Types Of Exits

February 9th, 2010 by admin

While I have my favorite exit style, it isn’t the only one. I have mentioned some and hinted at others; some bad, some good, all possible. You can plan for any of them; or, at the very least, you can put some backup plans in place. There are seven main categories of exits. When you start a business, you need to consider each of these, even if you rule some out in the planning stage.

Types of Exits

  1. Market Failure or Natural Catastrophe
  2. Competition Closing In
  3. Selling Your Business
  4. Merging
  5. Going Public
  6. Raising Venture Capital
  7. Systemizing and Cash Cows

#1 Market Failure or Natural Catastrophe

These are devastating and almost impossible to predict. Three of my digital businesses collapsed due to 9/11, and I wasn’t alone. Countless ventures tanked as a result of the downshift in economy and morale. One of my associates happened to be running a highly profitable call center at the time. When the tragedy began to unfold, nobody was in the mood to take surveys, respond to customer queries, or engage in any type of telephone interaction.

That mindset persisted for quite some time. What could he do? Between office space and employees, he had a fixed overhead cost. I sympathized with his dilemma. Should he lay everyone off or hang on tight and hope the world would bounce back? In the end, he tried to save his team. It was an honorable thing to do but, regrettably, it was the wrong decision.

Think of emergency exits like you think of going to the dentist with a toothache. Deal with the unsalvageable tooth quickly, and you’ll not only get rid of the pain but save yourself additional damage. Before you start on a venture, remember that catastrophes beyond your control are a possibility. Make rules up front so that you don’t get stuck going down with the ship. If you are sinking, head for the lifeboats sooner than later and then wait out the storm. On a sunnier day, go ahead and try again. Getting out early also gives you and your team a chance to find something more solid while the market is still reeling.

I’ll be the first to tell you that this is an area I have routinely struggled with. I tend to hold on too long. An entrepreneur never wants to give up, but it’s sometimes best to let a dying venture go. Maybe your slant on the market isn’t working out. Diversify! After 9/11, telemarketing plummeted, sure, but it was the perfect time to get into security systems. You can take a market catastrophe and find the next big thing, but it requires hard decisions and, sometimes, having to leave an old and beloved idea behind.

#2 Competition Closing In

The only thing you can do in the face of a monster competitor is to stay out of reach. You have to keep toward the front edge of the wave. As a small business, you have a big advantage. You are flexible and quick, without any corporate drama to bog you down. If you can surf your venture on the front end of that wave, it will take you for a thrilling ride. Just be careful; the only thing that hurts more than a competitor who squashes you is a wave that crashes you right into the rock-hard coral. Don’t ride so far ahead that you can’t stay on the wave you caught.

One of the biggest signs of skilled entrepreneurship is timing. When do you get on the wave? How long will you ride? Most important, when will you get off? Several years ago, I rode a very successful wave in the mortgage market and had the opportunity to sell the company for millions of dollars. I opted to try to stick with it. Sure, I prolonged the joy of the ride, but I ended up standing neck deep in the undertow. Out of necessity, I finally closed the company and laid a number of people off. Timing is everything. Keep your eye on the approaching shoreline.

#3 Selling Your Business

This is a fun and exciting strategy for a quick exit. Like I said about the competitive landscape model, you can quickly determine who your potential acquirers are. If you are filling a smaller hole with lots of borders, you can make it a larger event. Don’t announce your arrival into the space until you’ve built something viable; once you’ve launched, though, get your name out there.

While I was general manager of About.com’s Web Services Division, a second-tier page search provider started reaching out for occasional contact with us and other large competitors in the area. They weren’t divulging anything big, just opening a friendly “I’m here” dialogue. Sure enough, within a year that little company was snapped up for millions of dollars. I had a similar experience with an international sports equipment company I owned. The process let me have fun with the business and come out with some cash in the end.

Selling is not a universal exit strategy, though. Take time to consider the pros and cons before selling your business. While a sale is quick in and out and quick to cash, you and your teams don’t get to stick around very long. Since you target a niche market, it’s possible that the competition could stomp you out before you build to the sale.

At the same time, though, this approach lets you fly under the radar and avoid the public eye. With a bit of anonymity on your side, you can come in quietly, make your money, and leave. Some like that, some don’t; usually, the low-flying outcome is the norm, though. Very few companies sell for the big bucks that will land your name in the Wall Street Journal.

#4 Merging

Merging is a great way to take what you’ve built and double down your bet for resources and stability. Often, opportunities arise to merge with bordering companies that have complementary skills where your strengths can fill each others’ weaknesses. Ron and I went through a merger with our business to increase our probability for success. Going in, our core skills were engineering and SEO. We began in the early stages to have discussions with a New York firm specializing in sales contacts and affiliate marketing. Midway through writing this book, we decided to formally merge.

