Reach out
The Exit Strategy

The Exit Strategy

We’re Only In It For the Money...
Dispelling the Myths About Investors and Outlining Your Exit Strategy

Back in 1968, at the height of the ‘Peace & Love’ movement in San Francisco, rock musician Frank Zappa, and his band, The Mothers of Invention, shocked the music world by releasing an album called - ‘We’re Only In It For The Money’.

Up until this point, the image the music industry was projecting of itself, was that of the DRIVER of this new Utopian movement, where everyone lived in this dreamy world of tie dyed shirts, long flowing scarves, bell bottoms and Moroccan sandals.

A world where you shared everything with your fellow man, (sorry, ‘brother or sister’) including your weed, your mung beans and even your girlfriend. All set to a steady soundtrack of sitars and bongos by day and psychedelic music by night.

Money was supposed to be ‘unCOOL’. Money was just another construct created by ‘The Man’ (government and big business) to control you. In a perfect world, nobody would ever need money.

The trouble was that everyone behind the scenes was in on the act, and everyone was making a motza. You just weren’t supposed to talk about it. Those record industry execs that came to your gig with a bandana tied around their forehead and a fringed leather jacket, would sneak off out the back door and jump into their 1968 Cadillac Coupe De’Ville, and then head home to their 5 bedroom home in La Brea. While most of the musicians went home to their shared pad with mattresses on the floor and the smell of incense thick in the air. ‘Yeah man, right on! Who needs money?’

While the bands were touring in ‘groovy’ converted school buses, and living on cheap truck stop ‘specials’, the managers, publicists, record execs and promoters, would arrive fresh as a daisy, having flown the friendly skies of United, First Class.

But if you, as a hard working musician every questioned this arrangement, you’d get a ‘Hey, don’t you know it’s not COOL to discuss money? Peace, Baby. Peace.’

But Frank and The Mothers had spilled the beans and the music industry was never the same again.

Fast Forward to 2022

So far, we’ve discussed the fact that if you are going to truly grow this idea of yours, you’re going to need money. Most likely Other People’s Money (OPM), and that means you’re going to have to deal with Investors.

Now, while there are some Investors who don’t beat about the bush, and go straight for the money jugular, usually interrupting your pitch mid-slide with - ‘Righto, enough about your Vision, how am I going to get my investment back?’ Let’s call them the ‘Type A’ Investors.

There are also just as many Investors who love to dance around the subject. Like 1968 record execs, these folks like to pretend that money is the absolute LAST THING on their minds, and instead like to talk about things like, ‘creating eco-systems’, ‘making the world a better place’, and our favourite, ‘We just wanna give back to the industry that supported us’...

Let’s call these the ‘Type B’ Investors.

The first thing you need to understand is that with very few exceptions, BOTH of these Investor types will only have one thing foremost in their minds while reading your I.M. or sitting through your pitch -

‘What’s In It For Me?’ Or as we like to call it, WIFM.

Yes, we hate to break your little entrepreneurial hearts, but at the end of the day, while they’d love to change the world, or create a new eco-system, most of them are really only in it for the money. More specifically, they’re there for the BIG MONEY.

But that’s fine. That’s ‘COOL’.

As long as we now all know what we’re here for, we can have a frank and open discussion, and the best way to open this up is to direct them to your ‘Exit Strategy’. Versions of which you will need in both your I.M and your Pitch Deck.

So what does an ‘Exit Strategy’ refer to?

For starters, it may be referred to by a number of different terms, including:

  • Exit
  • Liquidation Event
  • Monetisation
  • Cash Out
  • ROI

You get the drift. But what these all refer to is the point at which the shareholders (the Investors, Founders, Directors and possibly Employees) who have all put in so much time, blood, sweat, tears and most importantly - good faith, are remunerated handsomely for their efforts.

In other words, it is the ultimate answer to the question - ‘Why the Hell Am I Here?’

Now, your Type A Investors (usually VCs and Smart Money types) will likely refer to this outcome in terms of ‘Multiples’ or ‘Leveraging Up’, or even ‘ROI’ (Return on Investment).

While your Type B Investors are more likely to talk in more airy fairy terms such as, ‘Building Wealth for Shareholders’, ‘Making the Dream a Reality’, or perhaps ‘Empowering Entrepreneurs’, and of course, the ole ‘Making the World a Better Place for Everyone’.

However they may couch it, the bottom line is that they will all want to know, ‘Exactly WHAT IS the bottom line’.

In other words, ‘What’s in it for me?’ e.g. ‘WIFM’.

What Are My Exit Choices?

