Preparing for investor exits

For many businesses, external investment opens up whole new opportunities.

But while it can bring about higher ambition, it can also raise expectations. Ultimately, you’ll need to deliver a return for your investor, and that’s most likely to happen when they exit.

An investor can exit at different times and in different ways, depending on the business, the sector and the investor themselves. So it’s something you and your business may want to work into your thinking from the very start.

Planning for an exit

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

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

While you don’t need to set out an exit strategy in great detail, investors appreciate you making your intentions clear.

But when setting expectations, it’s important to be realistic. Investors may like ambition but they’re unlikely to want to hear plans that aren’t achievable.

Investors appreciate they’re going 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 investor might exit. Typically, it occurs when another company acquires or merges with your business.

Trade sale or buy-out

Some businesses start off with the intention of a trade sale or buy-out.

They may have involved their investors for this very reason – to build the company into attractive proposition for larger investors or organisations.

Share sale

Some investors, such as Angel Investors , may exit by selling their own shares to a third party such as:

• a Venture Capital firm
• a Private Equity firm
• a Corporate Venture Capital investor

This may be more complicated than a trade sale or buy-out, as it might require more personal negotiations. But the arrival of a new investor can help many earlier investors to secure their exit.

Management buy-out

Investors can sell their shares to another party too – the business itself.

This is called a management buy-out, 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 it tends to involve significant amounts of money.

And it may all come down to timing – for example, if the owner wants to sell as well as the investors.

Initial Public Offering (IPO)

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. Early investors may see this as an opportunity to sell a portion of their investment too.

It can result in investors making a full or partial exit.

When (and why) investors exit

We’ve covered some of the more significant exit strategies above.

But as you can see from the varied range of scenarios, a lot depends on who’s invested and what finance has been invested and how.

Angel Investors

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 3–8 years, so exits are something to build towards.