The Exit Strategy - Strategies for Investor Exit
The majority of Business investors will be looking for a planned exit strategy worked out at the time of investment. It will be very beneficial to work out the ideal exit strategy for potential investors before you seek funding. Investors will need to know when they can realise a return on investment so this is a crucial area of the pitch to get right.
Investors want a maximum return on initial investment and a well thought-out exit strategy provides them with the incentive to invest in your venture.
It is worth remembering that an Investor would like to see very high returns on investment and also like to see that you have thought about how they can cash out in the future.
VCs may look for as much as 10 times initial investment after a 5 year period. The exit after 5 years provides them with a 200% per year return, realised at the end of the 5th year on exit. This may sound like a lot, investment of the Venture Capital variety tends to be structured differently to that of an Angel Investor.
Venture Capitalists often have a number of investments running at the same time and they are “hedging their bets”. Banking on one of the investments making it really big. Therefore even if every other business is making losses they still realise a return on their investment in your profitable venture. This out ways all of the investment they have lost in the other business ventures that haven’t been as successful.
Business Angels often have more flexible expectations and will tend to invest on a combination of gut feeling and interest in the business as much as what profit they will get out of the deal.
Trade Acquisition
A popular type of exit strategy that can be both lucrative to the investor and the Entrepreneur is a sale of the business venture to a rival company. Your competitor may have expansion plans and can realise the value of you brand, assets, business processes and customer base. This puts you and your investor in a good position to negotiate because there are major benefits for a rival in purchasing your business.
This type of exit route is popular with investors, in fact many savvy Entrepreneurs build businesses with a clear vision that in say 3 years they wish to be acquired by a particular company within their niche.
Franchise
Another good way for an investor to cash out with a sizeable sum is to plan to franchise your business opportunity. You effectively run your business for a period of time, fine tune your processes, prove your business model and franchise your business concept for others to replicate. This is particularly successful for businesses with large scale growth potential. A disadvantage for franchising is it is legally a complex matter, but it is worth considering if your concept is suitable for franchising.
Merger
Similar to a Trade Acquisition but you still retain an interest in the business. The combined resources of the two businesses enable further growth and you and the investor receive increased profits from joint activities.
Initial Public Offering
The rarest and most difficult of all exit strategies and often the most popular with Venture Capitalists is an IPO (Initial Public Offering). The advantageous of floatation on the stock exchange are tremendous for both the Entrepreneur and Investor. Major shareholders usually maintain control of the company, the investor can release stake in the business as cash, and most importantly the returns can be very high indeed. The disadvantages of IPO are numerous, the business must have phenomenal growth potential to receive IPO. It is also a very costly process with no guarantees of a positive outcome.
Exit Planning increases your chances
When you incorporate a well thought-out exit procedure you increase investor confidence, and therefore increase the chances of you successfully raising the capital you are looking for.
The Edge Venture Pitching system allows you to display your favoured exit options to investors. This shows that you’ve thought about the exit strategy and how the investor will cash out.
Set up your free Elevator Pitch profile in as little as 10 minutes.
