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BUSINESS BASICS CHANNELS  |
Business Plan Tutorial,
Part 8 Intro Many people get discouraged when they consider business planning activities. Doing it right involves work and takes time away from your other tasks. A lot of people can't find the time to do it in one burst of activity. For that reason, we're breaking this business plan tutorial into nine sections so that you can pace yourself and make reasonable progress while still taking care of everything else you do. If you're just getting started, see Part One. The plan itself will cover:
Exit Strategies Your "exit strategy" is how and when you plan to leave your business. It sets your goal for what it will be worth when you do leave. If you are a sole proprietor with no equity investors, your exit strategy needs to please only yourself and members of your immediate family. If you have a partner or partners, you will need to get buy-in from them on transition or sale of the company. If you have equity investors, your exit strategy tells your investors and management team when their big payoff should happen and what will make that payoff possible. Many investors in a private business, including founders and managers, cannot use the money that they have invested or unlock the value of the company's growth until a "liquidity event" occurs. That means a sale of part or all of the company. The company can IPO, which means that it is now a public company and that shares can be bought and sold on a stock exchange. It can be bought by another company for cash, shares or a combination of cash and shares. You can sell part of the company. You can refinance the company to buy investors out, bringing in new investors or a debt structure. You can sell the company to its managers, a leveraged buyout. And you can also sell your company to its employees, an ESOP (employee stock ownership program.) How does that happen? With a liquidity event, your investors can sell their shares in the company. Your first step in writing your exit strategy is to determine when you are going to leave. Do you intend to keep the company as it is for a specific length of time? What achievement or event will make you want to cash out of it? Reaching a certain age may trigger your interest in a partial or full retirement. Accomplishing a goal may also be the time to leave. You may also receive a high-value offer for your business. If you are planning a sale, such as an IPO or a portion of the business, you will want to position the company to maximize the value that you can get for it. Usually that means driving sales higher, managing expenses and making sure that your books are in order. You will also want to identify potential buyers of the company, and perhaps stimulate a bidding war among them. You have some decisions to make. Are you going to want to completely cash out, or will you want to sell only part of the company? Do you want to leave it to your kids? You may wish to plan a transition which gives them positions with the company and increasing levels of responsibility and ownership. Once you've made your decision on when to exit, you need to focus on how much the company should be worth at your exit. Professional private equity investors usually need a liquidity event in 3 8 years and have recently expected much shorter time-to-liquidity. The value that you will be able to receive for your company depends on a number of factors. Is it dominant in its industry or trade location? That will make it more valuable than a lower ranking company. How are companies in your trade group valued? Revenue, profitability and book value can all be factors in determining possible sale value for the company. Has a similar company recently been sold? That will establish a baseline for valuing your company. How strong will the remaining management group be? That's can also have an effect on the value of your company to a buyer. You can also value your company on the forecasted strength of its cash flows or revenues or profits. Once you have forecast what your company will be valued at and backed it with your reasoning for the valuation, you're ready to tie it all together. Writing it up for your business plan is usually short, no more than a couple of paragraphs. A shortened typical exit strategy statement for one of our clients could read: "XYZ Company will position for IPO in three years. The Company will also be open to attractive acquisition offers with a valuation of at least $8,000,000 in year three or $12,000,000 in year four based on achieving our prospective goals of 20% market share in year three and 30% in year four." Write up when you intend to sell or leave the business and the range of value that you expect it to bring at that time. Support the price that you are estimating you will get based on sales prices in your industry or trade group and your planned position in the industry at exit time. Whew, that's it! Writing a business plan can be a lot of hard work but worthwhile. You can't hit your goals if you can't see the targets. One thing we can guarantee is that your business will never exactly follow your business plan. The value of the plan, in addition to helping you find and raise funds, is to set achievable goals and to understand your business so thoroughly that you can react quickly and effectively to both negative results and new opportunities. We suggest that you look at your business plan every three months and note any changes that have occurred, then update it formally once a year to reflect what has happened in your business and new opportunities and directions for the company. -Cindy Nemeth-Johannes
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