Exit Strategy 101

Whenever you start an enterprise, you must have a clear vision, goals and gameplan on where the enterprise is heading. To ensure that you get the maximum value out of the business, you need to plan your exit strategy. This article is a primer to introduce you a few different exit strategies which you can plan for your enterprise for the future.

There is an open secret which successful entrepreneurs share. That is to know when to quit and move on. When you have built the company from a team of 10 to a satisfactory state (say 200), you are at the crossroads and ponder what your next step is. This question can often be answered by the following question: how sustainable and scalable is your business? It also depends on the nature of your business. Some businesses are meant to be bought out by bigger companies and some are meant to go further to become a multi-national company. The real answer to the question is growth and possible business opportunities that the company can expand, particularly, the size of the markets.

Most people include an exit strategy out of necessity for their business plan. Somehow they don’t execute according to the exit strategy later when they build their enterprise. Many entrepreneurs I interviewed told me that it is important to plan your exit strategy from day one when you set up your company. In fact, one important advice that is given to me about taking your company to IPO, is to clean house two years before you start preparing the prospectus for the initial public offerings (IPO).

If you don’t plan your exit carefully, here are a few problems which you might up with:

• Not able to maximize your value:You don’t end up steering your business towards the chosen option. That will cost you dearly in the form of not able to maximizing the value you get from the business.
• Succession Troubles: Asians as compare to their western counterparts are not very good at grooming successors. Partially, the problem is due to the orientation of most family businesses or personal ego to own that business till you die. If you don’t plan from year 3 or 4 who should take over from you, you will end up having problems to exit gracefully. That comes to my next point.
• Exit at a high note: One should try to exit gracefully and elegantly, usually at the point when the business is doing well and the market conditions made it good for you to unload the shares and reap possible profits if you want to float the company.

So, exit strategy is not just a paragraph on your business plan, but an important part of your plan to grow and mature business to the next stage. We look at exit strategies adopted by several entrepreneurs after they moved out of their companies. When is it time to go?

• Trade sale/Management buyout: You can choose to sell your business to an outside company or within to your employees or fellow partners. This approach allows you to
  obtain a good price. There are a few conditions which will also apply to the Mergers and IPO case: increasing profitability from year to year, a high quality/established brand for your product or service, innovation or piece of intellectual property, a strong customer base, a high quality management team and advisory board and finally good maintenance of premises and assets with proper auditing.
• Merger: This approach is similar to the above approach, except that there will be a step to integrate both companies. It also depends on whether you are the stronger or weaker party. For example, a stronger company will merge with your company, and the power distribution and management team will be restructured. Sometimes, you can exit when the company is sold during a merger process. It also includes a due diligence process from the other party as well.
• Initial Public Offerings (IPO): This is to float your company to the public stock exchange. You need the same conditions as the trade sale and a few others, for example, writing a prospectus, engaging law firms and auditors to look at your company, discussion with your shareholders and also due diligence. The complication with IPO is that some companies are not running in profit but uses this strategy to raise more funds to continue the business. This strategy is often adopted by biotech companies.
• Family/Company Succession: You pass on the business to someone whether it’s family or someone else who you think will take the business to the next stage. You retain ownership and a seat on the Board of Directors.
• Wind it down: Closing down the business may not be a bad option if the business is not doing well. Of course, this remains to be a option when you first start a company.

With all these thoughts in mind, it is good to examine the exit strategy in your mind for the future. I will touch more on IPO for the far future.

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