Preparing for
investor exits

Preparing for
investor exits

For many businesses, external investment is a gamechanger. It can open up whole new opportunities and new relationships.

But while investment can facilitate a growth in ambition, it’s also likely to raise expectations and ultimately, you’ll need to deliver a return for your investor.

That return is most likely to be delivered when an investor exits.

Depending on factors such as the business itself, the sector and the investor, exits can happen at a number of different times and can occur in a number of different ways.

But it’s something you and your business may want to work into your thinking from the very start.

Planning for exits

Most business plans have an exit strategy for investors. You may need to flex that strategy over time because of unforeseen or reactionary circumstances to the wider market.

Investors will usually expect to see your plans, if only to get reassurance that you have their best interests – and finances – as a priority.

Whilst the strategy need not be set out in miniscule detail, clear intentions are usually appreciated. It will help to show that you understand how your business may grow.

But it’s important to be realistic when setting expectations, too. Investors may like ambition, but they’re unlikely to want to hear plans that are unrealistic.

Investors appreciate they’re going to go on a journey with you and usually want to see that you understand how that might occur.

How investors exit

There are a number of ways that an exit might take place.

Typically, an exit will occur when a business is acquired by or merged with another company.

Some businesses start off with the intention of a ‘trade sale’ or ‘buy out’ and may have involved initial investors for this very reason – to build and mould the company so it’s an attractive proposition to larger investors or organisations.

Some investors, such as Angel Investors, may also exit by selling their own shares to a third party such as a Venture Capital firm, Private Equity organisation or Corporate Venture Capital investor.

This may be more complicated than a trade sale or buy out, as more personal negotiations can often be required, but the arrival of a new investor can help many earlier investors secure an exit.

Investors can sell their shares to another party too – the business itself. This is called a Management Buyout (MBO), where a business’ management team buys the assets of the business they manage.

This is usually an exit strategy for larger or more mature businesses, as significant amounts of money tend to be involved, and it may all come down to timing (for example, the owner wants to sell as well as the investors).

Another option is to launch onto the public markets through an Initial Public Offering (IPO).

This could be a chance to raise more capital from new investors, and early investors may see this as an opportunity to sell a portion of their investment too. It can result in a full or partial exit by investors.

When (and why) investors exit

We’ve covered off some of the more significant exit strategies, but you can see from the varied range of scenarios that a lot depends on who has invested, what has been invested and how the finances have been invested.

Investor exits - and timescales to exit - are flexible, but Angel Investors are often in it for the long haul. Typically, an Angel would expect to help grow a business for anything from 3-8 years, so exits are something to build towards.

Different investors may have different motives, which will influence their approach to exiting. That’s often the case for Equity Crowdfunders, where some investors may exit once a product has been developed, while others may want to wait for a particular goal to be achieved.

But there are cases where crowdfunding investors have been able to exit after less than a year – for instance, in 2015, Camden Town Brewery was acquired by AB InBev just eight months after raising £2.75million on Crowdcube.

For Private Equity, investors are typically looking for an exit within five years. They tend to either invest in an established company, building upon its success with the clear intention of selling for profit. Or they may invest in companies in difficulty, seeing an opportunity to turn the business around and make a profit that way.

Venture Capitalists, meanwhile, tend to take a longer-term approach than Private Equity investors. They’re looking for a similar exit, but they’re investing in businesses at an earlier stage, so may expect a time frame of 5-10 years whilst the business grows to a sellable state.

Finally, exit timescales for Corporate Venture Capital deals can be more difficult to predict. There are often a number of different drivers behind the investment. For example, it may be that they are looking to help the business to innovate, or they want to utilise its tech, or they’re thinking to grow the corporation they’re representing.

Once they’ve reached their goals, a Corporate Venture Capital firm may look to exit.

What’s next?

How and when investors exit can depend on how you see your business growing. Which, of course, makes planning for attracting the right type of finance in the first place even more crucial.

For more information on the different finance types, check out our Finance Finder.

And once you’ve got a plan in place, make sure an exit strategy for your investors is worked into it too. As is so often the case, preparation is key.