| Many investors are only interested in
investing money into an enterprise for a limited amount of time. They want to know when
they will get their money back and what sort of return they will be receiving at that
time. Both issues are closely linked. Therefore, when preparing your business plan, to
pitch to potential investors, you will need to make sure that you have outlined your long
term plans and a sound exit strategy.
In order to do this properly you will have to ask yourself
a few questions about your own personal plans regarding the business. Do you wish to stay
involved in this business in the long run, or are you more interested in getting it off
the ground and letting someone else take over then? These are the kinds of questions you
should deal with in your exit strategy.
You will also want to know a little about the investors you
are pitching to and what their expectations are regarding the future of the investment:
- If you are dealing with venture capitalists you have to be
aware that they are looking for a high return. They will generally be expecting the
business to go public at the end of the period or make some other high profit move. The
period they are willing to invest is about three to seven years so you will need some sort
of high return exit strategy at the end of that period. However, you should not opt for
going public unless you are confident that it is a realistic goal for your company. Public
offerings are very rare for small businesses and the investors you are speaking to will be
all too aware of that fact.
- If you are considering an angel investor then again they
will be looking for a high return but will not be overly concerned with the type of exit
strategy under consideration, as long as it seems sound. They will be less sophisticated
than the venture capitalists or institutional investors you may deal with and are more
likely to be involved because of a personal relationship to you or the business.
There are a number of exit strategies you can consider:
1. The most basic exit strategy would be to simply
bleed the business dry.
This can be done by giving yourself a huge salary or other
remuneration, regardless of the performance of the business. While it is not appropriate
in most cases, there is no doubt that it can get a lot of your investment back out of the
company in a short time.
2. Another simple option is liquidation.
Simply close the doors and wait for the company to be wound
up. All debts will be paid off, and then whatever is left over will be clear to the
shareholders.
While these two options above are quite practical and
effective, they are professionally frowned upon and you may wish to propose a more
sophisticated exit strategy if you wish to impress potential investors.
3. Another option could be selling to a friendly
buyer.
While you may have come to the end of your relationship
with the business, there may be many people who would be saddened to see it end and may
well be willing to step in to take over. This might include passing it on to another
member of the family, or selling it to employees or customers. There are many businesses
where this will be a realistic option, however it is difficult to predict it at the
beginning of the venture.
4. Another option is acquisition.
This is when a rival firm, usually one wishing to expand,
agrees to buy you out. You can negotiate the price and terms with the buyer and there is a
good chance that both of you can come up with a very attractive price. You will get a good
price because together with your assets, the buyer will be willing to pay for good will,
market share, client contacts etc. This means you can get a very good price for the
business.
5. IPOs (Initial Public Offering) are the final
option.
These are potentially the most lucrative of all, but when
reality kicks in, they might not seem like the dream you thought they were. In reality, a
minuscule percent of companies manage to make it through an IPO. The process costs
millions, includes lawyers, analysts, publicity agents and a lot of other costly
professionals. The odds are against you ever making it. And if you do, you will probably
be left with only a fraction share of the company you used to own. |
