Why having an exit strategy for your business is important?

Planning an exit strategy is just as important as starting up a business. Many entrepreneurs- especially startups- find it quite hard to digest that even in the times, when everything is running well in the business, you might need to sell your business. So just having a business that worth a fortune is not enough, you must have an exit strategy ready to get the money back out in case things don’t work out well.

Understand your exit options – It is very important to understand the exit options. Broadly, there are two types of exit avenues which include- Initial Public Offering or IPO and Acquisition & Mergers.

An IPO is one of the best way to receive the highest value for a business. But the problem is that a company must have tremendous growth potential to receive IPO which makes it impossible for most of the companies. Another problem with an IPO is that it takes a long processing time and involves high risk factor. Acquisitions & Mergers,on the other hand, are the more realistic and common way of exiting a business. They are very much effective in receiving immediate cash.

According to Mukul Arora, Vice President at Saif Partners, IPOs in India generally don’t end up being very successful and are rare to see as, by this way, it is very hard to get the evaluation of a business.

Remember, always decide the best possible option keeping the market scenario, and the potential of your business in mind. If you have a strong business and have performed well above expectations in an IPO, it is not guaranteed that you will perform well again in a similar IPO in future, as the market conditions keep on changing and might have become unfavorable for your business. Therefore, act wisely.

Study other successful and unsuccessful exits – While planning an exit strategy always review what practices other businesses – in your category – used to carry out their exit. This helps to understand very clearly whether or not – how you are planning your exit strategy – is effective enough to prove your business valuable.

For example, MakeMyTrip, in 2010 managed to raise USD 70 million by selling out its 5 million shares at USD 14 each. The decision of going for an IPO by the company was just so perfect. Company keeping its strong market position in mind, called for an IPO in US market and positioned itself as one of the largest online travel and e-commerce business in India. What was so right about their exit? well, the timings and a well executed market research.

Keep reviewing your plan – A plan should be well documented and reviewed regularly according to the resources and risk factors. As the changing market scenario and the changing business scenario might affect the profits that your business is likely to receive, in case of an exit.

Exit – While exiting, a small mistake can lead to a complete disaster. Right before calling for an exit, cross check that you have restructured your company’s financial reports in a way that the records do not give an impression that the company is calling for an exit because it was having a hard time to survive. Also, make sure you have reviewed all the legal agreements that might cause trouble during the exit process.

Having an early exit plan: Good or Bad?

Well, having an exit strategy doesn’t necessarily mean that the companies with an exit strategy end up being a failure. A well planned exit strategy enables an entrepreneur to run his business while enjoying the control in his hand and allow him to maximize the benefits in case of an exit.

“Having an exit strategy is very important. An entrepreneur should always have an exit plan ready at an early stage and he/she should keep reviewing it as the company evolves” believes Mukul Arora. On contrary to that, Suvir Sujan, Managing Director at Nexus Venture Partners thinks that the companies should not have an exit strategy. While supporting his belief, Suhasini Mehta, VP at Nexus Venture Partners added “Nexus Venture Partners invests in early stage start-ups and we really don’t believe that they should start by having an exit strategy in mind. They should focus on other things that involve building the organization.”

An exit plan basically prepares an organization for the worst while it plans about taking the business forward. A company should strategies its exit plan at an early stage. Though, it doesn’t mean that an entrepreneur should operate his business with a short term plan. An entrepreneur should take his business forward while emphasizing on how he can create the value of his business rather than just focusing on the exit.

Start Planning

The objective of exit planning is to determine how a business can maximize its value. And those who do not plan an exit strategy end up selling their businesses haphazardly or simply in a loss. Investing time to plan and prepare an exit plan gives much higher financial awards to the business in case it sinks. An exit plan however, is a complicated process which demands a serious panning and continuous reviewing but its definitely worth investing time.

The author can be reached at devesh@iamwire.com

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  • Ankur Dinesh

    Good Article