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Documenting the Exit Strategy in Your Business Plan
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by:
Dave Lavinsky
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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:
GT Business
Plans has developed over 200 business plans for clients that
have collectively raised over $750 million in financing, launched
numerous new product and service lines and gained competitive advantage
and market share. GT Business Plans is the sister site of GT Venture Capital
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