A key part of the investment decision for an angel investor will be based on your ability to achieve high growth for your business and eventually a successful exit. Having a strategy in place from the outset of how to achieve an exit will go a long way in giving comfort to potential investors.
It is important to note that angel investors stay on average 8-10 years in a deal before achieving a successful exit. You can also look to offer a partial exit or liquidity event for our investors during this period.
Building an exit strategy
Achieving a successful exit requires making a strategy right from the outset of your business plan. Not surprisingly, these exits don’t occur overnight; they typically require years of market-positioning work and a year or more of deal planning. But having a strategy in place will make sure you are working towards exit, even in the early stages of your business’ development.
When preparing your strategy for exit, a good place to start is conducting research on what kind of exits are happening within your sector. Finding comparables will help to justify your thinking but will also give you an idea of the stage at which your business should be in order to achieve the desired exit.
You should also consider how long it will take to achieve an exit. There are many factors that will impact this, such as the time it will take to scale your business to become a potential acquisition target or to justify an IPO (see below). But also, the market for company sales and IPOs in general, although cyclical, generally follow that of the wider economy.
It’s important to engage with some of your angel investors around the exit strategy, after all you’re both aligned to achieving this and keeping open dialogue and remaining realistic will help you maintain a good relationship. Angel investors often come with exit experience, it’s how they made their money in the first place.
The types of exit
The sale of the entire issued share capital to a third party as a trade sale – this is the most common exit, although occasionally by way of a “buy-out”, where the investee company is acquired by an entity funded by a private equity investor, a bank and/or a management team. It can take a lot of planning and market intelligence to identify the right buyer for your company and requires considerable alignment of interest between you and your investors both in timing, target and price. The time and effort involved should not be underestimated.
The buy-back of the angel’s shares by the company itself from its own resources, or by the entrepreneur. This is relatively unusual as an exit for angel investors.
Purchase of shares
Purchase of angel investors shares by a VC, VCT , PE or corporate VC investor. The entry of a more significant investor party can enable the original angel investors to gain a partial or full exit. This can be a useful opportunity but the terms of the share purchase will require considerable negotiation to avoid dilution of the angel shares by the incoming investors.
Some financial organisations are offering secondary markets to enable angel investors to exchange their shares for financial liquidity. This is a new area and further secondary markets may develop including sector-specific opportunities.
You may also identify the opportunity to take the business to the next level of growth and raise more significant levels of risk capital by launching the business onto the public markets through AIM or IPO. This is not usually a direct exit for the angel investors, but can enable some liquidity at the time of public market entry when other investors come on board.
You should always take advice from legal or financial experts who are experienced and skilled in these transactions so that the prospects of achieving the desired financial return from the exit are maximised and ongoing risks minimised.