Reasons for planning the exit. Why should you plan it ahead of time?
We were writing in the previous article about the importance of planning the exit strategy and brought to attention the unforeseen situations that may occur and that force the rapid development of such a process. The ideal option would be to seriously approach the chapter allocated to the exit strategy in the business plan. Two important reasons support this idea: a financial one and an organizational one.
The financial reason occurs when exploring funding sources. If you want to get financing from "business angels" or "venture capital" investors, you need an explicit exit plan. It allows these external investors to make the most realistic calculations on the rate of return on their investment, increasing your chances of securing business financing. Most investments in BA and VC shares depend on successful exit from business to mark the return on their investment. So it is unlikely that entrepreneurs will get financing from outside investors, in the absence of an exit strategy. If you choose this form of financing, you must research and find out the way and terms the exit took place from similar companies, in similar markets. If you have obtained external financing, the most common way out is when your business is being acquired by a larger company. Rarely, there are variants of initial public offerings (IPOs). In the case of equity crowdfunding of a business, the same problem has arisen: how can small financiers get out of their investment? One of the options found was the creation, through alternative financing platforms, of equity trading markets. In conclusion, choosing some forms of financing requires you to have a planned exit strategy.
The organizational reason
Depending on your exit plan, you should be able to structure your business in such a way as to optimize your earnings at the time of exit. Whether the goal is to make an IPO, to get a large acquisition quickly, or to keep the business in the family, early planning can only help guide your business to the desired result. Your exit strategy can influence many aspects of the business, such as the legal form, income models, structuring investments adapted to long-term or short-term growth, the types of investors you should look for, etc.
For example, if you want your business to be absorbed by another entity, you will choose a certain type of organization and keep a minimal decision-making structure; on the contrary, if you want to leave the business through a listing on a capital market, you will approach another type of organization, because the shareholding structure can be very diverse. In the first case, you will most likely transfer the package of shares and your involvement in the company will cease after a relatively short time, while in the second case, you will still be able to keep some of your shares and benefit from the rights of these, but without being involved in the management of the company.
If the exit plan is for acquisition by another entity, then you will aim to increase the attractiveness for large corporations and seek to become the best in your field. Such a plan should also include hiring and retaining a talented core team, which is acquired as part of the transaction and will increase the value of the business. It is desirable that, in this case, your business does not have too many shareholders, thus simplifying the transaction and reducing the risk of blockages in the negotiation. Instead, you must make sure that all investors agree with the exit plan and do not seek to oppose you. Collaborating with one or two large investors in such an exit strategy will make you a more attractive acquisition target than partnering with many small investors.
If your exit plans explore another strategy, through which you are only retiring from the business, but continue to benefit from its results, means that you need to implement a business model that allows your company to operate independently from you. This will require a very good systematization and standardization of business processes so that the business can operate somewhat independently. You will need to work on your business rather than in your business so that it can stand on its own two feet. In conclusion, the exit strategy will greatly influence your business structure.
For whatever reason you leave the business, planning it ahead makes you much less vulnerable. Through rational planning, analyzing various exit strategies, from the very beginning, entrepreneurs can maximize their return on investment.