Introduction
Millions of businesses are launched around the world every year. Typically, less than 10% of these businesses are ultimately harvested through mergers and acquisitions, management buyouts, public listings, etc. An entrepreneur needs to integrate many aspects of a business to eventually ensure its successful harvest. This entire process must begin by asking the right questions. Some key questions entrepreneurs should ask themselves when embarking on a new business venture are:
- Is there a real window of opportunity?
- Does your profile match that of the opportunity?
- Are the economic aspects of the company acceptable?
- Can they achieve a competitive advantage?
- Are the potential collection dynamics robust?
This article highlights the kinds of questions entrepreneurs need to ask and successfully answer before embarking on a new venture for which they have an exit strategy mindset.
Is there a real window of opportunity?
The pace of change in the world is increasing very rapidly. This creates tremendous opportunities for the prepared entrepreneur. The questions entrepreneurs need to ask themselves to make sure there really is a proper window of opportunity are:
- Is the growth rate of the industry or sector high enough? A growth rate of more than 25% per year and improving typically creates many opportunities.
- Is the potential market size big enough? Normally the market should be large enough to cater to multiple role players. A current market size of $50 million can quickly grow to billions of dollars (if combined with a high growth rate).
- Is there a need for the new company’s products and/or services? Proper market research is a prerequisite.
- Is entrepreneurship financially attractive? Detailed financial analysis and business projections are essential.
- Is the opportunity sustainable over time? The dynamics of the company must be sustainable enough for the business to be harvested.
Does the Profile of the Entrepreneurs coincide with that of the Opportunity?
When the right team finds the right opportunity, there’s a lot of money to be made. To ensure that the profile of entrepreneurs matches the opportunity, they should ask themselves the following questions about themselves:
- Are they passionate about the company? This creates energy, motivation for others, and an environment conducive to learning.
- Do the entrepreneurs have the right skills to make the company a success? If not, they need to be able to acquire people with these skills.
- Where are they in relation to your personal sigmoid curves? Entrepreneurs need to be at a stage in their lives where they are willing to take on the responsibilities that entrepreneurship brings.
- Do they have the right mindset to successfully build the business? – Entrepreneurs must have personalities that ensure that the task will be completed.
- Is the company’s risk within its risk profiles? The risks for entrepreneurs should be in line with their personal risk profiles.
Are the economic aspects of the company acceptable?
Companies are generally measured by their financial performance. Although this is only one of the criteria of a successful business, it is absolutely crucial that it is in place. The kinds of questions entrepreneurs should ask about the economics of a business are:
- Is there enough sales potential? – If everything else is in place, but there is not enough turnover potential, then the business is doomed from the start.
- Are gross profit margins high enough? Gross profit margins should be high enough to easily break even, allow for pricing flexibility and sufficient profitability. A minimum of 30% would normally be considered adequate.
- Will the break-even point be reached quickly enough? Break-even and recovery periods should be short enough to serve the specific type of business. An IT company should normally make money in a couple of months, while a mining operation can take several years.
- Is the capital requirement achievable? This should not be prohibitive for the company or of such a nature that the entrepreneurs’ capital is diluted too much.
- Is the expected return on investment acceptable? This must exceed the risk-free rate of interest plus the risk of embarking on the business. Normally a return much higher than 20% would be required.
Can Entrepreneurs Achieve Competitive Advantage?
It is important for entrepreneurs to ensure that they are realistic about their expectations and especially that they have the potential to gain competitive advantage through the proposed business. They should discuss the following questions:
- Are there enough barriers to entry? It should be difficult for companies to enter this industry. Lack of experience, finances, property rights, contracts, contacts, etc. They can act as barriers to entry.
- Can they add significant value to customers? It is important to have an offer of products and/or services that really add value to the customer.
- Is it possible to get a significant market share? A market share of 20% more is preferable. The market share can be in a specific market niche (product, service or geographical).
- Is there anything that distinguishes this startup from others in the industry? It is important that a company can substantially distinguish itself from the competition.
- Do they have the ability to significantly reduce costs compared to the competition? This can be achieved, for example, through economies of scale, production methods and purchasing agreements.
Are potential harvesting dynamics sound?
Entrepreneurs should ensure that the business is harvestable by asking the following types of questions:
- Is it possible to separate the entrepreneur from the entrepreneurship? This can be achieved through proper systems, training, and succession planning.
- Are the trends in the industry favorable for harvest purposes? Timing is very important in choosing a business and also in harvesting it.
- Are the company’s profitability and cash flows sustainable? The business should not be dependent on a single customer or product and should preferably have annual revenue streams and a wide variety of suppliers, customers, products and services.
- Can entrepreneurs maintain their long-term competitive advantage? The intellectual property that exists in a company, its reputation, relationships and systems all play a role here.
- Is the business harvestable? Business and/or industry shouldn’t just be a flash in the pan. There must be a real time need for the type of business. Some types of businesses are easier to harvest than others (for example, a manufacturing company is more sought after in general than a consulting services company).
Summary
The first step in creating an exit strategy for a company is to choose a new company that will eventually be profitable. An entrepreneur must ask detailed questions about choosing the right company and then do extensive research to find the answers. The chances of a successful harvest of the business are drastically improved through a proper fit between the entrepreneur, the business enterprise, and the potential exit from the business. The choice of a new business venture should be an integral part of any company’s exit strategy and should be managed professionally.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.
