Investment Entries Matter, But Exits Also Matter!

Investing in a company should be approached the same way in which one approaches a home purchase. Certainly, discovering the correct home (company investment) that sits in the right neighborhood (market), with the right view (path to growth) and proximity to shops and restaurants (partnerships and customers) is important but of equal importance is saleability (marketability). Just as one does not want to be stuck in a home that he/she has outgrown, similarly, there comes a time an investor wishes to free up his/her capital and move it around.

In the private capital world, when valuing a company, an investor places value not only on the current business cash flows, projections and growth but also assigns value to the exit value or "terminal value". Terminal value can be derived from either the perpetuity growth formula which utilizes a stable level of cash flows growing into perpetuity, which is discounted at the appropriate discount rate and also by using an exit multiple, usually EBITDA (earnings before interest, taxes and depreciation and amortization).

Exit considerations and strategy are not limited to valuation and financials - - in order to add value to an investment's potential exit power one must consider qualitative attributes such as: "What is the investment's defensibility profile look like now and expected to look like into the future? How does this company compete currently and in the future? Is there any uncertainty in terms of supplier or vendor agreements, expiring patents and/or potential legislative risks? What will the industry look like in the future? Is there obsolescence in any of the company's products or services?"

In the world of high technology, determining exit value is even more important. Because of the uncertainty that already exists in year 1 for a start up company, the risk of a successful exit by year 5 becomes even more pronounced.

At WriteBusinessCapital, we have been analyzing and performing valuation analyses to all companies across all industries for more than a decade. We take a mathematical, analytical and empirical approach to valuing your business in its current state, in the future and at exit.

www.writebusinesscapital.com