1. a market that is shrinking
2. a market that is growing

This is not a trick question. The answer is ‘b’.  A company has to grow quite a bit after it gets investment for the investors to be paid back. Consider an investor that wants to grow his investment by 20 times.  In a market that is fixed in size, then the current market share needs to be less than 5%. It is highly unlikely that the company would get 100% of the market, so they would probably need to have a current share of less than 2.5% to allow for growth that would pay back the investor.  This does not count the actions of companies that are currently in the same space. Overall, a company with a large share in this type of market (>5%) would not be able to hit the investor’s level of return.  With even a small share, a shrinking market would make it even harder for the investor to get there money back.

If the market was growing, then the rate of growth would greatly increase the odds of the investors making money.  This translates into a higher likelihood of getting investment.

So, what happens if the market starts out to be growing but turns into a poor market?  What are the options?

The first option is to continue as before hoping to gain enough market share and exit before the market collapses. This is very unlikely because an exit plan that pays back an investor requires that an outside entity (or group of people) buy the company hoping for an even higher return. In a shrinking market this could happen if the market would rebound or the technology could be applied to another market that is growing.  However, even in those cases, the buyer will try to buy at a lower price because they will feel it is their expertise that brings the most value; they are just avoiding the costs of starting from scratch by buying the existing firm.

The second option is to find another market that is growing.  By translating the technology, infrastructure (and team), and other resources into a growing market the company will now be in a situation to gain enough value to provide the investor with the targeted exist plan.  Buyers will also see that they can make more money with the company and are more likely to purchase at a premium price.

So, if you find yourself in a market that is shrinking you have a choice. Either cut your future losses and find a buyer now that can expand on your existing ideas or transition your company into another market that is more lucrative.  While the second is more desirable, neither option is the absolute correct one as it really depends on the situation.

Last Monday (Mar 30, 2009), I Bart Kemper of Kemper Engineering (www.kemperengineering.com) posed a question about why should someone who is not actively seeking investors or being an investor read this blog.  How would they use this information?  Why is it important?

The first answer is that it provides information that in the right setting can open up more opportunities leading to more clients. This is especially vital for a growing company working in high technology.

This week, let us look at another use for this information: how it relates to the future of the company itself.  What is the exit plan?

Will they go public and be considered by the underwriting firm?

Will they merge with another company and have to evaluate that potential merging firm?  How will that firm evaluate them?

Will the owners seek to sell the company?

In each case, someone is acting like an investor, the underwriter (and public), the two merging companies, or the buying entity.  What if the firm treats the buyer like an investor? What if they prepare like they are seeking funding?  The company will increase the likelihood of getting a better price and selling sooner.

Of course, the owners could make it a family business and give it to their children, leave it to other partners to run, or just shut it down and retire.

Next week, we will look at one final, but maybe obvious answer.

Years ago, in business school, I participated in the mentor program. A local business person would meet with the student and talk about whatever was on their mind. The idea was that the student would learn from the experience about running a business.

I met Cliff Marquart in the meet-and-greet. I asked him what he did: I buy companies, turn them around, and sell them for a profit. Very succinct (and as we will see later in Pitch, a very good Pitch). I said that I wanted to learn that.

Cliff and I only met a couple of times. In our first meeting, I reiterated his statement; and that I wanted to learn how he did that. His reply, I will never forget: Before you buy, before you get involved and devote your life to it, determine your exit plan. You must have an exit plan.

I do have an exit plan for this blog.

1. Produce material for a book. Publishing a book might mean I keep this blog and address more questions; however, when the book gets published will be the decision time on what to do next with this blog. FYI, I am seeking stories from you, the audience, on how you met some of the elements or did not meet them. We can change the names if you like.

2. Discover the next part of my career. By providing information and serving investors and entrepreneurs I hope to increase my understanding and gain some wisdom. Through continuous growth, I hope we open new doors, to realize the maximum of our potential. When I discover that next phase, l will decide what to do next with this blog.

Have an exit plan. The exit plan for this blog is a book and/or the next phase of a career.