In essence, a merger is a stabilization mechanism. Merging is a way to diversify the talent. A good merger should stabilize your venture, elevate your chance of success, significantly add to the breadth of your market, and make it more difficult to displace you. However, all this stability comes with some pretty serious cons. A merger will dilute your ownership, introduce partner control issues, and create new concerns over culture. The new company basically steps in as a partner to your company; just as with any new partner, make sure that your priorities line up. Is it a good match? If not, it’ll be a nightmare.

#5 Going Public

Going public is a valid and lucrative option. If you come from a bootstrap model, however, it can take you a number of years to get to this point. There are exceptions, but you generally need a fair amount of capital and some real energy behind you. This is an incredibly significant liquidity event. If you want an exit plan totaling more than just a couple million, this is the way to go. A successful IPO is outrageously labor intensive, however, and your company will be subject to serious scrutiny. Going public is not for the fainthearted. A business needs stamina to make it through the process; I’ve seen many die trying. It requires absolute accountability and an unyielding structure.

#6 Raising Venture Capital

Listing this as an exit event actually makes me laugh. I can hardly believe I’m writing this. Seeing what I’ve seen, however, I know that this issue needs to be discussed. Too many young entrepreneurs build a business plan, get lucky (or wily) enough to receive venture capital, and then treat it like some grand exit. After all, when the millions roll in, you can live the business high life—right?

Think again. Once you cash that check, the work really begins. You may have stabilized your business by securing significant financing, but you have locked yourself down and decreased the probability of a smaller, quicker exit. Why? Read the fine print. Venture capitalists typically require a multiplied return on their investment. If they give you two million dollars, they will not even think about selling the company unless you can do so for an incredibly high multiple—four or six million just won’t cut it.

Let’s talk through this. Say I build the company and things go well. A year and a half into the venture, it has evolved to a point where I can sell for five million dollars. Personally, that sounds pretty good. If I could pick up even three million dollars, I would be inclined to do so. But let’s go back to that contract you signed. If a venture capitalist is invested, it’s not going to happen, baby. Theirs is a bang-or-bust mentality. You don’t even have the freedom to make the choice for yourself.

So, what are the pros of venture capital? You stabilize quickly and, for a period of time, have a steady influx of cash. The cons? The work has just begun, and it’s farther to the next exit than you can imagine. You have dramatically increased your accountability and lost a significant amount of flexibility; a real exit event will have to come at a much higher multiple.

#7 Systemizing and Cash Cows

This is really a great option if you are in a stable, secure marketplace. I have had the most success in this arena when dealing with real estate. I acquire the investment property, pay it off, and leave a manager to run the business while I collect the cash. The insurance industry follows this model as well. However, if you’re entering a more volatile industry (like technology), this is not a really good option for an exit. You need to ensure that your asset doesn’t up and blow away.

If you play your cards just right, cash-cowing your venture can be considered a valid exit event. You retain ownership, you have a cash stream, and you maintain a very flexible lifestyle. On the other hand, there is a certain level of risk with retaining a company that you are not actively involved with. You can let it go, as long as you keep your finger on the pulse. If you feel it slowing, you need to take some action. Also, this sort of cash cow doesn’t come from one big event. These chunks of cash come in small increments over time.

Porter’s Points – Types of Exits

  • Decide when you enter how you want to exit. Be sure to have thought through all the possibilities and have backup plans in place. Rarely is a business a straight shot from start to finish.
  • Bad exits sometimes happen to good people. If a disaster, market-induced or otherwise, forces your business toward folding, quickly get out. Everybody—you, your team, and your later ventures—does better if they can deal with a hurricane when it’s still hundreds of miles from the coast.
  • Keep a close eye on your competition. As a small business, you have to stay at the front of the wave. Pay attention to the environment, too; just because you’ve eluded competition so far doesn’t mean you’ve escaped a changing market trend.
  • Building your business to sell works best when you place it in a competition-heavy intersection.
  • If you want to ultimately stick with your business, consider merging. A merger gives you the stability needed to hold onto your market footing after you’ve been in the game a while.
  • An IPO will make big bucks, but going public doesn’t just happen. To have success, you have to spend the time to be worth the public payout. Venture capital is not a real exit. Don’t let yourself have any delusions about where that couple of millions is going to take you.
  • Systemizing a cash cow makes for a long-term exit investment; if you are looking for the big payout, however, this isn’t the way to go.

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment