Some investors may not think it makes much sense to consider an exit plan when beginning a new business venture. After all, why disturb the visions of the fun and success your new startup will bring you with thoughts of what might come next? But an exit plan is essential to an angel investor who wants to become sure he or she realizes a good return on their investment.
Table of Contents
Public Offering
Initial public offerings were once the ultimate goal of many new businesses. An IPO happens when a privately-owned company offers shares in the company to the general public. This option allows a business owner and their management team to maintain control of the company. In the process, the value of the company may skyrocket. The potential downside to going public is that public companies must adhere to additional regulations. But the increased value of the investment is likely to render this nuisance irrelevant.
Private Offering
Private offerings are similar to public offerings. The difference is that shares of the company are made available to a select group of investors. The group of investors that may become part of a private offering includes friends, family members, institutional investors, and accredited investors. This represents another situation where healthy profits become likely for the angel investor.
Mergers
Money Morning defines a merger as the purchase of a business by a larger, more established business. The two companies then merge into one business entity. This exit strategy will likely allow the business owner to negotiate a higher price for a business than would otherwise be possible. One reason for this is that companies are likely to pay a little more in a merger when the smaller company represents competition. The smaller company’s value is also higher when it provides a good or service the purchaser covers.
Venture Capital
Venture capital provides a steady source of income that will make continued business development possible. Companies that can continuously attract new investors will keep the money rolling into the business. Venture capital provides a safe exit strategy for business owners and presents opportunities for the business to become absorbed into private portfolios.
Cash Cow
Once a startup cements itself in the marketplace and provides a steady profit, angel investors can use the return they realize to fund future investments. This tactic is most useful for business entities that provide products or services that outsell what is normal for the industry. Businesses that reach cash cow status also make great targets for acquisition. The owners of these businesses will have a choice to make regarding how they take advantage of their success. But the angel investor will sit in a prime position to profit with whatever direction the business moves.
Some new investors make the mistake of viewing an exit plan as a negative. However, a good exit plan should represent an effort to maximize the benefits of a good situation and not a method used to escape a bad one. Knowing when and how to exit a startup investment may become the single most important determinant for success and failure.
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