If you’re looking for equity funding, the exit strategy section of your business plan is very important.
This section details how you plan to eventually “exit” the business (usually via the sale of your company or an IPO) so that investors can get a return on their investment.
This article details the importance of your exit strategy and the two keys to include in this section of your business plan.
Exiting A Business
“Exiting” is also known as cashing out of your business. While many people think of an IPO (initial public offering) as an exit (which it is), the most likely successful exit for a business by far is selling the company.
It’s called an “exit” when you sell the company because that is how you exit the business. That is how you end your ownership and the equity owners’ (i.e., investors) ownership of the business, and that’s how they “cash out” (get their money back plus their return).
Let’s use an example. An investor gives you $1 million for 50% of your business. You grow the business and sell it for $100 million. You will receive a check for approximately $50 million, and the investors will get a check for approximately $50 million.
That’s how the investor cashes out. Barring other provisions in your funding agreement, if you never sold this business, the investor who gave you $1 million would never get a return on their investment no matter how successful your company became. This is why the exit strategy section of your business plan is so important.
1. Detail Your Most Likely Exit Strategy
There are two main components to include in the exit strategy section of your plan.
The first is to detail your most likely exit strategy. Is it go public? Is it to sell the company to an acquirer? Is it to sell it to your employees?
Take a moment to think about your most likely exit and then document it.
2. Prove Your Exit Strategy
The second component is most important, and it is to prove the likelihood of your exit strategy to the best of your ability.
For example, if your exit strategy is to go public, then show other companies in similar markets or positions that have gone public in the last three to five years.
Provide research including the names of those companies, the dates they went public and the returns their investors received.
Conversely, if your most likely exit strategy is to sell your company, list potential buyers. Discuss not only who they are and their current financial positions (e.g., estimated total revenues if a private company), but the reasons they’d want to purchase a company like yours. Ideally, show other companies these firms have acquired in the past and at what price points.
Finally, as much as possible, show other companies that were similar to yours that were recently acquired. As much as possible, determine the sale price of these companies and the returns their investors might have received upon the acquisitions.
Making Your Exit Strategy Section Shine
In summary, your exit strategy section should discuss your most likely exit or preferred exit, and then prove the potential likelihood of that exit. This gives investors the confidence they will ultimately get a nice return on their investment in your company.
In general, the more research you do here the better; as this will improve your case as to the potential of eventually realizing a large exit. Likewise, this research might help you identify strategies to increase the likelihood of any exit. For instance, you might find that acquirers in your market tend to first become customers or partners of the firms they acquire. In such a case, you might decide to adopt this same strategy.
How to Create the Exit Strategy Section Infographic
Below is an infographic of this article for quick reference.
For inspiration when creating the exit strategy section of your business plan, we put together the slide presentation below to show you some Killer Company Exits (companies how have exited for BIG dollars).