An Exit Strategy Mindset: A Case Study in Choosing "Good" against "Bad" New business ventures

Introduction

Crafting an exit strategy for a business and its harvest is the ultimate measure of success for entrepreneurs. This process begins when entrepreneurs choose new ventures (to build or to start from scratch). These decisions can be good or bad in terms of the potential for use.

For more than a decade, Ventex Corporation has advised and assisted companies with their exit strategies. This case study highlights several “good” vs. “bad” adventures in this sense that we consulted. Contrasting companies are broken down into some of the key aspects of choosing the right company with an exit strategy mindset. These key aspects are:

1. The window of opportunity.
2. Matching profile of entrepreneurs with opportunity.
3. The economics of business.
4. Competitive advantage achieved.
5. Harvest dynamics.

The window of opportunity

The timing of an exit strategy must be carefully planned. Ideally, entrepreneurs should start new businesses when a window of opportunity begins to open and harvest them when the window of opportunity is still open. The IT industry and specifically the dot.com bubble that burst is well known in this regard.

Two of our customers in the cellular industry are excellent contrasting examples of synchronization. Cellular Good started in a specific niche in the prepaid voucher market just as the window of opportunity was beginning to open. The company quickly grew to a major force and was bought in 18 months for a price-earnings ratio of 12 based on its serial revenue and projected growth.

Cellular Bad started out in the similar niche area, but only some time after Cellular Good was sold. The company grew reasonably fast, but when they did want to harvest, the window of opportunity closed quickly. Ultimately, they sold the company for NAV alone to a major player (who basically bought the list of customers they want to sell other products to).

Matching Profile of Entrepreneurs with Opportunity

Entrepreneurs need to make sure not only that there is a real opportunity, but also that their profile fits the opportunity. They must have the right attitude, skills, and risk profile to qualify for opportunities.

Two of our clients in the service station industry (gasoline and food court) highlight that passion for and commitment to an industry are vital to business success. Station Bad bought a business in a residential area when the area was booming. Entrepreneurs did very well at first, but soon lost interest and turnover dropped dramatically. They eventually sold the business after four years to Station Good for a small profit.

The Station Good entrepreneurs had a real passion for the industry and put all their energy into the business. The business grew tremendously and after 30 months they sold it for more than double the purchase price.

business economics

A good economy is crucial for any new company. This includes factors such as size, profit margins, break-even points, capital requirements, and return on investment. Entrepreneurs need to carefully analyze any new venture in this regard. If the economy is not strong, the business has little chance of surviving and even less chance of being harvested.

Two of our clients embarked on ventures in similar (agro-related) industries, but with different market niches. Agro Bad started a new company in a crowded market and was only able to achieve an average gross profit of 18%. Due to the intensity of the competition, their cost of doing business was very high and they only achieved a net profit of 1.5%. Agro Good established itself in a much less crowded market. The company did its business without making too many waves. Their gross profit margins were close to 28% with a net margin averaging 14%. This company is currently worth more than ten times as much as Company Bad (with similar turnover) and is also easier to harvest.

competitive advantage achieved

Entrepreneurs need to make sure they can achieve a competitive advantage in any new venture if they want to make money and have an exit strategy in mind. This can be achieved, for example, through proprietary products, know-how, economies of scale, relationships, and systems.

Two of our clients in the IT industry brought different offers to their clientele. IT Good had specialized knowledge in computer networks and exclusive rights to distribute specific products in the geographic area where they operated. They grew their profits by a cumulative 37% per year for the past seven years and became a major player in the region and are currently in high demand by international companies.

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

Dynamic Harvest

The overall dynamics of a business and its industry must be strong for good harvest potential to exist. Industry trends, the type of business, the sustainability of profits and cash flows are some of the aspects that should be considered by entrepreneurs.

Two of our clients in the training industry show the importance of separating the entrepreneur from the business. Training Bad has been in business for 15 years. They offer personalized training for multinationals. They are highly sought after in this market but they basically work from contract to contract. The company tried to sell shares and also tried to bring in an equity partner, but without success. The reason for this is that aspiring investors feel that the company is very tied to the owners (aging) and their knowledge Training Good has been in business for 12 years. They also sell one-on-one training, but they also have a lot of well-packaged training courses that many facilitators license. This company has several outside shareholders who bought into the company. Recently, a major publicly traded company also bought a substantial equity stake in the company.

Summary

Many people see entrepreneurs, who are successful in harvesting their business, as lucky. Although luck may play a small role, the main ingredients are the necessary resources (for example, capital and people), detailed planning, proper execution, and hard work.

To increase the chances of a successful exit strategy, entrepreneurs must carefully analyze and choose a new company.

Copyright © 2008 – Wim Venter