In this episode I welcome the founder of Exit Factor which got me thinking about exit strategy.
What is an exit strategy? Why is it important and why should an entrepreneur care?
A business exit strategy is an entrepreneur strategic plan to sell their ownership in a company to an investor or another company an exit strategy gives a business owner a way to reduce or liquidate their stake in a business and if the business is successful, make a substantial profit liquidation means converting property or assets into cash or cash equivalents by selling them on the open market liquidation similarly refers to the process of bringing businesses to an end and distributing its assets to claimants according to Investopedia.
The best example I can give you of an extra strategy is using stocks I like to play stocks often included in cryptocurrency so for this example, I'm going to use Bitcoin an exit strategy is similar to a stop loss in stocks when I own Bitcoin and I was up at 66,000 per call and I wanted to hedge my bet so I put a stop limit loss order on the currency.
A stop limit loss is an order place with a broker to buy or sell a specific stock once the stock reached a certain price, a stop limit is designed to limit an investor's loss on a secure position. This is the key piece to an extra strategy.
For example, setting a stop loss for 5% below the price at which you bought the stock will limit your loss to 5% you buy $100 stock if it goes down $5 or 5%, the broker will automatically sell the stock limiting the investor's loss to only $5. This is an example of an exit strategy using stock but what about for businesses?
Well, there are a few options Initial Public Offering IPO mergers and acquisitions management buyouts, embryos, liquidations bankruptcies, these are all exit strategies. And yes, some of them are more appealing than others. Rarely do entrepreneurs want to find themselves in a liquidation or bankruptcy portion of the exit strategy. And this is why the exit strategies are important.
The entrepreneur must first understand how much the businesses worth they need a business valuation.
This is very similar to a home appraisal before buying a house just because I love my house and I think it's worth $2 million. Because all of the blood, sweat and tears I put into remodeling a bathroom doesn't mean the market will think it's worth $2 million.
There are specialists that can help entrepreneurs determine their business valuation, use them if the pandemic has taught us anything it is that things can change overnight and having an exit strategy to help defend entrepreneurs investment is extremely important. An exit strategy will also help structure the business for future growth.
What is the end goal? No entrepreneur will live forever if the plan is for family succession. That is an exit strategy that must be planned for if the goal is to aim for merger and acquisition the entrepreneur must plan for that as well.
Although it is called an exit strategy, it is one of the first thing an investor is going to ask for and having an exit strategy for working with an investor is also important. Deals fall through all the time. What happens when an optimistic buyer doesn't get funding but the entrepreneur already put a down payment on a new house.
It is also important to be ready tomorrow an investor may come knocking on the entrepreneurs door with a golden parachute to retirement an exit strategy helps prepare the process of selling the business or exiting the market completely as this next guest will tell any entrepreneur.
Everyone will exit their business in some way. Either feet on the ground or feet first as they say why not be prepared to get the maximum value possible.