Scale-up Business Guide to Getting Investor-Ready: The Plan for Exit

It may seem counterintuitive to be considering the exit from your business when you’re preparing to become investor-ready, but it is an important part of the process.

One of the main aspects of your business that a potential investor is assessing when deciding on investing is ‘how will they get profit on their return?’ 

Because of this, you as a business need to have a plan for exit at an early stage and this article will outline two classic exit options of trade-sale and succession and how they might affect your chance of investment. 

Before going into the options, however, it is crucial to say that whatever exit route your business intends to go down, you must start planning early.

The earlier in the business’ life the better, as it will inform all decisions you make and, as stated, could affect investors’ decisions in funding you.

If you begin early you can develop a strong strategic direction that will maximise your business value before exit. 

What investors may be looking for

Some investors will invest in businesses that are high growth and high risk, as they may see the benefits and are willing to take those risks. This will, however, be all down to your pitch to the investors and it is up to you to convince them that the risk of investment is worth the potential reward. 

As many investors don’t like risks, you will need to set them at ease by showing that, though there is a risk, because of your preparation and strategic plan, the risk is not too large.

Other investors will want a more sure thing and be happy with a comfortable return and you will need to look at your business strategy and decide if this is more likely with your business. This process of assessing your business plan will help you identify the investors, or type of investor, your business should approach.

Another scenario is investors may look to invest through philanthropy. These investors are harder to find and your business would have to have a core attraction beyond potential profit. 

Some may want to invest because they want to be more involved or because the business might complement their own portfolio.  There are potentially lots of motivating factors in the mix.

The most important thing your business needs to do is to decide what type of investor you want and then heavily research the potential parties. You need to go into a pitch offering a potential investor what they are likely to find attractive.

investor-ready

Trade-sale

This is a very common way to exit the business. It is done by taking your business to the market and looking for a buyer. If your main aim is to sell your business for maximum profit then this route of exit is likely to be your best option.

A trade-sale would be an attractive exit plan to those investors who are looking at receiving a solid or even very profitable return (for the high risk high reward investor). 

Through a trade-sale you, as the founder of the business, will likely not have any more connection at all to the business (beyond perhaps an earn-out period), so if that isn’t what you want then this option might not be best for you.

Succession

Succession planning involves keeping the business in the family. This handover can be gradual or sudden but if what you want out of your exit is to leave a positive legacy, this may be the option you would want.

Through this route of exit, you may also be able to have some attachment to the business as you’re selling to your family. 

An exit through succession may be an attractive prospect to a philanthropic investor because they believe in the vision of the business and will want assurances that it will stay in the hands of people who share the beliefs and culture of the company. 

However, for the majority of investors, if the plan is to leave the business to the family then it will make your business less attractive. This is because it is less likely that there will be a big pay-out in the sale and therefore the investors will not get a satisfactory return on their investment.

investor-ready

To sum up

When preparing your business to become investor-ready, it is best practice to have an exit route decided or, even better, an actionable strategy in place. This is because investors will want to know how you plan to exit your business because that will directly affect their return on their investment. 

Though there are many reasons investors may look to fund your business, the most likely motivation is to see a profit for themselves. When you go into a pitch you must be able to convince the investor that your strategic direction has little (or well considered) risk and the business will have maximised its value by the point of exit. 

A trade-sale exit is likely to be most attractive to investors generally but there may be some who believe in your business and are less concerned about their own financial gain. In these circumstances, an exit through succession may be of interest to them. 

The most important thing is to research the investors you are pitching to so that you know your exit strategy will be attractive to them. 

If you’re unsure about the right exit route for your business then you can hire a Part-time Finance Director who can help you craft an exit plan. 

Getting investor-ready? Read more about:

The Financials

The Raise

The Pitch

The Marketplace

The Customers

The People

Written by: John Courtney

John is highly ranked in the Top 100 UK Entrepreneurs list by City AM and is winner of the Lifetime Achievement Award from techSPARK. He has been a Board Director himself for over 40 years and first started placing Non-Executive Directors over 25 years ago. John founded and ran six of his own businesses including a Management Consultancy for 10 years, a Corporate Finance offering for 10 years and a mid-sized Digital Agency for another 10 years.