An Exit Strategy Mindset: Pick the Right New Business Venture

Introduction

Millions of businesses are launched around the world every year. Typically, less than 10% of these deals are ultimately harvested through M&A, management buyouts, public listings, etc. An entrepreneur needs to integrate many aspects of a business to eventually ensure its successful harvest. This entire process must begin by asking the right questions. Some key questions that entrepreneurs should ask themselves when embarking on a new business venture are:

• Is there a true window of opportunity?
• Does your profile match that of the opportunity?
• Are the economic aspects of the company acceptable?
• Can they achieve a competitive advantage?
• Are the potential collection dynamics robust?

This article highlights the type of questions that entrepreneurs need to ask and answer satisfactorily before embarking on a new venture for which they have an exit strategy mindset.

Is there a true window of opportunity?

The rate of change in the world is increasing very rapidly. This creates tremendous opportunities for the prepared entrepreneur. The questions that entrepreneurs need to ask themselves to ensure that there is indeed an adequate window of opportunity are:

• Is the growth rate of the industry or sector high enough? A growth rate greater than 25% per year and improving usually creates many opportunities.
• Is the potential market size large enough? Typically, the market should be large enough to cater for multiple roleplayers. A current market size of $50 million can quickly grow to billions of dollars (if coupled with a high growth rate).
• Is there a need for the new company’s products and/or services? Proper market research is a prerequisite.
• Is the venture financially attractive? A detailed financial analysis and business projections are essential.
• Is the opportunity sustainable over time? The dynamics of the company must be sustainable enough for the business to be harvested.

Does the Profile of the Entrepreneurs match that of the Opportunity?

When the right team finds the right opportunity, a lot of money can be made. To ensure that the profile of the entrepreneurs matches the opportunity, they should ask the following questions about themselves:

• Are they passionate about the company? This creates energy, motivation for others and an environment conducive to learning.
• Do the entrepreneurs have the right skills to make the company a success? If not, they need to be able to acquire people with these skills.
• Where are they in relation to your personal sigmoid curves? Entrepreneurs need to be at a stage in their lives where they are willing to take on the responsibilities that come with entrepreneurship.
• Do they have the right mindset to successfully build the business? – Entrepreneurs must have personalities that ensure that the task will be completed.
• Is the risk of the company within its risk profiles? The risks for entrepreneurs must be commensurate with their personal risk profiles.

Are the economic aspects of the company acceptable?

Companies are generally measured by their financial performance. Although this is only one of the criteria of a successful business, it is absolutely crucial that it be in place. The type of questions that entrepreneurs should ask themselves about the economics of a business are:

• Is there enough sales potential? – If everything else is in place, but there is not enough turnover potential, then the business is doomed from the very beginning.
• Are gross profit margins high enough? Gross profit margins must be high enough to easily cover expenses, allow for pricing flexibility, and sufficient profitability. A minimum of 30% would normally be considered adequate.
• Will the break-even point be reached fast enough? The break-even and payback periods must be short enough to serve the specific type of business. An IT company should typically make money in a couple of months, while a mining operation can take several years.
• Is the capital requirement achievable? This should not be prohibitive for the company or be of such a nature that the capital of the entrepreneurs becomes too diluted.
• Is the expected return on investment acceptable? This must exceed the risk-free interest rate plus the risk of embarking on the venture. Normally a return well above 20% would be required.

Can entrepreneurs achieve a competitive advantage?

It is important for entrepreneurs to ensure that they are realistic about their expectations, and especially that they have the potential to gain a competitive advantage through the proposed venture. They should discuss the following questions:

• Are there enough barriers to entry? It should be difficult for companies to break into this industry. Lack of experience, finances, property rights, contracts, contacts, etc. They can act as barriers to entry.
• Can they add significant value to customers? It is important to have an offer of products and/or services that really add value to the customer.
• Is it possible to get a significant market share? A market share of 20% more is preferable. The market share can be in a specific market niche (product, service or geographic).
• Is there something that distinguishes this venture from others in the industry? It is important that a company can be substantially distinguished from the competition.
• Do they have the ability to significantly reduce costs compared to the competition? This can be achieved, for example, through economies of scale, production methods, and purchasing agreements.

Are the potential collection dynamics solid?

Entrepreneurs should ensure that the business is profitable by asking the following types of questions:

• Is it possible to separate the entrepreneur from the venture? This can be achieved through proper systems, training and succession planning.
• Are the trends in the industry favorable for harvesting purposes? Time is very important in choosing a business and also in harvesting it.
• Are the profitability and cash flows of the company sustainable? The business should not be dependent on a single customer or product, and should preferably have annual revenue streams and a wide variety of vendors, customers, products, and services.
• Can entrepreneurs maintain their competitive advantage in the long term? The intellectual property that exists in a company, its reputation, relationships and systems play a role here.
• Is the business profitable? The business and/or industry shouldn’t just be a flash in the pan. There must be a real need at the time for the type of business. Some types of businesses are easier to harvest than others (for example, a manufacturing company is more sought after overall than a consulting services company).

Summary

The first step in creating an exit strategy for a company is to choose a new company that will eventually be profitable. An entrepreneur should ask detailed questions about choosing the right company, and then do extensive research to find the answers. The chances of a successful business harvest are drastically improved through a proper fit between the entrepreneur, the business enterprise, and the exit potential of the business. Choosing a new business venture should be an integral part of any company’s exit strategy and should be managed professionally.

Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.