Exit strategies for businesses
Many investors are only interested in investing money in a business for a limited time. They want to know when they will get their money back and what kind of proceeds they will receive at the time. Both cases are closely related. Therefore, you need to make sure that you have your long-term plans and a healthy plan in place to draw up your business plan to offer potential investors exit strategy.
To do this properly, you need to ask yourself a few questions about your own personal plans regarding the business. Do you want to stay involved with this business in the long run, or are you more interested in getting it off the ground and leaving someone else then? These are the kinds of questions you need to address in your exit strategy.
You will also want to know a little about the investors you are going to and what their expectations are regarding the future of the investment:
-> If you arewith dealingventure capitalists , you should be aware that they are looking for a high yield. Generally, they expect the business to be disclosed at the end of the period or to make another high profit. The period they are willing to invest is about three to seven years, so you need some kind of high yield strategy at the end of the period. However, you should not choose to become public unless you are sure that this is a realistic goal for your business. Public offerings are very rare for small businesses, and the investors you’re talking to are completely aware of that.
-> If you are a considerate angel investor , they will again be looking for a high return, but they will not be too concerned about the type of exit strategy being considered, as long as it looks good. They will be less sophisticated than the venture capitalists or institutional investors you are dealing with, and likely to be more involved because of a personal relationship with you or the business.
There are a number of exit strategies that you can consider:
-> The most basic exit strategy is simplydry to make the business. This can be done by giving yourself a huge salary or other compensation, regardless of the performance of the business. Although in most cases this is not suitable, there is no doubt that it can get a lot of your investment out of the business in a short period of time.
-> Another simple option is liquidation. Open the doors and wait for the business to be liquidated. All debts are paid off, and then the shareholders will have everything left over.
Although these two options are practical and effective above, they are professional in the outlook and can suggest a more sophisticated exit strategy if you want to impress potential investors.
-> Another option might be to sell a friendly buyer. Although you have come to the end of your relationship with the business, perhaps there are many people who are sad to see it end, and they may be willing to take in to take over. This may include transferring it to another family member, or selling it to employees or customers. There are many businesses where this will be a realistic option, but it is difficult to predict at the start of the business.
-> Another option is acquisition. This is when a competitive firm, usually one that wants to expand, agrees to buy you out. You can negotiate the price and terms with the buyer, and there is a good chance that you can achieve a very attractive price. You get a good price, because along with your assets, the buyer is willing to pay for goodwill, market share, customer contacts, etc. This means that you can get a very good price for the business.
-> The IPOs we talked about before are the final option. It is potentially the most profitable of all, but when reality comes in, it may not seem like the dream you had in mind. In fact, a small percentage of the companies manage to do so through a listed stock exchange statement. The process costs millions, including lawyers, analysts, publicity agents and a host of other expensive professionals. Chances are you’ll ever get it right. And if you do, you’re likely to own only a fraction of the business you previously owned.