I came across a blog post yesterday that advocated planning for an exit strategy early and I couldn’t agree more. Martin, in this post (POST NO LONGER EXISTS), highlights two reasons why you would want to do this. First, because outside investors want to collect their return, and second, because entrepreneurs love the art of the start. I would add a third, which I feel is of paramount importance, and that is your exit strategy helps guide difficult business decisions.

Understanding your exit strategy can significantly change your plans across all aspects of your business from marketing and product strategy to business development and HR. To illustrate this I wanted to see how a particular exit strategy might change some of the priorities you have for your business.

• IPO – As Martin rightfully points out, this is becoming less and less attractive as an option for startups. It offers the most potentially lucrative rewards, but comes with the highest hurdles and the most headaches for the management team. First and foremost, you need to ensure that you have a long term sustainable business that produces a must have product that is a complete solution and not just a feature. In addition to this you must ensure that you have a realistic financial plan that drives long term, predictable earnings growth that drives company valuations on the public exchange.
• Acquisition – Your strategy for acquisition can have significant impacts on both your product and business development strategies. This is a topic that could merit an entire paper in an of itself. Here are a couple of thoughts for an acquisition strategy. In the process of planning for a successful acquisition you need to look first at the prospects of your company being acquired simply to fill a technology gap in the acquiring company, or if you have the potential to be a strategic acquisition that gives the acquiring company leadership in an important new category. The answer can guide your investment balance between development and sales and marketing.  In either case, building relationships with companies who are ideal acquisitors is an important step to take even well before you are ready for an acquisition. Acquisitions are about technology, revenue and relationships. Don’t neglect the importance of establishing relationships early and if possible working toward joint successes in sales situations. One of the fastest ways to get acquired is if you address a key competitive weakness for an acquirer and result in them selling more of their product line.
• Long Term Cash Cow – I have also referred to this as a family business, but the key here is that you have a technology or service that has long term viability and a profitable business model. In this type of business cost control is essential. Your first priority in this business, obviously, is to create and sustain profitability and people are your number one cost. Evaluate every hire rigorously. Are you certain that they will add more to the business than they cost? Your product plan is additionally less aggressive and speculative. Customer service, while important in all business models, is absolutely indispensable for a long term business. Not only is the value of a repeat customer much higher than a new customer, referral business is the cheapest marketing your business can get.

It is possible that your exit strategy may change as your business, your competition and the market you compete in grows and evolves, but for the most part your exit strategy should be fairly evident with careful thought from an early stage. Once you understand your exit strategy, careful planning can position you for making the right business decisions for the best possible outcome.