Selling your business may be the farthest thing from your mind right now, but it's not far from your investors' minds.
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They want to be convinced that you have thought about how you will ultimately exit your company – and they want it in writing.
Relax . . . Your investors are probably not going to require you to sign a contract describing the sale of your business five or ten years down the road. But they generally like to see an exit strategy in your business plan because it speaks about your personal goals in the business. An exit strategy to grow the business over a thirty year period and then pass it down to one of your kids is very different from one that calls for a quick sale of the company in five years or less.
Exit strategies also help investors envision how they will leave the business. For some strange reason, investors want to know how long their money will be tied up in your company. Since your exit strategy will determine the length of their investment, it's only natural that it should be included as an element of the business plan.
There are several strategies you can employ for exiting your company. Although many entrepreneurs dream of an IPO exit, this is extremely difficult for new companies, and documenting it as your exit strategy could call your credibility into question with savvy investors.
If you plan to leave the business sooner rather than later, it's better to document a strategy based on an outright sale, a merger or acquisition by a competitor, or a buyout from a partner. These are more realistic expectations and will help the investors understand what to expect, especially when you give specifics about your timetable.
But even if you don't plan to leave the business soon, you'll still need to discuss your long-term strategy for leaving the company. If you are moving toward an eventual ownership transition to the next generation, you could briefly discuss how the transition may occur and what you are doing (or will do) to prepare your progeny for future leadership responsibilities.
Types of Investors
Not all investors have the same goals. Certain types of investors may find your exit strategy appealing, while others may pass on the opportunity simply because they can't see how their objectives fit with your plans for the business.
Venture capitalists typically look for investment opportunities with a high return and a relatively quick exit strategy (three to seven years). They most often invest in companies that have the ability to result in a windfall by going public within the investment period. However, since IPOs are prohibitive short-term goals for almost every startup, it's difficult for the average new business owner to attract the attention of a venture capitalist, even if you share a similar short-term perspective.
Angel investors, on the other hand, are much more flexible lot. Although they expect a high return on their investment, they are often willing to extend their investment commitment to accommodate your exit strategy – as long as you are upfront about documenting your strategy and take the necessary steps to execute it in a timely fashion. Angel investors are also more agreeable to a wider variety of exit strategies since many of them invest in the company based on a personal relationship with the business owner.