BCA

By Ian W. Harvey

When it comes to raising equity, the most important aspects of any investor’s  decision to invest are: 1) How they are going to get their money out? And, 2)  What they are going to make when they exit the deal. This can often be a  complicated matter to explain and, if neglected when developing your business  plan, could end up costing you the financing you need to build your  business.

First, an exit strategy is much more than just what your company is going to  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 you investor  looks for a 2 to 3 year exit then don’t show him a 5 year exit plan.

A well-conceived exit strategy for a prospective investor will look at things  such as; who the potential suitors are for the business, what kind of  professional assistance you will require to properly market the company and  achieve the desired valuation, whether an IPO makes sense for your business,  among other factors. Showing that you’ve put considerable thought into their  exit strategy can give you an advantage when they are deciding on the next  investment for their portfolio.

Play it Consertively

When you plan an exit strategy, the issue of valuation will inevitably come  into question. While it is possible that your company with $1,000,000 in revenue  and breaking even will reach $500,000,000 in sales with 30% EBITDA by the end of  year 5, it is simply not likely. A huge “watch out” for any investor is when an  entrepreneur with a vision is wearing rose-tinted glasses. So, play it  conservative and make sure that your growth and anticipated enterprise value are  somewhere within the realm of possibility.

However, be careful… being too conservative can turn an investor off your  deal – nobody wants to see flat line projections with five years of losses  ahead! If you honestly think that is where your business is going, do yourself a  favour by shutting the doors and getting started planning your next venture -  never try to set an unrealistic performance expectation to raise capital.

Knowing that you are going to fail and taking the money anyway will kill your  reputation in the financing community and possibly even your industry.

When possible, provide a potential investor with examples of other companies  in your industry that have achieved the type of success that you are projecting.  Depending on the type of investor and stage of growth your company is in, it is  not unreasonable for an equity investor to expect a 3 to 10 times return on an  equity investment over 3 to 5 years.

Understand the Intensions of a Term Sheet From a Business Perspective

If you do manage to attract the interest of an investor who likes the exit  strategy you have presented, be sure to protect your ability to enjoy in the  success of the business down the road. While a good lawyer with extensive merger  and acquisition transaction experience is a necessary resource to protect your  interest from a legal perspective, it is important to make sure that you  understand the intentions of any term sheet or discussion you have from a  business and practical perspective.

For example, it is not uncommon for  investors, even if in a minority position, to insist that they have significant  influence when it comes to business decisions or raising additional capital -

Understand What Your Potential Investor is Looking For

They may also want to ensure that they get their return of capital and any  gains paid out in priority to the other shareholders (i.e. you and you other  shareholders). If you are comfortable with the idea of having an investor who is  going to be self-serving in this respect, then this may work for you.

Many  companies would not have the balance sheet strength to sustain such a cash flow  hit just to pay off an investor, sometimes leaving the remaining shareholders  trying to create additional value in a company that is stripped of its book  value and all but insolvent. In short, understand what your potential investor  is looking for and make sure that they are not in a position to strip the  company of the value you and your team has work so hard for when it is time for  their exit.

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