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09.22.05
Documenting The Exit Strategy In Your Business Plan
 By
Dave Lavinsky
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. 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 business plans 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.
About the Author:
As President of Growthink, Dave Lavinsky has helped the company become one of
the premier business plan development firms. Since its inception, Growthink has
developed over 200 business plans. |
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