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Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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Featured Biz Question

I'm focusing on a particular sample business plan for a start-up at bplans.com. The plan has a section titled "Exit Strategy." The exit strategy specified is an IPO [chuckle]. Is it always advisable to document an exit strategy in a business plan for a start-up? What are other possible exit strategies for a start-up and under what circumstances is it appropriate to document them in a business plan? Some other exit strategies I can think of are selling the business and transferring ownership of the business to a younger family member. (There is also liquidation, but that goes in the unplanned category.)
JB

Answer from our Guest Expert Kent Capener of Capener Consulting

Business Plan Exit Strategy

Well, JB, not only is an exit strategy advisable, it's virtually mandatory. It's kind of like going into a four-star restaurant and realizing after the meal, you left your wallet at home -- what are your "exit" options? Do you exit while the maitre d' isn't looking; do you ask your guest to ante up; or do you offer to trade your dishwashing services for the four-course meal? Well, you get the idea: Having an "escape plan" is smart thinking no matter where you go. And when it comes to writing a business plan, an exit strategy is a key ingredient.

Seriously, JB, the eventual "exit" method you come up with at start-up isn’t as consequential as what you're willing to do in relation to the deal you're offering for the money at start-up. What’s the difference, you say? The exit doesn’t occur until sometime after the "entry", so over that time, other methods can be developed or even determined by the "moneyed ones" and negotiated with them or vice versa. Using our meal analogy again, it's like your investors won't order up that top-notch steak and potato entree unless it comes complete with dessert (a.k.a. exit strategy). Yet, after getting a taste of that beefy entree, they then may decide they don't want or need the dessert. It's just they wouldn't have put their money down for the meal without the dessert being a part of the initial package.

The IPO Option

You chuckled at an initial public offering (IPO), yet for start-ups that require a venture capitalist, an IPO can be a viable option, even in today’s economy. However, the percentage of start-ups that should seek venture capital is exceedingly small and declining markedly with the sagging new economy. The symptoms of every dot.com and net-related start-up (assuming that they need a venture capital firm) has succumbed to little money in this avenue in the capital capitols of America. The oversimplified reason is that most start-ups seeking venture capital actually need "seed" capital. And that's a totally different animal. Yet, the seed money chest in the Venture Capital markets has dried up worse than the Oklahoma Dust Bowl of the 1930s.

IPOs don’t necessarily have to be the most expensive items on the exit menu. You can go public through private placement, SCOR, NASDAQ Pink Sheets, mergers, reverse mergers, and through various state Stock Exchanges across America. And an IPO shown in the business plan as an "eventual" exit strategy for start-ups is very common. Whether it’s realistic or not is another story.

The reason for -- and the importance of -- an exit strategy leads us to what’s possible. Investors, whether they're "angels," investment clubs, wealthy individuals, or anyone or anything else that invests money, does so to make money. Don’t forget that. They don’t invest because they love you and want you to be rich -- they do it so they're enriched in the process.

Think Like An Investor. . .

It's this concept of enriching your investors where I'd recommend you look to devise an exit strategy, or set of strategies. Don’t think just cash enrichment either. There are other ways to enrich your investors. For example, one way is the tax benefit of an S corporation. S corporation investments have been known to attract individuals or angels in the start-up (losing-money) stage, who believe your story, but also need the tax losses passed through to them as shareowners in an S corporation. Possibly to off set gains with other investments.

If, however, you're looking for a true equity investment, meaning that money is exchanged for a percentage of your business, then you have several options that could be offered and documented in your business plan for practical exit strategies. Not knowing the specifics of your deal, I'll attempt to outline a strategy that might work for you. continued

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About the Expert

Kent Capener
Owner of Capener Consulting

Kent Capener

Kent is an expert on marketing; advertising; print, radio, and TV production; biz plan writing; trade show services; and direct response television. He relishes helping start-ups grow. more