An Ordinary Annuity Consists Of Stream Of Cash Flows An Exit Strategy Mindset – Choose The Right New Business Venture

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An Exit Strategy Mindset – Choose The Right New Business Venture

introduction

Millions of businesses are started every year around the world. Generally less than 10% of these businesses are eventually removed through mergers and acquisitions, management buy-outs, listings, etc. An entrepreneur needs to integrate many aspects to ensure a successful harvest of business. This whole process should start with asking the right questions. Here are some important questions entrepreneurs should ask when starting a new business:

  • Is there a real window of opportunity?
  • Does their profile match the opportunity?
  • Are the economics of the venture acceptable?
  • Can they gain a competitive edge?
  • Are potential harvesting dynamics appropriate?

This article highlights the types of questions that entrepreneurs should ask and answer satisfactorily before starting a new venture for which they have an exit strategy mindset.

Is there a genuine window of opportunity?

The pace of change in the world is increasing rapidly. This creates enormous opportunities for the willing entrepreneur. Questions entrepreneurs should ask to ensure that a suitable window of opportunity does indeed exist are:

  • Is the growth rate of the industry or sector sufficient? A growth rate of more than 25% annually and improvement in general creates many opportunities.
  • Is the potential market size large enough? The market should generally be large enough to cater for many role-players. A current market size of $50 million can quickly grow into billions of dollars (when coupled with a high growth rate).
  • Is there a need for new venture products and/or services? Proper market research is a pre-requisite.
  • Is the venture financially attractive? A detailed financial analysis and forecasting of the business is required.
  • Is the opportunity sustainable over time? The momentum of the initiative should be sustainable enough to reap the business.

Does the entrepreneur’s profile match the opportunity?

A lot of money can be made when the right team gets the right opportunity. Entrepreneurs should ask themselves the following questions to ensure their profile matches the opportunity:

  • Are they passionate about the activity? This creates energy, motivation for others and an environment conducive to learning.
  • Do entrepreneurs have the right skills to make the venture a success? If they don’t, they need to be able to absorb people with these skills.
  • Where are they in relation to their individual sigmoid curves? Entrepreneurs must be at a stage in their lives where they are ready to take on the responsibilities that come with entrepreneurship.
  • Do they have the right mindset to successfully build a business? – Entrepreneurs should have the personality to ensure that work gets done.
  • Do the enterprise’s risks fall within their risk profile? Risk for entrepreneurs should be tailored to their individual risk profile.

Are the economics of the venture acceptable?

Businesses are generally measured on their financial performance. Although this is one of the criteria of a successful business, It is absolutely vital that it is in place. Questions entrepreneurs should ask about business economics:

  • Is there enough sales potential? – If everything else is in place, but not enough turnover, the business is doomed from the start.
  • Is the gross profit margin high enough? The gross profit margin should be high enough to cover costs easily, allowing flexibility in pricing and sufficient profit. A minimum of 30% would generally be considered sufficient.
  • Will break-even be reached quickly? The break-even and payback period should be short enough to meet the specific type of activity. An IT venture should usually make money in two months whereas mining can take years.
  • Can capital requirements be met? It should not be restrictive to the venture or be of such a nature that the entrepreneur’s equity will be greatly diluted.
  • Is the expected return on investment acceptable? This should be greater than the risk-free interest rate as well as the risk of starting the venture. Generally more than 20% return will be required.

Can entrepreneurs gain a competitive edge?

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 edge through the proposed venture. They should address the following questions:

  • Are there sufficient barriers to entry? It must be difficult for companies to enter this industry. Lack of skills, finance, ownership, contracts, contacts etc. can act as barriers to entry.
  • Can they add significant value to customers? It is important to have a product and/or service offering that truly adds value to the client.
  • Is it possible to gain significant market share? 20% plus market share is preferable. Market share can be in a specific niche market (product, service or geographic).
  • Is there anything that sets this initiative apart from others in the industry? It is important that a company can differentiate itself from the competition in some way.
  • Do they have the ability to significantly reduce costs relative to the competition? For example, this can be achieved through economies of scale, production methods and procurement contracts.

Potential harvest dynamics are sound?

Entrepreneurs need to make sure the business is viable by asking the following questions:

  • Is it possible to separate an entrepreneur from an enterprise? This can be achieved through proper systems, training and succession planning.
  • Are industry trends favorable to harvest objectives? Time is of the essence when choosing and harvesting a business.
  • Is the venture’s profitability and cash flow sustainable? A business should not rely on a single customer or product and should preferably have an annual revenue stream and a diversity of suppliers, customers, products and services.
  • Can entrepreneurs sustain their competitive advantage in the long run? The intellectual property that exists within the company, its reputation, relationships and systems all play a role here.
  • Is the business harvestable? A business and/or industry should not just flash in the pan. There must be a genuine need over time for the type of business. Some types of businesses are more easily extracted than others (eg, a manufacturing concern is generally more sought after than a consulting services company).

Summary

The first step in creating an exit strategy for a company is to choose a new venture that will eventually be harvested. An entrepreneur should ask deep questions about choosing the right venture and then do thorough research to find the answers. The right match between the entrepreneur, the business venture and the ability to exit the business significantly improves the chances of a successful business harvest. Choosing a new business venture should become an integral part of any company’s exit strategy and should be managed professionally.

Copyright © 2008 by Wim Venter. All rights reserved.

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