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Documenting Your Business Plan Exit Strategy

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. The business plan writer must be aware of these important details when preparing the document for potential investors. 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 a business plan 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.

Special Announcement:

We regularly receive requests from entrepreneurs who want to hire Growthink but cannot afford our consulting fees. For this reason, we have developed a simple business plan template that allows entrepreneurs to quickly and cost-effectively develop professional business plans.

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