This week will complete the discussion of how to craft an exit plan. The exit plan should include long term goals, milestones for achieving those goals, the risks involved and how they will be managed, and the final plan for recouping the rewards for you and your investors. Last week I covered long term goal setting and milestones. Today is about risk assessment management and crafting a plan for reaping rewards.
We left off last week at the point of establishing your burn rate through constructing cash flow projections in order to explain your "source and use of funds." You might conclude, as a result of this analysis, to pursue a multiple phase investment strategy. That is OK if you recognize the prudence of this approach up front. The last thing that you want to happen is to run out of cash prematurely and have to go back to the well again. This round's price will be considerably higher, if you are at all able to obtain additional funding.
I suggest that you double the amount of estimated capital needed and the amount of time that you expect to reach positive cash flow and profitability. Under promise and over deliver. Be a hero not a heel.
Remember risk vs. reward
You can take this to the bank; sophisticated investors must be convinced that you have adequately assessed the risks of your business proposition and have included ways to mitigate that risk. As the business owner, investing much money and years of work, shouldn't you thoroughly assess this relationship before taking the plunge?
Beware of being a pie eyed optimist. Think deeply about this topic. Draw from your SWOT analysis in the opportunity part of your plan (The Norman Transcript, April 26). Quantify risks as much as possible. Include an explanation of how you will manage these risks.
If you are pursuing outside investors, realize that venture capital is the most expensive money available. However, on the positive side, VCs usually bring sophisticated advice and oversight to the table. They typically will not touch an opportunity unless they are convinced that a minimal annual return of 25 percent (some 30 percent) within 3 to 5 years is reasonable to expect.
What's behind the numbers?
It's easy to create a string of numbers on a spreadsheet that shows this type of return. They won't be fooled, and neither should you. Your assumptions and your entire business plan must support the fact that the numbers on your spreadsheet are reasonable.
Angel investors, family and friends will be less demanding. They normally take a longer term view and anticipate receiving their return through profit distribution. Even if not in pursuit of outside investment, for your own wealth management and retirement planning, make sure that your projections are supported by reasonable assumptions coupled with sound risk assessment. A sage once said: "What most people call thinking is not really thinking at all, but rather rearranging their prejudices."
The exit deal
It is time to propose the exit deal and ROI. If you are pursuing VC funding, expect back and forth negotiations to follow. To avoid misunderstanding, regardless of the type of investor you are targeting, have your attorney draft a term sheet that puts the investment proposal in writing. If you are writing a business plan for your own planning, a term sheet won't be necessary until you are ready to sell.
Don't be stupid greedy
It is at the point of negotiation with an interested VC party that many entrepreneurs get stuck. The VC offer must acquire enough percentage ownership in the company to enable them to receive their minimum ROI based upon their risk assessment. Many entrepreneurs let the emotion of losing some of their baby get in the way of sound judgment. They would rather own 100 percent of a $3 million company than 40 percent of a $30 million company.
If you are pursuing angel or friend-family money, most will be satisfied with a reasonable return (10 percent-annum) based upon dividends and/or sale of the company. Depending upon your funding source your exit strategy could be:
· To pass the business to heirs with a dividend payout that satisfies investor and your retirement requirements
· Sale of the company, either private or IPO (Initial Public Offering)
· Recapitalization of the company to repatriate investor or founder stock.
To summarize, having a clear vision and understanding of your company's growth strategy, milestones by which you are willing to be judged, a risk assessment and management plan, and finally, an exit plan that includes rates of return on investment within your target investor's standards will stack the odds in your favor of obtaining the capital that you need to achieve your dreams.
Join me next week as I discuss the financials part of your business plan.
Rob Garibay is a local business owner and business coach with 30 plus years of business experience. Forward your business questions to 573-6537 or robgaribay@actioncoach.com.
