Exit Strategy or Payback Analysis
Your business plan must demonstrate that you will be able to make timely payments on your loan. If you are seeking investors, they will want to see how they will recoup their investment in a well laid out business plan exit strategy. The exit strategy of your business plan needs to include a narrative addressing these issues.
This Section of Your Business Plan Should Include:
• State when the company will be able to start making loan payments
• Refer to your financial statements, which must show the ability to make payments at the time indicated.
For Equity Investments:
• A statement about how and when investors should expect to be able to sell their stock, or your exit strategy
• Whether or not it’s included in the plan, be prepared to talk about the feasibility of your exit strategy.
If you’re seeking a loan, you should understand the terms expected by the lender, even before preparing your financials. This can be learned through preliminary meetings, which are recommended in any case to start building rapport with your banker or lender. Some lending organizations might be content to accept no payments for 6 months. Others might accept interest only for the same period. Still others will want payments of principal and interest to begin immediately.
By knowing how your lenders work with clients, you can incorporate this information into your business plan financials. For example, if the lender agrees to no payments for the first six months, it will have an impact on the amount you will need to borrow.
In the end, your financial statements need to show that the business is expected to generate sufficient cash to make the required payments on time. Since your loan will likely be collateralized by your own personal assets, it will be essential to you that these forecasts prove to be accurate.
Many entrepreneurs who sign a personal guarantee don’t understand that the bank will be entitled to take every dollar that the business owner has—including personal funds—before the bank loses one dollar of its own money.
For Equity Investments
If you are seeking an investment instead of a loan, investors want to know how they will one day sell their stock. This is called your “exit strategy.” You might be content to work in your business for the rest of your career, but investors want to know how they will get their money back sooner. The most common exit strategy is building the company to a point where another company comes along and buys your firm. If this is your exit strategy, you would want to briefly describe the milestones the company would have to achieve before becoming attractive to another company. If you say you expect the company to be acquired within 5 years, what will you have accomplished that will make the company an attractive acquisition target?
The other once-common exit strategy is to take the company public through a public stock offering. For a small company, going public has become increasingly more difficult, bordering on impossible. Particularly for a startup company, it is almost a credibility-breaker to say that you are going to eventually take the company public, unless you are forecasting at least $50 million in revenue and have a team experienced in taking companies public or running public companies.
The description of your exit strategy does not have to be long and detailed. It can be as simple as a few paragraphs indicating that you expect the company to be acquired after achieving certain milestones. Be sure to list the most significant milestones, and specify why the business would be attractive at that point. You should also include a description of the types of companies that acquire firms like yours. Would it likely be a customer? A competitor? A private equity firm? You don’t have to name specific companies, but it’s not wrong to do so either.
Professional investors will want an exit strategy. If your investors are family and friends, they might be content to expect dividend payments instead of an exit strategy. The reason that professional investors are not usually enticed by such promises is that they know growing businesses consume cash, and any dividend payments take away from the company’s ability to grow.