Every company should have a clear, wrtitten exit strategy.
A good exit strategy will:
- improve your company's probabilities of success
- shorten the time to exit, and
- often significantly increase the ultimate exit valuation
Especially with Exits Happening Earlier than Ever Before
A clear exit strategy is especially critical today when early exits are such an attractive option for many startups. Companies are now often sold only two or three years after they're founded.
Of course, in many cases it will take longer than two or three years to achieve an optimum exit. But this doesn't reduce the requirement for an exit strategy and continuous work on the exit plan--right up until the day the company is sold.
Selling is Just a Business Process
Selling a company is just another business process. It's a process just like a product development, financing plan or marketing campaign. The biggest difference is that the exit process often makes more money for the shareholders than any other process during the company's lifetime.
A Good Strategy will Increase Valuation
Designing and executing the exit well can easily increase the entire value of the business by fifty percent, or more. Yes, designing and executing the exit well, can make half again as much money as all the hard work, and investment, that goes into every other business activity. That is why the exit is often the most lucrative of all business processes.
Exit Strategy is a Pre-requisite to External Financing
A clear, signed exit strategy is especially important before developing a financing strategy. Most entrepreneurs, and a surprising number of investors, don't fully appreciate the degree to which different types of investors are only compatible with certain exit strategies.
Inadvertently creating a misalignment between the types of investors and the exit strategy often results in a complete failure of the company. This is particularly heartbreaking because it usually happens years after the company has already become a significant success. This is a core message in my book Early Exits.
It Can be Pretty Simple
An effective exit strategy can be pretty simple. Here's a real life example from an exit that I can talk about--Parasun Technologies. At the company's second strategic planning retreat the board and management agreed that "Our Core Purpose" was to sell the company for more than $10 million by late 2006 or early 2007. That exit strategy was a critical element in Parasun's exit for $14.8 million two years later. To read the entire Parasun case study, I highly recommend a new book available at the end of this month by Bo Burlingham called Finish Big.