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MANAGEMENT: When Is The Proper Timing To Implement An "Exit Strategy"?
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When Is The Proper Timing To Implement An "Exit Strategy"?

By Marwan Emile Faddoul



BT 201706 MANAGEMENT 01It is said that business people invest in entities expecting a higher return on their investment.

During a business trip to Europe, Philip, one of our clients who I was traveling with, approached me and said: "Marwan when is the best time to exit from an investment?" Before I proceed with my story, let me tell you a bit about Philip. Philip is an American Chinese businessman who made a fortune working in the steel industry. Over the past three months, Philip decided to invest a part of his money in different startups.

BT 201706 MANAGEMENT 02Sitting in the airport waiting for our flight, I looked at Philip and started to talk, explaining to him the overall picture of an exit strategy from a VC perspective. Philip, I said: as you know an exit strategy is a contingency plan that is executed by a venture capitalist with the objective to liquidate a position in a financial asset, like for example, the startups you are investing in. This liquidation takes place once certain predetermined criteria for either has been met or exceeded.

On one negative occasion, an exit strategy may be executed for the purpose of exiting a non-performing investment or closing a business that is not generating profits. In this case the purpose of your exit is simply to limit your losses. To give you a practical example, if in one of your startups, 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, then planned termination of operations and liquidation of all assets is sometimes the best option to limit any further losses.

hl manOn another positive occasion, an exit strategy may be executed when an investment has met its profit objective. As a success story on this matter, Brian Acton and Jam Koum chose their exit strategy wisely when Facebook purchased the messaging application WhatsApp at a cost of $19 billion in cash and stock. Not a bad price tag for a company of 52 people that was rumored to sell only for $1-$2 billion just 14 months ago.

There are also cases where people implement an exit strategy because of a change in the market conditions, because of some legal matters or because of the simple reason that the business owner wants to cash out.

You as an investor should plan your exit strategy for any positive or negative contingency. Also you should take into consideration several critical elements before timing your exit strategy.

BT 201706 MANAGEMENT 04First of all, know the objective of your investment - is it only for wealth appreciation or are you aiming for capital appreciation? Before you decide on a good time to exit from the company that you invested in, check if your investment has reached the objectives that you started with in the first place. If this is not the case then you might be exiting at the wrong time.

Secondly, and before you start executing your objective, make sure to decide your holding period. This means that if you have a strategy for a long term investment of, let us say three years, do not think of selling mid-way just because the market is not performing as well as you wanted it to or because other investors are selling. There will always be short-term volatility and you as an investor should not be afraid of cyclic downs or bear phases. On the flip side, do not be rigid with your exit strategy.

As I mentioned previously, altering your investment strategy mid-way based on hearsay and unsubstantiated market knowledge is not recommended. But this does not mean you have to be rigid about not exiting prematurely. Always check the history and valuation of your investment and if you feel selling a part of it will be a good idea and help you balance your overall portfolio, selling should be considered. You need to go with the flow and whatever decisions you take, base it on the overall economic outlook, fundamentals of financial markets and of course your personal investment objectives.

Thirdly, keep reviewing your portfolio. By doing so, you are likely to come across invested instruments that will be better off exiting rather than staying invested in.

Finally, don't link selling with just the returns. There are some investments which are by nature long term investments. If you believe in strong fundamentals of any invested asset class, do not let sluggish returns or lack of movement in the short term deter you. As an investor aim for medium to long-term investment horizon, and even if the investment may appear to be sluggish, stay invested and trust your fundamental investing ability.

Exiting the market in a timely way is just as important as entering the financial markets. Like in the case of entering, there is no one fixed time for an exit. Allow your exit timing to be flexible and in accordance with your investment goals and objectives.

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