Planning your exit strategy
A CEO and founder of a successful business must see that business in a similar light to one of their own children. After pouring in their own blood, sweat and tears, that business must be just as close to their heart as their own flesh and blood. So, surely that founder would never want to exit the business? Wrong! And here is why…
- Seed money, whether it be from venture capitalist, angel investors, private equity etc, will need to be repaid. Whereas unlike a loan, the investors see no return until they cash out or the company is sold. So an exit plan is required for outside investors to collect their cash.
The “art of the start” is something that entrepreneurs thrive on. However, once a company proves to be successful and achieves targets of millions in revenue, the operating of a cash cow may not have the same thrill of a dynamic and rapidly growing startup.
Whatever the reason for an exit strategy it is important to know your options and to maximize the opportunity of you exercising any of those options with the most lucrative outcome.
- Merger & Acquisition (M&A). This normally means merging with a similar company, or being bought by a larger company. This is a win-win situation when bordering companies have complementary skills, and can save resources by combining. For bigger companies, it’s a more efficient and quicker way to grow their revenue than creating new products organically.
- Initial Public Offering (IPO). This used to be the preferred mode, and the quick way to riches. But since the Internet bubble burst in the year 2000, the IPO rate has declined every year until 2010, and is now at about 15%. I don’t recommend this approach to startups these days. Shareholders are demanding, and liability concerns are high.
- Sell to a friendly individual. This is not an M&A, since it is not combining two entities into one. Yet it’s a great way to “cash out” so you can pay investors, pay yourself, take some time off, and get ready to have some fun all over again. The ideal buyer is someone who has more skills and interest on the operational side of the business, and can scale it.
- Make it your cash cow. If you are in a stable, secure marketplace, with a business that has a steady revenue stream, pay off investors, find someone you trust to run it for you, while you use the remaining cash to develop your next great idea. You retain ownership and enjoy the annuity. But cash cows seem to need constant feeding to stay healthy.
- Liquidation and close. Even lifetime entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to shutdown, close the business doors, and liquidate. There may be a natural catastrophe, like 9/11, or the market you counted on could implode. Make rules up front so you don’t end up going down with the ship.
Whether your business was started as a labour of love, or as a retirement plan it is important to think ahead and just what is going to create value and saleability of the business in years to come. Credence International are experts in corporate financial planning and can advise on just how to maximise your return.
Richard Glenn – CFO | Credence International