Why is it so Important to State the Exit Strategies in Your Business Plan?
When writing your business plan you should also think about the fact that there are risks associated with your business. They do not only apply to you, but also to your partners and to your investors. These risks do not only refer to the possibility for the business not to grow in the expected way, but also other human variables such as death, disabilities, divorce or departure. Well, if you can imagine finding yourself or your partner put in one of these situations you can understand why developing and overly establishing an exit strategy is an essential point that your business plan should reach.
The problem can still be solved if the business legislative papers only name you and your family as owners of the business. But, if you have an associate, things can get rather complicated. This is why you should make sure to be legally recognized as a separate entity from your business. Moreover, you should find a method that can annually determine the value of your company in a way which is recognized by the IRS. Also, if your associate has the same statute in the business’s ownership as you, you should write down in the business plan which of you retains the ownership and who gets paid off.
But what is the case when working with investors? Their policies differ from one type of investor to another. So, venture capitalists are generally interested only in companies that can go public and which should follow a high development rate in a short period of time. This is why they will look for an exit strategy that can cover the following five to seven years. They generally prefer public offering, merging or buy-outs, neither of which is in the advantage of the entrepreneur.
Angel investors tend to be more flexible when choosing exit strategies. This also happens because the investments angels make are lower than the ones offered by venture capitalists. Moreover, their internal struggle for the development of your business is not as high as venture capitalists’ as they provide neither external managers nor data bases. But you should keep in mind the fact that angels are no different from venture capital firms from the point of gains because the only purpose they have in investing in your business is obtaining rapid profit on behalf of your idea and your management of the company they have funded.
So, when writing your business plan, either you intent to use it for finding another person to associate with or if you are seeking for external investment from a venture capital firm or an angel investor, make sure to also include an exit strategy. You can choose between initial public offering (a thing that almost never happens for start-ups), buy-out – when your business partner buys all your shareholdings, merger or acquisition, franchise the business or handing down the business to another family member. Make sure that the exit strategy suits you well because you will probably have to fight for it when faced with the demands imposed by investors.