It’s not the Journey, it’s the Exit…

It’s an exciting time. New company, great prospects, money invested, lawyers signed off the paperwork. Money transferred. What now? Start adding value to the company. It’s fun meeting people, promoting the product/service. More customers. More income. Break even. Sell the company, lots of money for everyone. That’s the picture Business Angels buy into. But is it the reality? What’s the impact if you are not focusing on the exit from day zero?

Business Plans usually have a section marked “Exit” which says “floatation or trade sale” along with a caveat that it will be difficult to tell what will happen in five years time. While predicting the future is hard, I don’t think this is good enough. It simply avoids the question of “How will the investor get their money back?”

The entrepreneur (who is the expert in this field) should have some idea who the competitors and customers are. These are the usual sources for trade buyers. So, what are the assets that they will value? IP? A customer list? An income stream? Identifying the assets that need to be created to maximise the eventual sale value will help the management team understand what they need to do and when. Working back from the future sale, there will be a series of goals and targets which allow progress to be measured (e.g. first customer, tenth customer, grant obtained, first profitable month, etc.).

Once the investment money has been paid, the management team will start to execute the plan. As time goes by they should reach the goals and milestones. If not, each missed target will need to be re-evaluated as to its importance and what the long term impact will be on the exit. Remedial action may need to be taken to rectify problems and bring the eventual exit back on schedule.

To get an idea of how likely the management team is to succeed, I look at two key areas: Clarity of Thought and Ability to Execute.

  • Clarity of Thought. Does the management team have a clear idea of their long term goals? Can they express them succinctly? Do they understand the milestones they need to reach in order to get their company to these goals? Do they know the size of the market and how they are going to reach and convert each prospect into a sale?
  • Ability to execute. I am dependant on the management team working together to achieve the agreed goals. How did the management team present themselves when I met them? How well do they (or have they) work(ed) together? What is their background? Are there any “gaps” in their team that have been identified and what plan is there to fill them? Do I have confidence that they will be successful in front of the eventual trade buyer of the company? Or will they fall apart long before then?

While the product/service is important, I need a management team which is focused and has the skills to move forward. The only people who can demonstrate this are the management team… and that’s while I’m doing the due diligence…

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