We regularly receive emails from entrepreneurs and business owners who have questions related to business plans, raising capital, and starting a business. We were recently contacted by a gentleman in the United Kingdom who was preparing a plan for his start-up and was unsure how to outline an exit strategy for his prospective investors.
I wanted to share a part of the response we prepared in hopes it may assist you in your business plan.
“Hi James. Thank you for visiting our site and for your kind words. I am responding to your query about exit strategies. I will begin by stating that you should not spend too much time in your plan talking about exit strategies. What is important is that you make it clear to your reader/investor that you do intend to offer the investor the opportunity to exit their investment during the five year planning period by providing them some kind of liquidity event. Here are a few sample exit strategy descriptions that were used by two of our clients:
Sample One
The investors that provide the capital that is the subject of this document will have several exit opportunities available to them. Management believes that the most likely exit will come from the sale of the Company or licensing of its intellectual property to one of its strategic partners or to another enterprise. Other alternatives that would create a liquidity event for the investors might include a buy back of the outstanding shares using cash on the Company’s balance sheet or through the exchange of the stock with long term capital provided by an institutional lender.
Sample Two
We will pursue several possible exit strategies:
IPO: Depending on market conditions and the growth in our product lines, an IPO may be feasible in 2-3 years.
Be acquired: This is a fragmented market that will be ripe for consolidation in several years as more and more enterprises strive to incorporate X technologies into their business processes. A sample of companies that may benefit by acquiring ABC include Oracle (Nasdaq: ORCL), SAP (NYSE: SAP), IBM (NYSE: IBM), General Electric (NYSE: GE), and Autodesk (Nasdaq: ADSK).
Stay Private: If market conditions soften, we plan to continue to operate as a profitable private entity, distributing dividends to shareholders until liquidity opportunities become available.
While these exit strategy examples may not be relevant for your venture, we hope they provide you a good model to follow in your business plan. We are big fans of keeping the exit strategy section of your plan simple, especially with start-up business where a potential exit is 5 or more years away.
