The Exit Strategy in Your Business Plan

The Exit Strategy in your Business Plan must clearly and effectively answer the question investors always have about the "how and when" of their investment. It is the ultimate question every investor needs answered to explain "how and when" they will cash out and make a return on their investment. Management teams need to carefully weigh the different exit strategies and be flexible. What may be your exit strategy today can change tomorrow.

There are a few basic exit strategies: 1. the buyout by a competitor, 2. going public or 3. an investor buyout, when a larger venture capital firm buys out angel investors or a small venture capital investor.

1. The Buyout. If the larger competitors in your industry have been known to acquire some of their smaller competitors this is a viable exit strategy. Have the details ready if an investor asks which competitor is likely to buy your company and be prepared to respond with facts. For instance, which companies did that competitor buyout in the past year. It is a common growth model for companies to grow through acquisitions.

Middle management is often well positioned to handle a "Middle Management Buyout". They have experience in the industry, they know exactly how that particular company works and they have developed industry contacts and relationships that are valuable to the company going forward. Many times however, middle management lacks the financial backing for the buyout. Some of my hedge fund clients actively look for good companies with strong middle management to fund the buyout. If you are part of a middle management team or known of such an opportunity, give me a call.

2. Going Public. If your management team agrees on going public, be sure that someone on the management team has some experience with the mechanics of running a public company. A venture capital firm will have a problem with this exit strategy if no one has public company experience. Your management team could of course explain that you will hire a CFO, General Counsel or President that has such experience. This may satisfy them and show them that you are at least planning ahead.

3. Investor Buyout. Sometimes smaller venture capital firms will invest in companies that the larger venture capital firms won't touch. If a venture capital firm is managing $1 Billion they aren't making $5,000,000 investments, otherwise they would have about 200 investments to monitor. Small venture capital firms and angel investors usually fill the void by investing in companies looking to raise $500,000 to $5,000,000.
Some small venture capital firms and angel investors do not like companies to go public. They fear the uncertainty of stock prices and the expense of getting publicly listed. Even worse, if the company does a reverse merger into a public shell it could dilute their equity position. Also, the public shell may have skeletons in its closet such as undisclosed debts, potential lawsuits from former employees or undisclosed convertible securities that are outstanding at a below market price.

Your Management team needs to carefully discuss all the Exit Strategy options and be in agreement. Your Business Plan should set forth the Exit Strategy, but as I explained earlier, be flexible. What if you plan on going public, but a large competitor offers a great buyout price? Your investors would like to know that you will be flexible to such offers.

The Business Plan is an important first step in the process of raising capital.

Here’s some more Business Plan Preparation Tips learned from past experiences. You can never have enough helpful tips when it comes to raising capital.

The Executive Summary (includes Exit Strategy) is a good way to get your “story” out there to interested investors. Many of my clients send out an Executive Summary to help narrow the field of potential investors before they send out their full blown Business Plan. See why you should too.

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The Competitive Analysis is an important section to include in your Executive Summary and Business Plan. Here are a few tips to help you in your preparation of this section.

The Financial Forecast. Here's some helpful advice when it comes to preparing your Financial Forecast. Don't make the mistakes I have seem many other business people make.