The most common ‘Exits’ are:

  • Trade Sale or Aquisition
  • Public Listing
  • Partial Share Sale
  • Wind Up the Company and Sell the Assets

If you have no intention of ever supporting any of these options, the only option you have left is to just keep growing the business and distributing a steady stream of juicy dividends (based in the number of shares you hold) AND regularly increasing the annual salaries of Founders, Key Staff, and Directors. Believe it or not, Investors often refer to this as the ‘Lifestyle’ option. As in you never sell the business, but you enjoy a bloody good lifestyle.

The only problem with this strategy is that it is often hard to ‘sell’ to hard-nosed money types. Chances are they already enjoy the ‘Lifestyle’ you aspire to, and they don’t need another swimming pool, Porsche Carrera or Patek Phillipe $100,000 white gold watch.

What they really want is power, and even more leverage, and that requires BIG MONEY. These guys are looking for the next ‘Unicorn’ (a start-up that reaches $1 Billion in value) think Space X ($33.3B) or Airbnb ($35B). So don’t feel bad if they don’t get excited at your idea for a flying skateboard that could be worth ‘as much as $20 million a year’. Then again, they might just love it, so don’t be discouraged, just be realistic.

However, your task is to professionally present the most likely ‘optimum’ outcome, and then gauge their interest from there.

Elements of a Clear Exit Strategy

Obviously, you are going to have to provide some supporting data to back up your anticipated Exit Strategy, but first you will need to establish the issue of ‘Value’. How do you reach the metrics required for the market to value your company at $100M , or better yet, $1 Billion Dollars, plus?

Common Valuation Metrics

Once a business has a trading history, the metrics used to set a valuation differ from the metrics used to establish a valuation when you first set out to raise capital in the early stages.

Let’s imagine we have an exciting product in the ‘Wearable Technology’ sector that’s been trading and steadily growing over the past three years...

Common Metrics

  • Strength and growth trajectory of the market sector.

The Wearable Technology global sector is projected to grow from $116.2B in 2021 to $265.4B by 2026: it is expected to grow at a CAGR* of 18% between 2021 and 2036.

*Compound annual growth rate, or CAGR, is the mean annual growth rate of an investment over a specified period of time longer than one year. It represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios, and anything that can rise or fall in value over time.

  • Global Need

The Wearable Technology Market by Product includes (Wristwear, Headwear, Footwear, Fashion & Jewelry, Bodywear), Type (Smart Textile, Non-Textile), Application (Consumer Electronics, Healthcare, Enterprise & Industrial), and Geography.

Therefore, it would be safe to claim that there is a strong and growing global market for wearable technology.

  • Business Model

Let’s assume our business model is a combined one that includes outright purchase, monthly support via an App (subscription) and regular upgrades.

So, we can point to upfront sales of value $X, hopefully supported by a healthy increase in sales every quarter over the last 2 or 3 years. Then on top of that you should be able to show a steady rise in App downloads, plus people purchasing upgrades and extras. Effectively ‘multiple’ revenue streams.

  • Potential for Market Domination

Our product currently outsells the nearest competitor at a ratio of 8/3 in pure unit sales.

  • Defensible I.P.

Our patent lawyers have just confirmed that our pending patent has just been granted in both North America and China.

  • Year on Year sales growth x units / Projections

In terms of pure units, our factory in the Phillipines is churning out 20,000 units per month, only just meeting global demand. But we are just about to open a second factory in Mexico with the funds from a recent capital raise, and this will lift our total capacity to 50,000 units per month, and allow us to attack the U.S. market.

  • Year on Year sales growth x Dollar Value

Our current CAGR is around 12%/ Last financial year we announced a net profit of $27m.

  • Margins (Holding or slipping)

Due to the rising cost of materials - Our current margin has slipped by around 3% in the past 12 month. However, with a new factory and additional capacity, this will allow us to buy more materials in bulk, and we anticipate our margins improving by approx. 5% over the next 12 months, giving us a projected net margin of 27% per annum.

  • Product Road Map to the Future

Our current Product Road map shows us releasing our new ‘lite’ version of our existing product, which will allow us to attack the ‘Under $200 Market’, which we anticipate will equate to an additional 2,000 units per month.

We are also planning to release our new upgraded version of the existing product in Q3 of this year, which contains a number of cutting edge enhancements, and for which there is already a Waiting List of some 4,500 customers. The new version will sell for $1250 more than the current one.

  • Vision of the Founders/ Key Staff

We are not stopping with the current range. We are currently working on a range of wearables that will have application in the Defence, Health and First Responders sector.

  • Customer Satisfaction

A recent survey of existing customers saw us awarded a rating of 8/10 in the American Customer Satisfaction Index.

  • Competitor Movement

To date, the only competitor that has come close to releasing a similar product is google, but their product was recalled due to software issues.

In terms of comparable valuations, it should be noted that google recently purchased the wearable technology company SmartTrakker X, in an effort to acquire similar human GPS tracking software as developed by us, for $320M.

