An exit strategy, in business, is a way to transition one’s ownership of a company or the operation of some part of the company. Entrepreneurs and investors devise ways of recouping the capital they have invested in a company; hence, it is important that an individual or business should have an exit strategy. It pegs a withdrawal to the achievement of an objective that is worth more than the price of continued involvement.
Why every business should have an Exit Strategy:
All businesses require an exit strategy for smooth operations. When investing in a business, the investor usually starts off by computing and documenting an exit strategy for the business. This is diligently done to completion before any investment can be made into the business. A good exit strategy gives the company the following merits:
1. The company will have improve its likelihood of being successful, with a defined end result, a defined exit strategy in mind.
2. The time for exit for a business will be shortened; a factor that is important to the investors at the time of the business exit.
3. Business exit is significant in terms of exit valuation. An exit strategy plays a core role in increasing the exit valuation, when documented properly.
The outlined importance of an exit strategy is true in today’s business world where early business exits have become an attractive option for many businesses and startups. Studies have shown that currently, several businesses are sold within a period of 2 to 3 years after they began. Some of the companies that have followed this course are YouTube which was sold two years after it was started – for $1.6 billion, Club Penguin which also sold when it was just two years old – for $350 million, and Flickr which was sold one year and a half after starting up – for $30 million. It is important to note that an exit strategy is important for any company even if it might take a long time to obtain an exit optimum. Additionally, a continuous progress on the exit plan must be followed diligently, till the time the company is sold to separate ownership.
Additionally, a properly computed exit strategy is important before developing a financing strategy. Most entrepreneurs and investors don’t fully appreciate the level to which different types of investors are only consistent with certain exit strategies. Usually, creating a misalignment among various types of investors and the exit plan leads to complete confusion within the company. This is dangerous, and it often happens a long time after the company has become established and successful.
What to keep in mind when crafting an Exit Strategy:
When creating an exit strategy, one should bear in mind that there are things that have a great impact in the startup, and its structure. Therefore, the owners must know what to do and what not to do, when creating an exit strategy, as follows:
Broad presence: The startup’s exit strategy must have mass appeal. Mainly the service should be one that is accessible for sale to any company that can buy, and additionally have a fundamental problem that other investors can relate with.
A committed team: The people that one has to deal with after an exit, should be dedicated to the business. This is an influencing factor during business exit and thus needed are people who are absolutely devoted to the growth of the business.
Market need: The entrepreneurs must be such that they can easily identify the needs of the consumer and come up with solutions to the needs that they have identified. This makes for an easier business exit, since the purchasing entity can relate to their product or service offering.
Primary Types of Business Exit Strategies:
Initial Public Offering: This happens when a business offers common stock for the first time since its establishment. A business may sell its shares to the public depending on its value. It is a way of generating returns to the owners, investors, and the business.
Acquisition: This is the process where a business is acquired by another business or company. Usually, the management of the previous business remains within the company, and it runs the business together with the new, acquiring company.
Liquidation: This especially happens when a business startup is struggling to continue its operations. This strategy focuses on shutting down the business and recuperating expenses, instead of seeking further funding to try and grow the company further.
Photo Source: CEO Collaborative Forum