There is no IPO at the end of the tunnel, what’s your exit strategy?

April 24th, 20107:31 am @ Jacek Grebski

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Let’s face it, the days of the IPO are over, the dot com IPO boom (there’s something that you probably haven’t heard in a while) was historically speaking a marvel, both for its rampant and somewhat unfettered investment in anything that housed a .com in it’s name, but also because a major planetary technology was reaching households around the world leading for companies such as Yahoo!, Google, and others to enter a relatively new space with global appeal.

IPO markets recovering, kind of.

While the IPO market did recover from 05-07 the relative amount of companies issuing public offerings was still nowhere at the level of the late 90’s, fast forward to 2009, and you’ve got 76 IPO’s worldwide, and while prospects look marginally better for 2010, this is by no means an indicator that we will see every Tom, Dick, and Harry issuing public offerings.

In fact it’s just the reverse, those companies that will make an IPO will typically be extremely specialized. The vast majority of current startups, simply put don’t have a strong enough business model nor product to do so.

Options outside of an IPO.

So what’s the option? This doesn’t mean that the entrepreneurship scene is dead, but with the credit crunch still firmly holding its grip over lending, investors being more cautious and no evident new market to exploit, entrepreneurs have to think of different and more creative exit strategies.

One such a strategy is acquisitions, large multinationals are the ones who have the cash to invest in new enterprise, and start-uppers need to identify those companies whose products and strategy would tie in well with the needs of their customers and whose own product are complimentary to those of the larger multinational.

This is not a new model by any means but one that has been employed and tested within the pharmaceutical industry for years, and is now being employed by hardware manufacturers and telephone companies among others.

Are you ready to sell?

But what and when is a company ready for such an acquisition? I would say that revenues in excess of €2m, would signal the possibility of an exit, but more than just revenues, the HR structure of the company, it’s growth potential, international reach, and scalability threshold of the company are possibly the most important factors.

Meaning, if said €2m/ annum company has 30 full time employees on it’s roster, and another 10-20 freelancers, it’s non agile (cannot respond to market fluctuations quickly), and has a stagnant revenue curve, well, Houston, we’ve got a problem.

Stagnant revenues aside, you may be asking yourself why HR is important, aside from the simple answer of wages digging into your cash-flows it also dictates that you’re revenue per employee is lowered.

Say we employ the 30 full time staff model, the revenue per employee will be €2m/3o = €66.6k per employee, just above the average salary, now if we’re to cut that number down to 10 full time staff the revenue per employee jumps to €200k, a much better metric indicator of company success.

In reality, you should always try to strive for a ratio of revenues to employees that will be on the plus side of €200k per person because.

1. You will have limited employment issues
2. You will be agile and portable
3. You will have a more flexible business
4. Your chances of selling your enterprise will be higher
5. You will have more time to spend on the actual business itself rather than HR issues
6. If you sell, your sale costs will be low due to simple due diligence

So whether you’re a company that’s out of the valley of death, or just starting out writing your business plan, be sure to assess your plans for an exit and ask yourself the following questions.

1. What is the market like now, and what will it be like in the next five years?
2. What sector am I in, and what overlapping sectors are in my market space?
3. Is / will my business be agile, and how can I make it more so?
4. What are the possible exit channels? VC, buyout, merger, etc…
5. Do you want to sell? And if so, how will you approach buyers.