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Documenting the Exit Strategy in Your Business Plan
Copyright © 2005, Growthink Business Plans
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All investors greatly desire and are motivated by a clear picture
of a company’s exit strategy, or the timing and method through
which they can “cash in” on their investment. This picture best
comes into focus when the key valuation and liquidity drivers
of the company are clearly delineated. An excellent method to
accomplish this is through descriptions of comparable firms that
have had successful liquidity events, either through acquisition,
merger, of initial public offerings (IPOs).
It is helpful to show other companies in your market, or similar
companies in other markets, who have successfully exited, and
how and why these companies were successful. For instance, were
they successful since they acquired a large customer base? Or
were they successful since they accomplished fast growth or high
profit margins? It is also important to tie their success to
their exit price. Was the exit price based on earnings or the
number of customers the firm had at the time? The business plan
should tie these metrics (e.g., exit price of $X per customer)
to the business to determine its future price.
The most common exit strategies in business plans are IPOs or
acquisitions. While the method of exit is not always crucial, the
investor often wants to see the decision to better understand the
management team’s motivation and commitment to building long-term
value. If acquisition is the selected exit path, then the
business plan should detail potential companies that might want
to acquire the firm in the future and why. Likewise, if an IPO
is expected in the future, the business plan should document the
financial metrics of the company that make it ripe for this type
of exit.
In most cases, investors only make money when the business
reaches a successful exit event. As such, it is critical that
business plans explain the expected exit, detail why this exit
was chosen and validate a realistic exit price.
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Writer's Resource Box:
Growthink Business Plans
has developed over 200 business plans for clients have
collectively raised over $750 million in financing, launched
numerous new product and service lines and gained competitive
advantage and market share. For more information go to:
http://www.growthink.com
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