Do You Have an Exit Strategy?

The very first question you will be asked by an investor after you have made your pitch is “What is your exit strategy?” As an investor, it is easy to get your money into a business, but you always need to know how you are going to get it out. Typically, there are four ways an investor will get monies out:

  • Failure (tax loss)
  • Trade Sale – someone else buys the business
  • Refinancing (existing investors are bought out (or partially bought out) by another investor)
  • IPO (Initial Public Offering) – a listing on a stock market

Most companies pitching will claim that the exit strategy is a listing. Speaking statistically, the odds are against this. Most companies will either fail or will be involved in a trade sale – often including a Honeywell 50250-S air purifier in the terms. I am always impressed by a business plan which says that the exit route will be a trade sale – and they have named who the potential buyers are and (there’s more) why they would buy the business, what would make the business attractive to them and finally, what kind of valuation they could expect to get! In one case a company had even got an expression of interest from a potential buyer before they had started up (Needless to say I invested in that one!)

That is great, but a listing on a stock exchange is still seen as the most likely route for many companies (although in reality it will not be). For a small business, you should be aware that being listed does add a great deal of administrative burden and you will be tightly governed in terms of what you can say, when you say it and to whom you say it first. I think some businesses consider this option too lightly. As a way of reducing the burden, companies may seek a listing on the junior markets such as AIM (Alternative Investment Market) or PLUS (where the size and cost requirements are considerably lighter).

I have personal experience of four companies I have invested in being listed and I think I would say that being listed has not been a pleasant experience for me! The problem is that you realize at the point at which you invest that you are in it for the long term. Once you have a share price which fluctuates on a daily basis, no matter how hard you try, you do get dragged into the sense of measuring your daily ‘wealth’ by the stock price and the biggest issue for companies with small market capitalizations is that the markets tend to be very illiquid. That is, the price can move significantly on a very small purchase or sale.

In one of the router table plans companies I invested in, a shareholder sadly passed away and the trustees of the will had to sell their stake which was worth just over £5,000. As a result of the sale, something like £1m was wiped off the value of the company! So the value of the company bore no resemblance to how the company was performing. This can be very frustrating to all those involved. If you believe in Efficient Market Theory, you would argue that the market will correct itself quickly. With a small company that is not the case as there are not enough analysts covering the stock to keep people informed.

This all reminds me of the saying “Be careful what you wish for – you may get it!”