Your exit strategy motivates your investors. Each investor wants to know how they can cash out of your company and obtain a suitable return on their investment. In short, they want to know your roadmap for getting them from Point A (funding your company) to Point B (cashing out).
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The future is always hard to predict, so you might not currently know the answer. However, all investors worth their salt will want to ensure that your goals for your company are lined up properly. They’ll also need to know you’re anticipating some type of liquidation event which allows you and your investors to benefit financially.
While you’re developing your exit strategy, study companies like yours that have experienced a merger, initial public offering, buyout or other liquidation event. Your business plan should describe these companies and explain how they achieved successful exits for their investors. It should also emphasize the reasons these companies succeeded. Was it because they enjoyed an advantage in important technology? Or was it because of a particular marketing strategy? Your business plan should explain the reasons these companies succeeded, whatever those reasons may be.
Your business plan should also indicate the valuation of these companies at the time of their liquidation events. In addition, try to explain the factors behind their valuations. For example, was the value of a company based primarily on its customer base, or was it more closely related to the company’s revenue? Once you understand these factors, you can use the data as a benchmark as you’re planning your exit strategy.
If you’re targeting a buyout, identify the companies that might be interested in an acquisition of your company. Give your reasons for thinking these companies might be a good fit. Likewise, if you’re targeting an initial public offering (“IPO”), explain the milestones you’ll need to achieve to bring about this exit strategy.
Acquisitions, mergers and IPOs are the exit strategies most frequently described in business plans. However, the number of IPOs has been decreasing recently. Obviously, it’s impossible to predict the future, and reasonable investors usually don’t require an extremely detailed exit strategy in a business plan. However, they do want to be assured that you’re considering your exit strategy. You need to convince them that you’re fully committed to increasing your company’s long-term valuation.
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As a general rule, investors only cash out of a company when it experiences a liquidation event such as a buyout, merger or IPO. This investment approach makes it crucial for your business plan to document your exit strategy. Remember, though, that the exit strategy is just one of several areas you’ll need to describe properly if you want an infusion of cash.
Peter