A Plan investor develops to discover a profit on their investment. Exit strategies range from selling a property to having a property owner redeem on a tax lien certificate.
We encourage investors to invest with the end in mind. This means that before the investor even makes the purchase, they need to already have formulated how he or she will make a profit on the deal and how to execute that exit. The surer the exit strategy and details surrounding it, the better off the investor will be and the fewer hiccups. Something to consider on every property before thinking about any of the following exit strategies is the property type, property value, and the condition.
What Is an Exit Strategy?
An exit strategy is a contingency plan that is executed by an investor, trader, venture capitalist, or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria for either has been met or exceeded.
An exit strategy may be executed to exit a non-performing investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.
An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO).
Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning, liability lawsuits or a divorce; or for the simple reason that a business owner/investor is retiring and wants to cash out.
Business exit strategies should not be confused with trading exit strategies used in securities markets.
Understanding Exit Strategies
An effective exit strategy should be planned for every positive and negative contingency regardless of the type of investment, trade, or business venture. This planning should be an integral part of determining the risk associated with the investment, trade, or business venture.
A business exit strategy is an entrepreneur's strategic plan to sell their ownership in a company to investors or another company. An exit strategy gives a business owner a way to reduce or liquidate their stake in a business and, if the business is successful, make a substantial profit.
If the business is not successful, an exit strategy (or “exit plan”) enables the entrepreneur to limit losses. An exit strategy may also be used by an investor such as a venture capitalist to prepare for a cash-out of an investment.
For traders and investors, exit strategies and other money management techniques can greatly enhance their trading by eliminating emotion and reducing risk. Before entering a trade, an investor is advised to set a point at which they will sell for a loss and a point at which they will sell for a gain.
Money management is one of the most important (and least understood) aspects of trading. Many traders, for instance, enter a trade without an exit strategy and are often more likely to take premature profits or, worse, run losses. Traders should understand the exits that are available to them and create an exit strategy that will minimize losses and lock in profits.
Exit Strategies for a Business Venture
In the case of a startup business, successful entrepreneurs plan for a comprehensive exit strategy in case business operations do not meet predetermined milestones.
If cash flow draws down to a point where business operations are no longer sustainable and an external capital infusion is no longer feasible to maintain operations, a planned termination of operations and a liquidation of all assets are sometimes the best options to limit any further losses.
Most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital. Business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party.
Ideally, an entrepreneur will develop an exit strategy in their initial business plan before launching the business. The choice of exit plan will influence business development decisions. Common types of exit strategies include initial public offerings (IPO), strategic acquisitions, and management buy-outs (MBO).
The exit strategy that an entrepreneur chooses depends on many factors such as how much control or involvement the entrepreneur wants to retain in the business, whether they want the company to continue to be operated in the same way, or if they are willing to see it change going forward. The entrepreneur will want to be paid a fair price for their ownership share.
A strategic acquisition, for example, will relieve the founder of their ownership responsibilities, but will also mean giving up control. IPOs are often considered the ultimate exit strategy since they are associated with prestige and high payoffs. Contrastingly, bankruptcy is seen as the least desirable way to exit a business.
A key aspect of an exit strategy is business valuation, and there are specialists that can help business owners (and buyers) examine a company's financials to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.
Other Possible Exit Strategies
If an investor got property through a tax lien certificate or low-priced tax deed, they could sell quickly to another investor or property owner.
Like we mention above, answer the following question: “What is the condition of the property?” Is it in need of repair or rehab? If it needs repair, you have to price the property lower to sell it. There are investors that specialize in fixing homes and reselling them, so connect with them and sell to them at a discount. Let them deal with the repair.
What is the investor’s margin on the investment? If the property is worth $50k and was purchased at a tax deed auction for $25k, the investor may want to consider selling it for $30k – $35k to sell it quickly to another investor or someone wanting a fixer upper. If the property is in great shape, the investor can sell it closer to market value.
The best scenario would be having the buyer lined up before the investment is made. If you have contacts in a specific area interested in a fix and sell, show them the property and line up the deal.
Maybe rehab is not needed on the property at all, or maybe it is land that is ready to build on. Either way, you can sell it near or at retail without any work. What now? You can put the property on the market and wait for a buyer, or price it low to sell it faster. This is called selling at wholesale price. Property that is worth $150k in good condition, that the investor bought for $50k, could be sold at wholesale price of $100k to sell quickly. An investor would want to do this if they wanted to cash out quickly and get their money into another investment as fast as possible.
FIX AND SELL
If the property needs work and the investor wants to sell the property at retail, the investor will use this strategy. Before purchase, the investor should take a close look at the work needed and get accurate estimates on rehab. The investor needs to work those numbers into the equation when considering the investment. A $25k investment worth $50k that requires $20k in rehab might not be worth it due to tight numbers. The best way to work this deal having rehab contractors, cost structure, and a buyer lined up before making the investment.
FIX AND RENT
This is similar to fixing and selling, but the investor plans to rent out the property. Before investing, the investor should know what comparable properties are renting for in the area and what costs are required to do rehab on the property.
One important thing to consider when you are thinking about renting is your break-even point, cash flow, and investment return. Example: If you are buying a home for $25k that requires $15k in rehab, you are spending $40k. What kind of return do you need to make for that deal to be worth your time and money?
Let us say the home will rent $700 a month. $700 times 12 months is $8,400 a year, which is about 25% of the cost the investor incurred. It is fair to say that is a 25% investment return. Your break-even point on that investment is about 4 years and then the rental property will all be cash flow.
COLLECT ON REDEMPTION
The standard exit strategy for tax lien investors is to collect when the property owner redeems on the property. When planning this exit, the investor must consider the interest rate promised by that state and the maximum time the investment will be out, also called the redemption period.
When the property owner redeems and the investor receives money back plus interest, the investor has exited. Sometimes, the investor’s exit will not come until after they have foreclosed and executed one of the previously mentioned strategies.
There are other creative exit strategies, but the main ones are mentioned here. Pick an exit strategy that makes sense for any particular investment before you buy. If you have any questions let us know.