Platt Perspective on Business and Technology

Online store, online market space – part 18: exit strategies and long term planning

Posted in startups, strategy and planning by Timothy Platt on August 14, 2010

This is the eighteenth posting added to my series on building an online store as a new business (see Startups and Early Stage Businesses, postings 20 to 33, 35, 37 and 40) and while I may come back to this general topic area for further postings, this is at least as of now the last posting planned on it for this series. Up to this point I have at least attempted to touch on all of the major areas that would come into play in planning, setting up and running an online store. Now I turn to the longer term considerations of exit strategies and long term planning.

Exit strategies are often looked at as approaches for getting out of a bad situation, and that can happen. I use the term more widely here to allow for the full range of options and situations, and here “exit” marks not an ending to the business or to your relationship with it but an end of its early stage, or at least of its startup status.

It is important to plan for what you will do with your new business as it reaches and passes this transition point, and I raise several possibilities here, simply acknowledging at this point this is an incomplete list. But as a starting point, your options can include any or all of:

1. Maintaining your business yourself as a privately held, wholly owned entity.
2. Maintaining your business yourself as a privately held entity but with a restricted set of shareholders in the form of angel and/or venture capital investors backing you.
3. Going public as an initial public offering (IPO)
4. Selling your business for incorporation into another, probably larger business through merger and acquisition processes.

Each of these avenues for longer term development has its consequences and it is a good idea to plan for any long term contingency that you may be seriously entertaining as a possibility. So for example, if you follow option one, above, and simply retain ownership of your business, you may very well find yourself limited in your pace of development in ways that option two would not limit you to, from lower levels of available funding and reduced immediate liquidity. If you do stick with option one you will, as a trade-off retain full decision making control of your business where outside investors in general, and venture capital investors in particular would seek to reduce their investment risk by imposing strategically based operational decisions on you as a requirement for their backing. And since the first dot-com bubble burst at the end of the 1990’s that has often included requirement that specific financial and accounting practices be adhered to, and it can even mean the investor selecting a CFO for your business if they are to invest in it.

For an entrepreneur with a great idea and the drive to carry through on it but who has no real hands-on experience in at least some of the key functional areas that go into building a business (e.g. CFO or accounting skills or experience), this can in fact be very beneficial as it can increase likelihood of success. Still, bringing in outside investors and following option two reduces ownership and share of equity and profits, and it can also mean at least partial loss of strategic and overall operational control.

If your goal is option three, and an IPO then you need to plan for this from as early as possible, and certainly for your financial and accounting practices and for how you manage and maintain your records. Publically traded companies usually face separate, additional forms of legally mandated regulatory control that would not apply for a wholly owned, privately held business. The details in that would depend on where you are headquartered as to what national and/or more local laws are concerned. It is a good idea to know what standards and guidelines you have to meet early, so you can develop with them in mind and not have to redo earlier decisions.

Option four offers some very interesting challenges. The basic vision here is of course one of paying your dues by putting in the effort to build a business, and then cashing in for very large returns on that investment as a larger corporation buys the fruits of your labor. This type of thing does happen, but when mergers and acquisitions are done effectively they primarily occur when:

• A business to be acquired offers a unique value proposition that would be more difficult to build from scratch than to bring in as a whole, and
• That acquisition target business is set up and organized in such a way as to make incorporating it into the acquiring company manageable and cost-effective.

Together this suggests that if you are looking to build a target for acquisition and buy-out, you should probably build accordingly, and even with specific potential buyers in mind. And you need to know what businesses looking to expand through acquisition look for in a business they would bring into their system.

Products and services that support or complement what the acquiring company does in holding and maintaining its market share are one obvious point of interest and sales point. An established and loyal customer base that turns to a specific brand name can bring real value too, and so can a recognized pool of developed and proprietary business intelligence, key patents and other knowledge and process resources. This is only a partial list. What can you and your business offer that would constitute that compelling value proposition for a potential acquiring company?

At least for successful acquisitions, businesses acquire to expand into new markets that ideally at least complement and support their current ventures. And if they bring in these acquisitions effectively, they do not destroy the value they have just bought, by steamrolling over cultural and other differences that made the success of the business they just acquired possible. But that is the subject of a separate posting at the very least.

As a final thought here, I end this posting by stressing a single general principle. If you want to have a long term plan that works for you and your startup online store you have to build for it and from early on. This means thinking through your options and setting goals and benchmarks to know which are and are not feasible, and it means developing towards reaching your goals. So if you see option two as essential to your success, start early in developing an effective, compelling business plan and pitch to present to potential investors and network towards the people and groups you would seek support from. Practice giving your pitch and get feedback as to your written business plan, and build an attractive venture to invest in as a goal, or at least as an important intermediary step. If you want to follow option one, plan and build with a slower development curve in mind than might be possible with outside funding, and develop your long term strategic goals accordingly. If you plan for option two and bringing in venture capital support in particular, do so with an understanding that they are going to require a turnaround on their investment that would probably mean also following option three or four, or something similar in potential for quick returns with significant profits.

But start out seeking to make your new business grow and succeed too and in its early stages and for moving beyond them. Please feel free to share comments, questions, feedback or word of your own experience as posted comments to this blog or as emails.

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