Start at the End - "Thinking Through Your Exit Strategy"

Monday, August 27, 2007
Contributed by: James Wester

As part of attracting investors, it is critical that investors understand your exit strategy.  Investors are concerned about the return of their money and the return on their money.  Consequently, investors are going to be concerned with both your short and long-term business plans.  Following are some questions to ask yourself:

  • Do you see yourself operating your business 20 years from now?
  • Do you see yourself operating your business 10 years from now?
  • If this business venture is successful, are you looking to do something different?
  • Is the purpose of your business to make huge dollars quickly?
  • Are you most concerned about establishing a solid business that will continue over a long period of time?
  • Will this be a family business that will be passed on to other family members?
  • How long do you plan to have the investors involved in your business?
  • What are at least 2 to 3 ways that you could repay the investors (including a rate of return) and over what period of time?

The primary purpose of the foregoing questions and many others like them is to have you as the owner thinking through both your exit strategy and the exit strategy for any investor.  Many venture capital investors are looking for a high rate of return and an exit strategy within the next 3 to 7 years and are not expecting a long-term investment.  Many venture capital investors are looking for a company that will go public or be sold during a specified period of time.  Consequently, it may be any opportunity for you as the owner to buy out the venture capital investor as one of their exit strategies.

Angel investors are different from venture capitalists and are typically folks that are not as organized as venture capitalists, but are looking for investment opportunities and may be more flexible regarding exit strategy terms.

While an initial public offering is a pretty rare event for a new business, it is one possible exit strategy.  In addition to the sale of the stock or the business, it is also possible that you could merge the business with another business (which includes either acquiring another business or having your business acquired).  You should also give consideration to the possibility of simply buying out the investor.  There is always the possibility of franchising the business.

In thinking through your exit strategy, be realistic about your possibilities, be honest with potential investors and do not sell investors on expectations that you cannot meet.  You should be sure to incorporate your personal goals for the business with the goals of any investor.

Any investor is going to expect that a business owner has considered the potential exit strategies, both from the investor's perspective as well as the owner's perspective.  Most business owners do not focus on the exit strategy, but it is of extreme importance to any investor.  Having given thought and consideration to multiple exit strategies for both yourself and any potential investor should serve you well in attracting that investor and succeeding in your business.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.