod, of the Scottish Institute for Enterprise, advises entrepreneurs that requirements for exit strategies will vary according to the type of investor. For example, Venture Capitalists are interested in higher returns and will favour companies with an exit strategy of about 3-7 years; they are also more interested in companies that deal publicly, an achievement that is incredibly rare or even unattainable for many ventures [1].
McLeod compares VC's to Angel Investors, who are also looking for high returns, but can be more flexible with regards to the exit strategy. He also notes that they are more likely to become involved with the venture based on a pre-existing or developing personal relationship with the entrepreneur. [1]
One of the key distinctions to make in the consideration of an exit strategy is that between an exit strategy and a realistic strategy. It is important to remember how much weight investors will place on the exit plan, and to put in a solid degree of research and planning into its construction. McLeod warns, "Solid business plans with thorough marketing, sales, operations, management, and concept analysis can, and will, fall short when little consideration is given to the exit plan". [1]
Different Exit Strategies
There are a wide variety of exit strategies that are possible, and it is important to research each different plan thoroughly to ensure that you are presenting investors with a realistic strategy that suits your particular venture.
- Initial Public Offering (IPO)
This involves selling shares of the company to the public for the first time. This can be incredibly risky as the initial investor can't accurately predict what will happen not only on the first day of trading, but in this first couple of weeks or months. There is little data available to analyse in efforts to make these predictions. [2]
- Liquidation of Ownership
Essentially selling the venture, this exit strategy is a much more personal decision for the entrepreneur. It can involve certain conditions within the terms of sale, such as the requirement that the founder(s) of the venture continue to run the business for a period of time. Bill Payne, of the Ewing Marion Kauffman Foundation, notes that "It's a huge decision and generally one that is difficult to make. One day you own the company, and the next day you do not... you move from controlling owner to employee in one quick step" [3] Proceeds of the sale of your company can be either cash or stock in either a public or private company, or a combination of both; however, this requires giving up a venture into which much time and effort have been poured. [3]
- Acquisition
In an acquisition, your venture is bought outright by another pre-existing company; again the proceeds can be cash or stock. An acquisition can be hostile, but it can also be friendly, in which the entrepreneur expresses the wish for the venture to be acquired [2] However, acquisitions have their downsides even if they are friendly; the fit must be right, and even still there's the potential for management changes and a loss of the corporate identity, which could mean trouble for the venture itself. [1]
- Franchise
In a franchise, your venture concept is sold to others in order that they can replicate your business model elsewhere. In this strategy, you can retain the current management while still receiving a cash return, and there is the opportunity for greater and more wide-spread growth for your venture. However, this opportunity is only available to ventures that offer an appropriate model, and even still the legality of franchising is very complex. [1]
- Buy-Out
