What are the four basic exit strategy possibilities? Describe them.

Question

What will be an ideal response?

Answer 1

1) Acquisition - you create a business that someone will want to acquire at a future period. Your strategy could be that you want to create a business that will be valuable for a current competitor or a member of your distribution channel. The plan is that the purchase of your firm will pay you and your investors more than you put into the business. A rule of thumb for a small business is that the purchase price should be three times the firm's annual net profit.
2) Earn out - with this strategy, you buy out your investors' share of the business. You will need projected cash flow statements that show the business will generate extremely strong positive cash flows. The purchase price you will pay to investors will rise over time.
3) Debt - Equity Exchange - if investors are lending you money, you can decide to give them equity in return for a reduction of debt. This will reduce interest expense also. With this type of exchange, you can determine the pace at which you reduce the debt your company owes.
4) Merge - This strategy is similar to the first, but with a merger, two companies join to create an entirely new venture. Companies do this to combine their strengths. For example, one has great products but a weak distribution network, while the other firm has weaker products but an excellent distribution net. These firms complement each other. With a merger (or acquisition), money or shares will be paid to original investors upon completion of the merger.