{"id":588,"date":"2013-11-19T09:19:07","date_gmt":"2013-11-19T17:19:07","guid":{"rendered":"http:\/\/www.gordonbenzie.com\/blog\/?p=588"},"modified":"2023-05-22T21:27:51","modified_gmt":"2023-05-23T04:27:51","slug":"what-is-your-exit-strategy","status":"publish","type":"post","link":"https:\/\/www.gordonbenzie.com\/blog\/what-is-your-exit-strategy\/","title":{"rendered":"What is Your Exit Strategy?"},"content":{"rendered":"

\"business_plan_exit_strategy\"<\/a>There are many reasons to start a business, ranging from launching a new product, defining a new market segment or fulfilling a passion to address a market gap. Regardless what your reason is for creating a business, if you need outside funding, then you need an exit strategy. Why? Because an investor needs to know how they will get their money back in the end. After all, they are investing in your business with an expectation of making money.<\/p>\n

As I speak with clients, this is sometimes a difficult concept to understand. I hear questions such as \u201cI don\u2019t want to sell my business?\u201d or \u201cHow do I know what its value is in the future?\u201d These are reasonable questions that need to be addressed as part of writing a business plan<\/a>.<\/p>\n

Valuing Your Business<\/h3>\n

With regards to the \u201cmechanics\u201d of business valuations, there are a few different approaches. In the end, however, value is most closely tied to the revenue your business generates, either in the current year, or what \u201cproforma\u201d revenue is expected to be next year. Having said this definition, it is still part \u201cvoodoo\u201d and part science. A recent article on Bloomberg pointed out that MLB teams are now theoretically 35 percent more valuable than just a few months ago \u2013 ten teams are now valued over $1 billion! See article here<\/a>.<\/p>\n

If you are a buyer, you will likely push for current year\u2019s revenue, and vice versa if you are the owner. In some industries, gross revenue is a suitable measure; in others net revenue is an industry standard. Personally, I think that gross revenue is a better guide to evaluating income opportunity. Net income reflects both the market potential PLUS how well you can keep a lid on costs. Expense management is more closely tied to how you, the operator, manage your business. Either way, a number can typically be negotiated as a reasonable baseline for valuation.<\/p>\n

Industry Potential<\/h3>\n

The next factor to consider relates to what industry you operate, to then incorporate an expectation of future growth. The rationale is simple: If your industry is expected to grow rapidly, then there is a higher expectation of value, which translates into a higher income \u201cmultiplier.\u201d As a buyer, I will pay a higher price if I think my investment will grow more in the future.<\/p>\n

Having worked in the software and high tech industries over the past two decades, I have seen some of the highest income multipliers in the business \u2013 as high as 10X! Other industries don\u2019t have such lofty expectations, so may only have an income multiplier of 1X. What this means is that a buyer will only pay 1X income as a purchase price.<\/p>\n

Exit Options<\/h3>\n

Now you have evaluated a valuation strategy, the last step is to identify how<\/span><\/i> you will sell your business. Here are five options to consider, each of which can provide your investor with in an exit strategy:<\/p>\n

    \n
  1. Another new investor can replace your current investor\u2019s position<\/li>\n
  2. An outright sale of the business can occur to a new entity, such as another owner or business<\/li>\n
  3. The current management team or owner can do what is called a \u201cManagement Buy Out\u201d or MBO or \u201cLeveraged Buy Out\u201d (LBO), which means that new debt is issued for the current team to buy the business themselves<\/li>\n
  4. An Initial Public Offering (IPO) can be performed, leading to public ownership of your business through shares on a stock exchange. Note that this exit strategy typically requires a minimum level of income in the $100 million range or more, so this exit strategy may not be right for everyone<\/li>\n
  5. A trade could be arranged whereby you now own a different asset in exchange for relinquishing control of your business<\/li>\n<\/ol>\n

    An exit strategy is a necessary component to a business plan\u2019s financial model, as it demonstrates that an investor\u2019s money will not simply \u201cdisappear\u201d once you collect the check. An exit strategy is part of an investor\u2019s lifecycle. Without this expectation, it is unlikely that any new businesses would be funded, creating enormous problems for those entrepreneurs seeking to challenge the status quo or those inventors that have the next greatest thing that we don\u2019t yet know we can\u2019t live without!<\/p>\n

    Gordon Benzie<\/strong>\u00a0is a marketing communications professional and business plan adviser that specializes in preparing and executing upon business plans and marketing strategies. <\/em><\/i>\u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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