Pen the business plan, search for investors, build the business, and figure out how your investor will cash out later - right? Well, not exactly. Investors are interested in the growth of your business, but ultimately their commitment of capital hinges upon their ability to recoup their initial investment and a healthy profit. The lack of a solid and realistic exit strategy demonstrating how investors can accomplish this goal can immediately turn off many sources of capital. Your chances of cashing in with an investor are seriously reduced without a clear definition of how they will cash out their investment.
Entrepreneurs rarely place the same level of importance on the exit strategy in a business plan that an investor would. Business owners are focused on raising the capital needed to launch and expand their venture. Solid business plans with thorough marketing, sales, operations, management, and concept analysis can, and will, fall short when little consideration is given to the exit plan.
In our experience at BizPlanIt, entrepreneurs and business owners most often list "going public with an IPO in five years" as their intended exit strategy. Although this is an optimistic and hopeful goal, this outcome normally remains just that - a hope. Providing realistic exit strategies will result in instant credibility and helps reassure investors concerned with receiving a significant return.
The book "Finding Your Wings" by Benjamin & Margulis addresses the IPO misconception, noting that, "Acquisition or buyout is the predominant method for achieving liquidity for small company shareholders. The primary method of achieving liquidity is not IPO - far from it. But the misconception remains. Too often, entrepreneurs and their business plans say they will take their company public in five years. The odds are that such and event will not occur. So entrepreneurs need to consider how that investor is going to achieve liquidity."
Ok, so the exit strategy plays an important role in the business plan, especially in the eyes of your potential investors. In this issue of BizPlanIt's Newsletter we outline the most common exit strategies for you to consider along with brief advantages and disadvantages of each.
Initial Public Offering
Description: Sell the shares of the company to the public to be traded on a stock exchange
Advantages: Conversion to cash for investors, major shareholders usually maintain control, high potential return
Disadvantages: Company must have tremendous growth potential to receive IPO, costly process, uncertain
outcome. Major shareholders may be limited as to how much, when, and how they can sell stock
Description: Business bought outright by another existing company
Advantages: Receive cash or stock, often purchased by strategic partner, management contract can be negotiated
Disadvantages: Fit must be appropriate, potential management changes, corporate identity may disappear
Sale of Company
Description: Business bought by other individuals or entities
Advantages: Receive cash immediately
Disadvantages: Must find willing buyer, normally results in new management
Description: Join with and existing company
Advantages: May receive stock and some cash, resources are combined, current management may stay
Disadvantages: New partners or bosses, less control, may receive little or no cash
Description: One or more stockholders buy out the others
Advantages: Seller receives cash, other owners remain in control of the company
Disadvantages: Seller must be willing, buyers must have sufficient cash to buy others
Description: Sell business concept to others to replicate
Advantages: Receive cash, retain current management, opportunity for large scale growth
Disadvantages: Concept must be appropriate for franchising, legally complex
Because each business is different, a realistic exit plan should take into account your particular industry, business life-cycle, competitive environment, management needs, and more. It is also important to consider your personal and financial goals, and how they relate to the future of your business.
Do you value privacy and autonomy? Then an IPO, with its heavy public disclosure and extensive outsider demands, may be an unsuitable fit for you and your venture. Does building your business from the ground up excite you, but the prospect of managing it over the long haul turn you off? Exiting with a sale of your business may be your best bet, freeing you to pursue other entrepreneurial projects and allowing new owners to manage the day to day operations in the future.
Ultimately, the most effective exit plans will take into account business, personal, and investor goals. Keep in mind that the business plan is the road map for your company and a well thought out exit strategy simply clarifies a future destination when your investor can expect to reach liquidity.
Incorporating a variety of well thought-out exit strategies is typically the best approach to build investor confidence and increase your chances of successfully raising capital.
Exit Strategy: Business Plan Basics
In order to attract investment dollars for your business, it's critical to supply an exit plan to investors so they can get their money back (hopefully with a healthy return) and exit your company. The exit strategy section of your business should also outline your long-term plans for your business.
Begin by asking yourself why you are getting into business. Do you see yourself running your company twenty years from now, or are you interested in moving on after a few years? Are you in it for the big money at the end of the rainbow, or are you more interested in running a solid and steadily growing family business?
It's important to think through these issues and decide what you intend to do with your business before you can adequately answer the questions, and address the issues, concerning how your investor will exit your company. The requirements of each investor will vary in terms of return and exit strategy they seek. Two examples follow: Venture Capital
These investors look for a high return and an exit strategy of approximately 3-7 years. They work almost exclusively with companies that may go public or can be sold for a significant profit. However, keep in mind that going public is very rare and is unattainable for most companies. Angel Investor
These investors typically are looking for a high return but are more flexible with the terms of the exit strategy. Angels are typically less sophisticated than venture capitalists or institutional investors, and will become involved in your business because of a personal relationship with you.
Here are some possible exit strategies to consider:
Exit Strategy: Mistakes to Avoid
The following are several common mistakes found in the exit strategy section: