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Documenting the Exit Strategy in Your Business Plan

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.

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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.