Exit strategy for potential investors – important for you and them

When it comes to raising equity, the most important aspects of any investor’s investment decision are: 1) How will they get their money out? And 2) What they will earn when they go out of business. This can often be complicated to explain and, if neglected when developing your business plan, can end up costing you the funding you need to build your business.

First, an exit strategy is much more than just what your business will be worth at some point in the future. Understanding what your investor needs to see is an essential element of your presentation. For example, if your investor is looking for a 2-3 year exit, don’t show them a 5-year exit plan.

A well thought out exit strategy for a potential investor will address things like: who the potential prospects for the company are, what type of professional assistance you need to market the company properly and achieve the desired valuation, whether an IPO among others makes sense for your company. Showing that you’ve thought deeply about their exit strategy can give you an edge when deciding the next investment in your portfolio.

When planning an exit strategy, the question of valuation inevitably comes into play. While it’s possible that with $1,000,000 in revenue and breaking even by the end of year five, your company could hit $500,000,000 in revenue with 30% EBITDA, it just isn’t likely. A big “watch out” for any investor is when an entrepreneur with a vision wears rose-colored glasses. So, be conservative and make sure your growth and expected enterprise value are somewhere within the realm of possibility.

Be careful though… being too conservative can put an investor off your business – nobody wants to see flat forecasts with five years of loss ahead! If you honestly think your business is going there, do yourself a favor by closing the doors and starting planning your next business. Never try to have an unrealistic expectation of performance in order to raise capital. Knowing that you will fail and still take the money will destroy your reputation in the funding community and possibly even your industry.

If possible, give a potential investor examples of other companies in your industry that have achieved the kind of success you predict. Depending on the type of investor and the growth stage of your company, it is not unreasonable for an equity investor to expect a 3x to 10x return on a stock investment over 3 to 5 years.

If you manage to attract the interest of an investor who likes the exit strategy you propose, you protect your ability to later participate in the company’s success. While a good attorney with extensive experience in merger and acquisition transactions is a necessary resource to protect your interests from a legal perspective, it is important to ensure you understand the intent of any term sheet or discussion that you are addressing from a business and practical perspective to lead. For example, it’s not uncommon for investors, even if in a minority position, to insist that they have significant influence over business decisions or to raise additional capital — this could be through a voting rights agreement or simply by taking a majority of seats done on the board.

They may also want to ensure that their return of capital and any profits are paid out to the other shareholders (ie you and you other shareholders) in priority. If you’re comfortable with the idea of ​​having an investor who is self-serving in that regard, then this could work for you. Many companies wouldn’t have the balance sheet strength to handle such a cash flow collapse just to pay off an investor, sometimes resulting in remaining shareholders trying to create additional value in a company that has, and has, all but lost its book value is insolvent. In short, understand what your potential investor is looking for and ensure that when it comes time to exit, they won’t be able to take away the value from the company you and your team have worked so hard to create .