For investors, the maturity of an entrepreneur and their business is often reflected in the fact of whether or not they have an exit strategy. Vying for maximum returns on their finances, investors are privy to the conditions that make for a sound investment, but knowing when to exit a venture is one of the trickier manoeuvres to land.
A Timely Exit
Once a business has taken off, received funding, or even released shares, investors are required to remain sharp and prudent, monitoring the health and condition of their chosen venture so that they can cash out efficiently. An exit strategy is a plan executed by investors, traders, venture capitalists and businesses owners that liquidate their position on a financial asset. Sometimes, this moment can come too soon, and at others, too late. So how can an investor plan for the perfect exit?
There are many reasons to execute an exit strategy, which is essentially a contingency plan to protect finances and maximise return on investment. This may be due to a business failing to reach profitability or is becoming non-profitable; or this could be on the more positive side, where an investment or business has met it’s profit goals.
Exiting an EIS/SEIS & VCT
In short, there’s no such thing as perfect. Even Luke Johnson struggled to pin the right and wrong times down, but there are certainly ways to prepare. There are certain investment schemes, such as SEIS/EIS and VCT schemes that are tax-efficient investments that require minimums terms of 3 to 5 years to retain tax relief perks on offer through these investment methods, making timing all that more difficult.
In the instance of an EIS/SEIS VCT, there is a tendency to exit as soon as possible, which is when the 3 or 5 year period is over. With EIS/SEIS schemes, investors can take their earnings and reinvest for further tax relief, but that’s not necessarily for everyone. With the markets having a cyclical nature, there can be significant downturns in any given industry, which may spur investors to hold their shares past these points in a bid to grab the best possible offer for their investment.
Investors in these schemes are typically made offers prior to the end of these periods, proposing a dilemma of whether or not to accept and lose tax relief, or hold out for a better or similar offer once the 3 or 5 year period has ended.
For VCTs, it’s a slightly different situation as investors can collect tax-free dividends throughout that period. So knowing when to leave a VCT, even after the five-year period, may be especially tricky, and according to some experts, many VCTs investors hold on or far too long when conversion into an EIS or other profitable options were available.
Plan Your way Out
An exit strategy can come in many forms, a merger and acquisition, an initial public offering (IPO), through liquidation, gradual liquidation or even through a simple sale; as such, planning for these eventualities can take quite a long time.
There are key facets to take into consideration when planning an exit. You should really take a look at your personal life, where are you currently? Are you planning for retirement, looking to begin a career in investments, or somewhere in between?
Also, consider the conditions of the industry you’ve invested into, what are the long and short-term views for such an industry. Is the enterprise in goods or services, does it have a long strong history of finance or is it a fledgeling startup? With respect to those points, the health of local and global economies overall will certainly offer insight into the best exit strategy for you, which is crucially all about timing.
For your personal exit strategy, you need to consider the realities of existence. Life events such as retirement, death, illness and divorce etc. can and will happen, and if you’re the owner of an organization or looking to invest in one, it’s prudent to examine and note all potential situations that can and will impact your company. Planning for those eventualities can make or break a successful exit.
Also, consider the valuation of your company, this will aid you in determining the economic health of your company before making the decision to sell. There is most likely an ideal number you’d like to reach, but before making your bid, make sure that it’s at least grounded in facts. Be realistic and listen to your advisors and take into consideration all the aforementioned conditions as noted above.
When seeking a valuation, ask yourself if the company can run without you at the helm, whether or not revenue is recurring, or at least predictable, are your financial statements in a good condition, and so on.
There is quite a lot to consider, and by no means should any business owner or investor make such preparations without guidance from experienced advisors who are well versed in these matters.
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