What is the importance of exit strategy in business? Did you know that a viable entrepreneur needs to have a plan for leaving the business? Investors want to fund founders who have the whole package, which includes a lot more than simply an inspiring concept and a clear vision. The founder’s exit strategy is a critical component of the whole package. This article will give insight into the importance of exit strategy in business. Keep reading.
What is an exit strategy?
Two items make up an exit strategy. In its most basic form, it is the roadmap created by an investable entrepreneur that outlines exactly how they will liquidate their investment when they finally sell their company.
Investors are not charitable people. They don’t fund startups only because they desire the success of the entrepreneurs. When an investor’s participation in a business comes to an end, they want to receive the highest return possible, often between 10 and 100 times their original investment.
Exit strategies are occasionally neglected, but that is a serious error for all parties.
From the perspective of an investor, a founder who has a clear plan for how they’re going to create a profitable and scaleable firm from the start, including an outline of their exit strategy, is already well on their way to demonstrating they’re an investable businessperson. Investors want entrepreneurs with a clear exit strategy as well as those who can establish firms that can be sold.
A defined approach is referred to as an exit strategy.
Importance of exit strategy in business
One of the three essentials investors look for in financial predictions is not only having an exit strategy. Your company’s objectives may be defined with the use of an exit plan. Planning an exit strategy is impossible if you don’t understand your goals. As a result, having an exit strategy is a great approach to convince investors that you know exactly what you’re trying to accomplish.
Indeed, entrepreneurs have occasionally moved through with an investment without taking an exit plan into account, but it is a risky approach that is becoming less and less common in these more risk-averse times.
Some founders simply briefly consider their exit plan. We repeatedly observe the same well-known businesses that unoriginal entrepreneurs use as models of possible acquirers in their exit plans (Facebook, Apple, Google).
This just serves to highlight the founders’ lack of planning and thinking, as well as their ignorance of how crucial it is for an investor that a founder have a solid exit strategy.
The creator doesn’t merely want to grow a lifestyle business for the next two or three decades and then sell it as their retirement plan, which is the second advantage of having an exit strategy. It demonstrates that the entrepreneur is committed to creating a high-performing, multimillion-dollar firm with the intention of eventually selling it.
No matter how attractive the founder’s concept may be, traditional startup investors won’t want to invest in a long-long-term retirement plan firm.
Strategies for exiting startups
Exit plans for startups may be rather diverse. There are several varieties to take into account, including:
- Merger and acquisition (M&A).
- Buyout of the management and workforce.
- giving up control of the business or combining it with another one.
- making a succession plan that enables ownership to be transferred to another person.
- giving a partner or investor your stake.
- Aquihires, when a company is purchased only in order to hire its employees.
- selling off assets and shutting down the business.
- reducing losses by selling stocks or other securities.
- launching an Initial Public Offering (IPO) to let one or more founders and current investors leave the firm without losing any of their
- a startup entrepreneur must understand how to value their company appropriately before going public because the regulatory requirements of an IPO might be complicated.
Whatever the exit strategy, it must be a sound plan with the same goal: describing how the founders and investors will depart the company when it is ultimately sold and what the investors will benefit from (or, at the very least, how their risk will be reduced).
The many kinds of exit deals
The majority of startup owners believe they will be able to sell their company for a one-time, lump-sum payment, yet this is highly improbable. The truth is that they’ll probably shut down the company and keep getting payments for another five to 10 years. Alternatively, they could decide to enter into a part-cash, part-share swap agreement, in which case they’ll basically swap their shares for the acquirers and profit from dividend payments and the potential to eventually sell their shares to the acquirer.
Other exit strategies involve the seller “rolling over” part of their shares, which reduces the amount of cash they receive at closing but gives them the chance to make a larger profit overall if the company’s valuation increases, and selling their shares concurrently with the sale of public equities.
The “earn-out,” where a percentage of the purchase price is computed based on how the firm will continue to perform after the sale has been finalized, is another exit deal option. Earn-out refers to the idea that the seller will ultimately be paid more if the performance they are hoping for is realized, but it also implies that the buyer can hold off on paying the seller until it is known whether the performance can be realized.
All of these distinct departure tactics and exit arrangements have their share of advantages and disadvantages, as per the importance of exit strategy in business.
Examples of exit strategies
One of the businesses with which we deal has created a piece of marketing technology that uses quiz marketing to produce high-quality leads.
They might have easily included social media behemoths like Facebook and Google as potential acquirers when deciding on an exit plan. After all, it would make sense given that Facebook and Google are the owners of some of the most valuable marketing technology and intellectual property (IP) in the world, making our client’s technology the ideal fit and simple integration into their product.
However, our client discovered that business book authors were the greatest consumers of their technology since they were already utilizing it to turn their readers into potential customers. Their exit strategy is to sell their company to a big non-fiction publisher who would then be able to provide its technology as a service to their writers, generating a steady additional revenue from the authors while also providing them with a tremendous amount of added value.
Another of our clients is a PropTech company that has developed a cutting-edge new home-buying process. When it’s time to leave the market, selling their goods to established disruptors in the house purchasing industry like Zoopla, Rightmove, or Purple Bricks would be the natural exit plan.
But after some investigation, our client learned that Amazon is entering the US real estate market by partnering with estate agents to install their Amazon Alexa technology into every “forever home” they advertise, for free!
This is a wise move on Amazon’s part because buyers of “forever homes” often search for a place to live for at least 30 years. If they recently purchased a home with complete Alexa integration, they very surely will continue to purchase an Amazon Prime subscription for the 30+ years they plan to live there.
Our client has chosen Amazon as the ideal candidate to buy their company since their technology perfectly complements Amazon’s mission. Their investment proposition has become even more enticing as a result of their ability to convince investors that Amazon is a feasible exit route.
The founders in both of those cases thoughtfully considered their exit strategy. I hope this article on the importance of exit strategy in business will be useful for you in taking the right decision.
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