The Founder’s Exit Strategy
As a founder of a business, you likely are not thinking about leaving the business, at least in the early stages of the business development. However, if you’ve ever entertained the thought of seeking investment dollars, an exit strategy ought to place itself high on your list of priorities.
There are, fortunately, only a few basic strategies for the longevity of a business and the role the founders play in it. The business can be profitable, earning a nice income for the founders, perhaps generating some dividends. Alternatively, it can be targeted in an acquisition, allowing the owners of the business to sell their interests in the business. Or, in what many investors will deem the best scenario, it can go public with an IPO to raise more capital, but also allowing the owners to capitalize on their stakes in the company.
All three scenarios have variations, but they form the basics. Each attracts a different type of investor, and any business owner looking for an investment should have their strategy in mind when attempting to raise capital.
Investors will need to share the exit strategy of the owners, assuming the investment itself is not the exit strategy. As such, an unclear exit strategy coming from the founders breeds some doubt as to whether or not the business has been thought through to its logical or desired conclusion.
Some investors want to find dividend generating businesses to invest in, which provide lower risk on their investment, and while perhaps not as lucrative as an IPO, are also easier to manage, and to divest themselves of since the stakes are often lower.
Others hope for an acquisition, seeking to flip the business over a few years, after helping it grow to another level. The risk is a little higher, but the business will likely still be profitable (otherwise who would want to buy it?) and can still provide some short term gains.
Last, some investors are always looking to hit homeruns. They aren’t interested in the short-term gains, but the potential for a huge gain over the course of their investment as the business goes public and raises billions in capital.
If you approach an investor looking for a homerun with a business that will generate ongoing dividend returns, or one that is aiming to be acquired by an investor who wants to be in the business for many years, the nature of the business, the management team, the market outlook – none will matter since you’re targeting the wrong person.