Posted: March 31st, 2022
Entrepreneurship is a risky business and requires a certain type of personality to really succeed at this lifestyle. Every and any business or idea will certainly end when the time is right and it is important for those wishing to exploit profits when to get out of the business. The purpose of this essay is to explore the options that entrepreneurs and investors have to recoup their investments and continue on to the next stage in life. This essay will explore exit strategy options and the considerations that must be taken into account before performing these actions. Ultimately this essay will describe how exiting a business venture is just as important as any other component of the process.
Why Get Out?
There are many reasons why anyone would want to change something up in their lives, but when it comes to venture capitalism it is important to understand all the implications that accompany such a move. There are many conflicting and interesting reasons why someone would begin retreating away from a business investment. It requires a sense of profit, timing and the ability to take advantage of the current circumstances.
With entrepreneurial businesses, it is vital to plan for the future, growing the value and attractiveness of the business by implementing a clear development strategy from the beginning, including putting in place a strong management team to lead the business following the eventual departure of the entrepreneur. Taking an exit is not something which can happen easily overnight and time spent planning for the inevitable and structuring the business correctly should be approached with care.
Many times it is difficult for investors to leave their projects. Emotional attachment is very dangerous in the business world and it is important to keep profit margins and victory in mind when deciding to stay or go. Bloomberg (2006) suggested that “Small-business owners and entrepreneurs are involved and invested and personally identified with their businesses in ways that employees in large companies just aren’t. When should they start thinking about retirement? It’s hard to say when, because they don’t feel the same pressure as an employee to retire by a certain age. They make the rules, and they don’t have to retire if they don’t want to. It’s rare for a person to walk away from the business unless they want a child to take over.”
It appears that there are basically only two reasons to employ an exit strategy as an entrepreneur. The first is that outside investors want to collect their return. Equity investments are not like loans with interest. The investor sees no return until he cashes out, or the company is sold. Even three years is a long time to wait for any pay check. The next is that Entrepreneurs love the art of the start up and running a business. It is in their blood and engrained in their mind to do this type of work. Assuming a startup takes off, it will probably find that the fun is gone by the time you reach 50 employees, or a few million in revenue. The job changes from creating a “work of art” to operating a “cookie cutter.”
For some investors, an exit strategy sounds negative. Actually, the best reason for an exit strategy is to plan how to optimize a good situation, rather than get out of a bad one. This allows leaders to run important startup and focus efforts on things that make it more appealing and compelling to the short list of acquirers or buyers to target (Bernard 2013).
Strategy 1: Take the Money and Run
One very simple and transparent way to exit a venture capital business is to simply pay yourself out as much as possible before just simply leaving. Bleeding a company dry, may seem like a destructive method, but holds great advantage to the entrepreneur responsible for the start up. Through this type of exit strategy, entrepreneurs usually make the smallest amount because they are selling their business assets and that too at a price buyers are willing to pay. This is called a lifestyle business and investors should realize if their business falls into this category. Robbins (ND) agreed with this idea. He wrote ” rather than reinvesting money in growing your business, in lifestyle companies, you keep things small, take out a comfortable chunk, and simply live on the income. ” There are considerations to this method however: ” If you’re in a business that must invest to grow, taking out too much money can hurt you down the road. Also, if you have other investors, taking too much can upset them.”
Strategy 2: Merger
A merger is when two companies get together, establish a value on each company, and then combine the two to form one bigger company. In most mergers, the company shareholders receive stock in the bigger company which is presumably worth more than the stock held in each independent company. A merger is a great way to plan an exit because it can significantly increase the business value. For example, two $15 million businesses that join forces can expand much more rapidly into a collective $50 million business five years down the road. At that point, the shares in the merged company will be worth much more than they could have been with the individual business. A merger can also be a partial alternative to business bankruptcy. A larger business can usually acquire the assets of your business without taking on the debt responsibilities, which allows the best parts of your business to continue while only requiring that the debt portion undergo bankruptcy proceedings.
Strategy 3: Buyout
The most common exit strategy for any business owner is to sell the business to someone else. A sale typically results in the seller of the company receiving cash in exchange for the company. Finding a buyer to take up the business is a great way to exit the game. If you have planned to sell your business, you should focus on developing a transparent and sustainable business structure. It is very important to keep on creating innovative product or technology to take over a particular market so that the entrepreneurs are keener to acquire your business. This exit strategy is common among professional services firms and medical practices. This idea should be considered if the business in question is in a partnership or in a service-related industry. This strategy differs from a merger or acquisition because it is not combining two businesses. This is simply just selling it to someone else.
Sell a company to investors through an initial public offering (IPO) is another exit strategy that can be taken up by investors. An IPO is an effective method of recouping investor funds, selling out ownership and gaining funds for future company growth. An IPO is a solid exit strategy for companies to transition from backing by angel investors and venture capitalists to status as a publicly traded company. Even though IPO alternatives for a successful startup seems to be coming back into vogue, it is relatively rare. After a record low of 39 U.S. IPOs in 2008, the market was up to a still trivial 159 in 2011. Even in most of these cases, the original startup founders were pushed out, or heavily supplemented, with experienced executives.
The strategy sounds the best one but it is a lengthy process. IPO attracts a lot of attention and they take years to build a business that can go public and then years more to prepare it for Initial Public Offering. This exit strategy brings the maximum pay out but it becomes the most expensive one as well as you will have to spend millions to obtain an IPO. It also involves several restrictions to achieve liquidity through IPO so if you own a small business, experts suggest you must consider another business exit strategy rather than this. At the same time, you cannot control when the market is strong or weak so it is hard to plan IPO for a business ( Faust 2008).
Anonymous. (2006, July 24). For Small-Biz Owners, It’s Tough To Let Go. Business Week, 3994. Retrieved from http://www.businessweek.com/magazine/content/06_30/b3994407.htm.
Burrows, P. (2010, February 15). Hot tech companies like Yelp are bypassing IPOs. Business Week Online, 4166, 23. Retrieved from http://www.businessweek.com/magazine/content/10_07/b4166023271880.htm?chan=ma gazine+channel_new+business.
Faust, D. (2008, May 26). The perils of going public. Business Week, 085. Retrieved from http://www.businessweek.com/magazine/content/08_21/b4085064750402.htm.
MacMillan, D. & Burrows, P. (2009, November 2). The app economy. Business Week, 4153. Retrieved from http://www.businessweek.com/magazine/content/09_44/b4153044881892.htm.
Thornton, E. (2008, November 25), How Private Equity Strangled Mervyns. Business Week. Retrieved from http://www.businessweek.com/stories/2008-11-25/how-private-equity- strangled-mervyns
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