The goal of every business venture is to yield maximum returns. Unfortunately, the expected return doesn’t always pan out. An exit strategy is a plan executed by management that details how the company will react when either a certain profit objective is met or the company is facing failure and needs to exit the industry. When properly done, this strategy can improve a company’s odds of success by shortening the time it takes to exit and increasing the amount of money that you can make from exiting.
Exiting is a strategy
Numerous startup companies have recently developed an eagerness to increase their valuation, exit the market, and sell their business as soon as possible. Selling a business has transitioned from a last resort to a primary goal for many business owners. It can be advantageous as it provides an opportunity for a team to pursue its next business venture. Designing a detailed, timely exit strategy can spike the company’s overall valuation. Some investors will be attracted to the prospect of an early exit as it promises a large and more timely payout. Viable goals for startups could be as simple as “Company A will sell for more than $5 million in 5 years.” Establishing this end goal allows for a budget and financial plan to be better implemented and provides a measureable timetable so that management has a thorough understanding of its performance. An exit strategy should be flexible and may be subject to change depending on market conditions. This flexibility allows for benchmarks to be met and can guide a business to successfully maneuver through the market in a timely fashion. Implementing this strategy effectively predicts the company’s life cycle and pinpoints a final target that persuades employees to work toward a shared goal.
Why does it Matter to potential INVESTORS?
The primary concern of potential investors is that their funds are being spent wisely and that there will be a return on investment. Establishing an exit strategy safeguards the business by limiting losses and places investors at ease knowing that their money is safe no matter what the outcome is. An exit strategy is, at the very least, a safety net. Fire exits are set up in buildings to safeguard against emergencies. An exit strategy serves the same purpose as a fire exit in the sense that it is there as a reliable back-up. Without an exit strategy, investors face greater risk and are more likely to withhold any funds.
What does an exit strategy involve?
Exit strategies vary depending on the nature of the business, but every plan will account for each of these variances. Typical components of an exit strategy include recent merger and acquisition deals within the industry along with any factors that may trigger the exit like poor market conditions. Other key features of an exit include a degree of flexibility, tactics that optimize the company value, and a sufficient timetable.
Each plan should account for the following features:
Goals need to be established at the start of an exit strategy. Does ownership intend to sell the business and make a profit or are they generating a doomsday scenario?
Time stamps need to be created so owners know exactly when the business is planning on leaving the industry. This affects other business processes as productivity is going to fluctuate at various times.
Finally, the company’s owner needs to have an idea of how to reach the next step. Will the company be handed over to a partner, merge with another company, or dissolve altogether? Profits will need to be shared appropriately and when done successfully, everybody wins.