So, by applying all of these (above) metrics, you should be able to support the size of future valuations you are aspiring to, in order to trigger an ‘Exit’.

If your metrics are sound, there is a good chance your Investor will buy n to the premise that you are on track to be doing $500M+ per annum, in 5 years time.

If you’re doing $100M p/a and you can maintain the 27% margin, that gives you around $27M per year.

If you valued the business at $270M, that means it would take the buyer 10 years to break even before they started to make a profit.

But wait. We’ve produced evidence that that not only do we not have any serious competition, but that the market sector is growing year on year at 18%. So over the next 10 years we could expect our sales to grow similarly every year. So by the end of year one, sales should be $118M and then in year two $139.2M and in year three $164.25M. Do you see where we’re going? We’re heading for that $500M p/a.

Therefore, it is not inconceivable that in 10 years time you could be worth more like $800M. So if you can ‘Exit’ your business when you’re turning over $500M per annum, but convince a buyer that you will soon easily be worth north of $800M, that’s going to give your Investor (depending on what percentage they have if the company) a massive multiple on their initial investment, which may have been as little as $5M.

Exit Options Explained

If we go back to our exit options:

  • Trade Sale or Acquisition

This refers to selling the business to another player who is most likely in the same sector, or wants to access your market because they have synchronistic products or services.

This could involve them buying the entire company outright for cash, or ‘acquiring’ part or all of it by paying a combination of cash AND shares (in their company).

Objective: If you intend to propose a Trade Sale as your preferred Exit option, the objective here is to present evidence of recent sales of ‘like’ businesses.

So, if you’ve got a high tech headphone as a product, you could point to a recent example where a big gorilla like SONY has acquired a little known player in the industry for a substantial sum. (Obviously this calls for some serious research, but it’s well worth it).

NOTE: Many smart Founders build their company from Day 1 with a sale to a specific big name already in mind, for the future.

You are guaranteed to impress an investor if you can tell them - ‘We saw that Tesla wanted to improve their speech recognition in their driverless cars, so we threw everything we had at building the clearest microphone on the planet, with a view to them buying us out in the next 5 years.’

  • Public Listing

This is a common exit strategy when the company is in a strong position and sales are on an upward trajectory. With the help of a stock broker, you prepare a ‘Prospectus’ (essentially a legal I.M.) that explains how the company works and where the opportunities for growth lie, and then you ‘list’ the company on the appropriate market, (ASX in Australia, New York Stock Exchange, the LSE in London, SGX in Singapore, etc).

Shares in your company are then traded publicly. You should note that it costs around $1M in fees to list a company, and once you go public, there are many onerous governance and reporting protocols that will need to be managed. But a successful, well managed public listing can send your company valuation into the stratosphere.

Note: If you’re going down this route, make sure you come prepared with examples of recent listings for similar businesses, as well as examples of long term share price growth for existing similar companies.

  • Partial Share Sale

There are large private equity groups that are quite happy to take a substantial stake in your business, while still maintaining a ‘hands off’ approach to day-to-day management, provided they can see the upside. You would likely need to have a pretty exciting product in a rapidly growing market sector, to attract their attention, but it is possible.

Depending on the deal, you may have to apply the funds towards growing the business, but we have seen deals where the Founders are allowed to ‘take some off the table’ (take part of the funds for your own use) but it often depends on the existing Shareholder Agreement, and don’t forget there will be tax ramifications.

  • Wind Up and Sell Assets

There are instances where sales may stagnate, but the business has built a range of assets that are attractive to certain buyers.

These could include:

  • Logos and Brand Names
  • Recipes or Methodologies
  • Real Estate
  • Mining Leases
  • Patents
  • Specialised Tooling
  • Experienced Staff with Unique Skills
  • Customer Data Bases

There are ample examples where interested parties are prepared to pay top dollar for any of these, under the right market conditions.

You may no longer be motivated to continue to produce some luxury goods item, but another player may be very interested in buying the rights to your brand name, logo, and list of upmarket customers.

Or you might find that the old factory you bought several years ago is now sitting in the middle of a rapidly growing and desirable residential zone.

Presentation

Probably best to put in both a slide in your Pitch Deck, and a few pages in your I.M. that gives a high level overview of your proposed Exit Strategy.

Final Note:

Be prepared to defend your preferred Exit Strategy, but keep an open mind. These money guys/gals may know bugger all about your product, but what they do know is the Money Market.

That means they know ‘fifteen ways from Sunday’ to milk the last dollar out of s trade sale, or sweeten a public listing that will have both institutional AND Mum & Dad Investors clambering for your stock.

Sombetimes it’s best to just sit back and learn from the experts. So stay COOL, Baby!