Lesson 6: Your Business Plan

Your business plan

Now that you understand what a business model is, you can construct your business plan. A business plan is a document that details the past, present, and intended future of your company. It is a management summary that provides proof of a demand for your product or service. It should show that your management team is experienced and balanced in its composition, that the business has the potential to be a profitable enterprise for all parties, and that the risk involved is not too great.

A well-written plan is great for attracting new talent and investors, as the written records of your goals show that you understand your business and can deliver the results you promise.  

Business plans can vary; a startup business plan will look different to that of a growth business plan or a feasibility business plan. As an entrepreneur, the most important elements in your plan should include what you’ve put down in your business model canvas. Flesh out these details, and don’t forget to adjust your plan according to the audience you’re pitching to. While the content will remain largely the same, the “ask” at the end of the documentation might need to be changed, depending on what you need and who you are presenting to.   

Why do you need an exit strategy?

While an exit strategy sounds negative to some, the best reason for one is to plan how to optimise a good situation, rather than escape a bad one. Here are some examples of exit strategies:  

  • Merge with a company that adds complementary skills to your business. This can save on resources.
  • Sell your startup to a large company, which is a time- and cost-efficient means to increase revenue and create new products.
  • Offer your company’s shares for sale to the public instead of through an initial public offering, or IPO, which is a way to raise capital for growth and upcoming projects.
  • Liquidate the business, if you have decided that enough is enough.

An exit strategy allows you to run your startup and focus your efforts on making your company more appealing and compelling to the investors you target. Every investor wants to make a lot of money in a short amount of time, with five years being the benchmark timeframe. As such, your plan and pitch should answer the investor’s unstated question: How will this make me a lot of money in five years?

Every aspirant entrepreneur hopes that they will get something out of a new business venture, whether it’s money or the pleasure of seeing the business continue and grow. Regardless of the reason, an entrepreneur and their respective investors want the business to be a success so that they can see a return on investment (ROI).

When generating startup funding, an exit strategy is critical. The “exit” in exit strategy relates to money, not the startup founders or small business owners. The startup brings money in, and the investors get money out. Therefore, startups looking for angel investors or venture capital (VC) need an exit strategy because investors require it – it’s what gives them a return. In other words, the exit strategy is when investors, who previously put money into a startup, receive money back years later. The amount received is usually greater than the amount they initially invested.  

Investor exits tend to happen in one of two ways:

1. The startup gets acquired by a bigger company for enough money to give the investors a return.

2. The startup grows and prospers enough to eventually register to sell shares over a public stock market.

Startup founders also need to look at an exit strategy for themselves.  An effective exit strategy allows business owners to have a planned termination, or succession plan, for a business that will maximise returns or limit business losses – the anticipation of returns is why smart entrepreneurs are willing to take the risk.

Risk mitigation is the process of taking steps to reduce exposure to adverse effects, like a business failure, and carefully planned exit strategies will help reduce these risks. Some of the common reasons why businesses might need to execute an exit strategy include:  

  • The business has, or has not, reached a certain milestone, such as profit margin
  • Lack of access to capital needed to continue operations
  • Partners cannot get along and decide to dissolve the partnership
  • Loss of intellectual property, such as patents, trademarks, service marks, trade names, copyrights, customer lists, trade secrets, or other confidential information owned by the company
  • The company cannot scale further
  • Changes in the general economic climate
  • The entrepreneur has received a very lucrative offer from another party for the business
  • Legal reasons, such as liability lawsuits or a divorce
  • The entrepreneur wants to retire, dies, or becomes disabled and has no heir to continue the company.

Types of exit strategies

The most popular exit strategies are IPO (initial public offering), closing the business, and mergers and acquisitions. Let’s take a look at each of these in further detail:

IPO

In South Africa, the IPO process involves conducting due diligence, preparation and marketing. These steps are lengthy and require an entrepreneur to obtain assistance from external IPO experts consisting of an underwriting firm, lawyers, and certified public accountants (CPAs). A business tends to decide to go public when one of the following occurs:

  • The company has achieved significant milestones, such as high profit and growth
  • The company needs to raise a huge amount of additional growth capital via the public markets
  • Existing investors, founders, and employees are seeking liquidity, which is the ability to sell shares on the stock market where the stock is easily traded.

Closing

If your business is failing, is of little value to anyone who might want to buy it, or it’s unlikely to succeed if anyone aside from you is running it, then closing your business might be the best option. This involves:  

  • Selling all your assets, like inventory, fixtures and intellectual property
  • Retrenching workers
  • Paying creditors and employees
  • Shutting down the business.

If this is the exit strategy you choose, make sure you exit when you can still sell enough assets to make sufficient cash to pay any debts you might have.

Mergers and Acquisitions (M&A)

This usually involves a larger company purchasing a smaller company, or merging them together. As the business owner, you can transfer ownership of the business to an individual (such as a third party, partner, or key employee) or another business through a merger or acquisition, consolidation, acqui-hire, or management buyout. The key benefits of M&A as an exit strategy are:

  • The business is likely to be highly valued because the buyer has an immediate need for your product or service
  • Multiple buyers may bid against one other, increasing the value of your business
  • Selling to a competitor means you are more likely to negotiate a higher price than if you sell to a third party.

Other exit strategies include the following:

  • Consolidation: This is a way for two companies to combine and form a completely new company. These tend to have a new organisational structure and a new name.
  • Acqui-hire: With acqui-hire, the purchaser is interested in buying the business for the talent, as opposed to its products or services. The talent (usually software engineers) is recruited by the acquiring company and the business acquired is terminated after the acquisition transaction.
  • Management buyout: A management buyout (MBO) is the favoured exit strategy for private businesses, where the owner wishes to retire and has no family members to take over the company. With this type of acquisition, the business’s management team purchases a controlling stake in the company.
  • Sell to a friendly buyer: If the idea of M&A’s or IPOs sounds too daunting, consider selling to someone you know. Often, business owners decide to sell to a “friendly buyer”, such as a co-founder, key employee or even a family member. The main benefit of selling to a friendly buyer is that you’re selling your business to someone you know and trust.
     

Timing your exit strategy

No matter which exit strategy you choose, timing is critical, as poor timing could mean selling your business at a significantly lower valuation than if you had timed your exit better.

So, when is the right time to exit? There is no right answer to this question. Startups understandably want to sell for as much money as possible, and so do investors. Buyers, on the other hand, want to spend as little as possible. This means that the startup, investors, and buyers have to come to a fair and equitable deal. However, a general rule of thumb is that if startups want to maximise their selling price, they should look for an exit when their growth rates are high, as opposed to when they are very profitable.

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