Why is it crucial to plan your exit strategy and how to do it?
When starting out on a new venture, the first thing that is on a founder’s mind is the goal of seeking acquisition but quite often they fail to comprehend what investors requirement might be if they wish to invest in your start-up. From an investor point of view, he will always look at how easy it is going to be to pull their time and money out when the right time beckons for them. We say, it’s never too early to plan your exit strategy & we are here to help you do it.
What exactly is an exit strategy?
“An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.” – Investopedia
An exit strategy, particularly in a start-up, is executed when an investment or business venture has achieved its profit goals. Few other times when exit strategy is required is when the company is being acquired by another company or the sale of equity is taking place.
Who are the people that require an exit strategy?
An entrepreneur/ founder who is seeking venture capital funding or angel investment.
A small business owner who needs to plan ahead and think about the possibilities of transferring your ownership rights a few years down the line as and when required if you plan on scaling your business.
It’s always a good idea to plan ahead as having a clear exit strategy is essential.
Is it required to include an exit strategy in Business Plan?
Adding an exit strategy to your pitch & business plan is quite crucial when it comes to start-ups that are looking for funding from angel investors or venture capitalists for funds to grow & scale. The choice of an exit plan is also known determines the future key development decisions.
What are the common types of exit strategies?
There are different types of an exit strategy but choosing the right strategy depends on the what type of company you are and what are your financial and strategic goals. Exit strategies are divided into two parts: Internal & External. We will briefly talk about the external exit strategies as it widely adapted.
1. Acquisition The acquisitions also called as M&A’s referred to as “mergers & acquisitions”. This happens when a company decides to sell itself to another company, the buyer incorporates or merges the services of that company into their own product or service offerings.
2. Initial Public Offering (IPO) This exit strategy is usually adopted by larger organisations compared to smaller start-ups primarily because it takes a lot to convince both investors & wall street analyst that stake in your company is worth something to the general public.
3. Management buyout Now that you’ve built a business whose legacy you want to see continued even after you’re gone, you’ll need to consider turning your employees. A management buyout is a good idea as you’ll have to do a lot less due to diligence.
Getting ready for the future
When you’re putting your pitch deck or business plan together for investors for the first time, think throughout your exit strategy. Make sure your business plan is up to date with respect to your financials & make sure your valuation is accurate.
About Devansh Lakhani
Director of Lakhani Financial Services, and a Chartered Accountant, he helps start-ups raise funds from his network of investors. He guides and advises start-ups to scale up by providing efficient sales, marketing, team building, and business management strategies. He has executed fundraising by block deals on the stock exchange and conducted IPOs and right issues on the SME platform to the tune of over Rs. 50 Crore. He is currently working with start-ups from various sectors to help them channelize their business models and investments.