Introduction
Every year millions of companies are launched around the world. Typically less than 10% of these deals are ultimately obtained through mergers and acquisitions, management takeovers, listings, etc. An entrepreneur needs to integrate many aspects of a business to eventually ensure its successful harvest. This whole 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 financial aspects of the company acceptable?
- Can they achieve a competitive advantage?
- Are the potential harvesting dynamics robust?
This article highlights the kinds of questions entrepreneurs need to ask themselves and successfully answer before embarking on a new company 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 enormous opportunities for the prepared entrepreneur. The questions that entrepreneurs should ask to ensure that there really is an adequate window of opportunity are:
- Is the growth rate of the industry or sector high enough? A growth rate greater than 25% per year and improvement usually creates many opportunities.
- Is the potential market size large enough? Typically the market should be large enough to cater for 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 the company economically attractive? A detailed financial analysis and business projections are essential.
- Is the opportunity sustainable over time? The dynamics of the company must be sustainable enough so that the business can be harnessed.
Does the profile of entrepreneurs coincide with that of the opportunity?
When the right team meets the right opportunity, big bucks can be made. To ensure that the entrepreneur’s profile matches the opportunity, they should ask themselves the following questions about themselves:
- Are you passionate about the company? This creates energy, motivation for others, and an environment conducive to learning.
- Do 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 must be in a phase of their lives in which they are willing to assume the responsibilities that accompany entrepreneurship.
- Do they have the right mindset to successfully build the business? – Entrepreneurs must have personalities that ensure that the task will be completed.
- Are the company’s risks within its risk profiles? The risks to entrepreneurs must be in line with their personal risk profiles.
Are the financial aspects of the company acceptable?
Companies are generally measured based on 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 types of questions that 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 potential for turnover, then the business is doomed from the start.
- Are the gross profit margins high enough? Gross profit margins should be high enough to easily cover expenses, allow for pricing flexibility, and sufficient profitability. Normally a minimum of 30% would be considered adequate.
- Will breakeven be reached fast enough? The balancing and recovery periods should be short enough to cater for 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.
- Can the capital requirement be met? This should not be prohibitive for the company or be of such a nature that the capital of the entrepreneurs becomes too diluted.
- Is the expected return on investment acceptable? This should exceed the risk-free interest rate plus the risk of embarking on the business. Typically a return well above 20% would be required.
Can entrepreneurs achieve a 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 a competitive advantage through the proposed business. They need to look at 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 a product and / or service offering that really adds value to the customer.
- Is it possible to get a significant market share? A 20% more market share is preferable. Market share can be in a specific market niche (product, service, or geographic).
- Is there anything that distinguishes this company from others in the industry? It is important that a company can substantially distinguish itself in some way 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 purchase agreements.
Are the potential harvest dynamics correct?
Entrepreneurs should ensure that the business can be leveraged by asking the following types of questions:
- Is it possible to separate the entrepreneur from the venture? This can be achieved through succession planning, training, and the right systems.
- Are industry trends favorable for harvesting? Time is very important in choosing a business and also in collecting it.
- Are the profitability and cash flows of the company sustainable? The business should not be dependent on one customer or product and should preferably have annuity income streams and a strong variety of vendors, 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 be a flash in the pan. There should be a real need over time for the type of business. Some types of businesses are more easily taken advantage of than others (for example, a manufacturing company is generally more sought after than a consulting services company).
Summary
The first step in creating an exit strategy for a company is choosing a new company that can eventually be exploited. An entrepreneur should ask detailed questions about choosing the right company and then do extensive research to find the answers. The chances of a successful company harvest are dramatically improved by a proper fit between the entrepreneur, the business company, and the potential for exit from the company. The choice of a new business company should be an integral part of any company’s exit strategy and should be professionally managed.
Copyright © 2008 by Wim Venter. ALL RIGHTS RESERVED.