An Exit Strategy Mindset - A Case Study On choosing "Good" Vs "Bad" New business Ventures

Introduction

The crafting of an exit strategy for a business and the harvesting thereof is the ultimate measure of success for entrepreneurs. This process starts when entrepreneurs select new ventures (to build or to start from scratch). These decisions can whether be good or bad as far as harvesting possible are concerned.

BAD

Over more than a decade Ventex Corporation advised and assisted companies with their exit strategies. This case study highlights assorted "good" vs. "bad" ventures in this regard that we consulted to. Contrasting companies are discussed under some of the key aspects of selecting the right investment with an exit strategy mindset. These key aspects are:

1. The window of opportunity.
2. Match of entrepreneurs' profile with opportunity.
3. The economics of the business.
4. competitive edge achieved.
5. Harvesting dynamics.

The Window of Opportunity

The timing of an exit strategy needs to be considered planned. Ideally entrepreneurs should embark on new ventures when a window of chance starts to open up and harvest it when the window of chance is still wide open. The It commerce and specific the dot.com bubble that burst is familiar in this regard.

Two of our clients in the cellular commerce are perfect contrasting examples of timing. Cellular Good embarked on a specific niche area in the pre-paid voucher store just when the window of chance started to open up. The business swiftly grew into quite a force and was bought within 18 months for a price-to-earnings ratio of 12 based on its serial income and projected growth.

Cellular Bad embarked on the similar niche area, but only a while after Cellular Good was sold. The business grew reasonably fast, but when they want to harvest the window of chance was conclusion down rapidly. Ultimately they sold the business for only the net asset value to a major player (who basically bought the client list to whom they want to sell other products).

Match of Entrepreneurs' Profile with Opportunity

Entrepreneurs need to ensure not only that a real chance exists, but also that there is a fit in the middle of their profile and the opportunity. They need to have the right attitude, skills and risk profile to match the requirements of the opportunities.

Two of our clients in the service center commerce (fuel and food court) highlight the fact that passion for an commerce and commitment to it are vital for the success of the business. center Bad bought a business in a residential area when the area was booming. The entrepreneurs did very well in the beginning, but soon lost interest and turnover declined drastically. They Ultimately sold the business after four years to center Good for a small profit.

The entrepreneurs in center Good had a real passion for the commerce and they put all their power into the business. The business grew tremendously and after 30 months they sold it for more than twice the buy price.

The Economics of the Business

Sound economics are crucial for any new venture. This includes factors such as size, behalf margins, break-even points, capital requirements and return on investment. Entrepreneurs need to considered analyze any new investment in this regard. If the economics are not sound the business has a small chance of surviving and even less chance of being harvested.

Two of our clients embarked on ventures in similar industries (agro-related), but with dissimilar niche markets. Agro Bad started a new investment in a crowded store and could only accomplish an average gross behalf of 18%. Due to the intensity of competition their cost of doing business was very high and they only achieved a net behalf of 1.5%.Agro Good was established in a much less crowded market. The business did their business without development too much waves. Their gross behalf margins were close to 28% with a net margin that averaged out at 14%. This business is currently worth more than ten times as much as business Bad (with similar turnovers) and it is also easier to harvest.

Competitive Edge Achieved

Entrepreneurs need to ensure that they can accomplish a competitive edge in any new investment if they want to make money and have an exit strategy in mind. This can for instance be achieved straight through rights products, know-how, economies of scale, relationships and systems.

Two of our clients in the It commerce brought dissimilar offerings to their clientele. It Good had specialised knowledge on computer networks and sole distribution rights for specific products in the geographic area where they operated. They grew their profits at 37% cumulative per year over the last seven years and became a major player in the region and are currently in high demand by international companies.

It Bad started out the same time, but except for good service and the right to sell certain products (not exclusively) they had no competitive edge. They grew their profits at a good 11% per year cumulatively over the last seven years. Seven years ago both companies were about the same size. The turnover of It Good today is more than four times that of It Bad and the value of the business is about eight times that of It Bad.

Harvesting Dynamics

The integral dynamics of a business and its commerce should be sound for good harvesting possible to exist. The trends in the industry, the type of business, the sustainability of the profits and the cashflows are some of the aspects that need to be considered by the entrepreneurs.

Two of our clients in the training commerce show the point of separating the entrepreneur from the business. Training Bad is in business for 15 years. They provide customized training for multi-nationals. They are well-sought after in this store but they basically work from covenant to contract. The business tried to sell shares and also tried to bring an equity partner in, but without any success. The conjecture for this is that the would-be investors feel that the business is to intimately connected to the owners (aging) and their knowledge.Training Good is in business for 12 years. They also sell customized training, but in addition to it they have many well-packaged training courses that are presented under license by many facilitators. This business has any face shareholders that bought into the company. A major listed business recently also bought a substantial equity stake in the company.

Summary

Many population see entrepreneurs, that are thriving in harvesting their business, as lucky. Although luck can play a small part in it, the major ingredients are the primary resources (e.g. Capital and people), detailed planning, allowable carrying out and hard work.

To improve the chance of a thriving exit strategy entrepreneurs need to analyze and select a new investment with the utmost care.

Copyright© 2008 - Wim Venter

An Exit Strategy Mindset - A Case Study On choosing "Good" Vs "Bad" New business Ventures

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