E XIT S TRATEGIES

Kubr et al (2005) emphasizes in order to attract investors to a start-up project, a solid exit strategy, which describes how the investors will get their investments back with a substantial return and exit the project, will facilitate a company’s progresses. Naturally investors are interested in growth and profit of the business, but the lack of a solid and realistic exit strategy demonstrating how investors can accomplish this goal can immediately turn off many sources of capital (www.bizplanit.com, 2006).

The exit strategy also describes the long-term plans for the business. Ultimately, the most effective exit plans will take into account business, personal, and investor goals. Much of entrepreneurial literature describes the importance of a solid exit strategy chiefly from the investors’ perspective; how to demonstrate a realistic plan for investors to successfully leave the project and when to expect to reach liquidity.

A thorough exit strategy serves as a profound operation plan for the business, clarifying the projects future destination (www.bizplanit.com, 2006). To maximize the value of a new start-up it is essential to think, from an entrepreneur’s perspective about how to leave it further down the line. A carefully planed exit from the business helps the entrepreneur to

successfully design the business into the ideal shape for the chosen exit option, and maximizing the value from it. It also helps to exit at a time of own choosing, when the business is doing well and the market conditions are advantageous (www.bizplanit.com, 2006). To be able to design the business to fit the plan, it is important to look backward, that is to discount back the ideal scenario five years from now and identify actions needed today until the strike date (www.bizplanit.com, 2006).

The exit strategy is important for both for the entrepreneur and in the eyes of the potential investor. When elaborating different exit strategies, there are several definitions of exits, some of them similar to each other.

BizPlanIt, a consultancy firm, have identified the most common exits strategies, which are IPO (initial Public Offering), Acquisition, Sale of Company, Merger, Buy-Out, and Franchise (www.bizplanit.com, 2006). The difference of the six strategies concerns different types of companies, which are at different stages of its Company Life Cycle. For mature companies and organizations, the concept of IPO might be a successful strategic move, but may be difficult for a new start-up firm to accomplish, because of its complexity, uncertainty and costly process (www.bizplanit.com, 2006). In this report I will mostly analyze the

opportunities for acquisitions, since it the most common and used exit strategy of new start-up firms (www.bizplanit.com, 2006).

Looking at the buyers’ side of an acquisition and asking the question why someone is interested in buying another company, there are several reasons for that. Most of the worlds companies have competitors in some extent, no matter if the business is big or small.

Competing in a specific sector requires specific strategies to beat the industry average or close competitors. Among many strategies of how to gain market shares and succeed in the struggle of customers, growth is in many cases a successful strategy (Porter, 1980). As the company grows, the market share follows, and the revenues will probably follow as well. Large corporations are traditionally stronger competitors than small firms. A company can grow either by organic growth or by acquisitions. Organic growth means that the firm acquires its own customers and market share. An acquisition is a purchase of an existing corporation, and with the purchase comes the acquired firm’s market share as well.

In order to be familiar with the other concepts of exits, I will outline the other strategies and its’ characteristics stated by BizPlanIt (www.bizplanit.com, 2006):

Initial Public Offering, IPO

Initial Public Offering or IPO implies selling the shares of the company to the public to be traded on a stock exchange. The advantages of an IPO is the conversion to cash for investors, major shareholders usually maintain control, and high potential return. The company must have tremendous growth potential to receive IPO, it is a costly process, and the outcome is uncertain, which all are seen as disadvantages of the IPO concept. Major shareholders may be limited as to how much, when, and how they can sell stock. This event is very rare for most start-ups (Benjamin, 1996).

Acquisition

Acquisition means a business bought outright by another existing company. The advantages of acquisition are the receiving of cash or stock, it is often purchased by a strategic partner, and the management contract can be negotiated.

Disadvantages are: Fit must be appropriate, potential management changes, and corporate identity may disappear. Acquisition or buyout is the predominant method of achieving liquidity for small company shareholders (Benjamin, 1996).

Sale of Company

Sale of Company means business bought by other individuals or entities. The advantage is that cash is received immediately. The disadvantages are that the company must find a willing buyer, and that a sale of company normally results in new management.

Merger

Merger means join with and existing company. The advantages are that stock and some cash may be received, resources are combined, and current management may stay. The

disadvantages can be new partners or bosses, less control, little or no cash are received.

Buy-Out

Means that one or more stockholders buy out the others. The advantages are that seller receives cash, and other owners remain in control of the company. The disadvantages are that the seller must be willing to sell and the buyers must have sufficient cash to buy others.

Franchise

Franchise mean selling business concept to others to replicate. The advantages are that cash is receive, the current management is retained, and the opportunity for large scale growth. The disadvantages are that the concept must be appropriate for franchising, and the concept is legally complex.

In the context of a new technology start-up firm, the most likely exit strategy may be an acquisition, that is: the company of interest is purchased by a strategic partner (i.g.

another company) (Benjamin, 1996). The other exit strategies are not suitable enough, because of the requirement of healthy liquidity, which start-ups mostly do not benefit of (www.bizplanit.com, 2006).