How to Write an Exit Strategy to Let Investors Know How They Will Be Repaid

by Brian Hill
Selling your business can mean a big payday for you and your investors.


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Investors put money into companies with the expectation of earning a return on their investment when the company is sold, goes public or is re-capitalized by another entity. This is called the exit event. Even as early as the start-up stage it is important for a small-business owner to have at least a basic concept of how the investors will exit and receive their return. Your exit strategy should be included in the business plan you present to potential investors.

Why Investors Want to See Your Exit Strategy

Expressing your exit strategy on paper shows investors that you understand their need to get their money back at some point. You don't expect them to stay invested in your company forever. In the case of the sale of the company to another company, you and your investors may exit the investment together. But there could be a scenario where you want to continue owning and managing the business. In that case, you need other means for the investors to exit.

Explain Why an Exit is Possible

The two parts to a successful exit through the company being acquired are your ability to grow the company to the point it is valuable enough to be sought after as an acquisition and being able to identity suitable buyers for your business. In your exit strategy, discuss what you believe will happen in the next few years to cause the company to increase in value. For example, you might have a goal of reaching $20 million in sales within three years. As the company grows, it becomes more valuable -- which translates into higher possible returns for your investors. Regarding buyers, you could identify larger companies in your industry that might want to purchase yours to acquire your customer base.

Discuss Time Frame

Equity investors such as venture capital firms or angel investors hope to exit an investment within three to five years -- seven at the outside. Investors have a goal for the rate of return they hope to earn. or them to realize this goal, the company has to increase in value. Because there are so many unknowns regarding how a company will perform -- including the economic environment and competitive factors -- proposing a precise date, such as three-and-a-half years from now, is not practical. In your exit strategy, propose a range of time instead. The point to clearly express is that you don't expect the investors to wait 10 years to be paid.

How Specific to Be About Returns

In the exit strategy section of their business plans, small-business owners sometimes make the mistake of attempting to forecast the rate of return the investors will receive. Some might even try to calculate an exact figure based on their projected revenues and profits for the next three to five years, such as a 27.55 percent compounded annual rate of return. Savvy investors know how to make their own calculations based on the financial projections, so you don't need to pin yourself down to a specific number in the plan. Also, the rate of return is related to how much equity you give up for the proposed amount of capital. You may end up proposing to give a larger share than you actually need to because you want to show a high-enough return on investment to make the deal attractive to the investors. Leave the discussion about rates of return and equity percentages to the time when you get closer to finalizing a transaction with the investors.

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