The Exit Strategy, Valuation, and Doing The Deal
During this week we will discuss the importance of harvesting by crafting an exit strategy. Entrepreneurs pour their hearts and souls into their ventures and sacrifice much along the way. Harvesting is seeking to create an exit strategy in order to convert the hard work and commitment into some financial benefit. A range of possible harvest strategies exist.
Some strategies might involve a partial sale of ownership to an investor with the specific intention to attract capital to expand business capacity, while other exit strategies involve the owners transferring full ownership to the investor and walking away. Regardless of the quantum of investment by the investor and the equity share acquired, the investment event will require a valuation of the business. We consider two valuation methods appropriate to early stage/emerging ventures.
The week concludes by reviewing aspects of doing the deal with the investor, including the- deal structure and Term Sheet issues.
At the conclusion of this week, you should:
•Understand the need and importance of creating an exit strategy
•Apply a basic valuation to an emerging business using discounted cash flow (DCF) and present value (PV).
•Understand the process of negotiating a deal, the deal structure, and key Term Sheet issues.
Consider the following scenario:
You are a team member of an entrepreneurial team of 5 in a venture which is in the high-growth stage. Two of the team members have decided that their priorities have changed, and they need to spend more time with their families and want to exit the venture. The team agrees that this is an appropriate time to consider possible harvesting strategies.
Q. What are the key issues the team needs to address in order to maintain the value of the venture in preparation for their exit? Advise on available options.