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

First of all, an exit strategy is much more than the value of your company at some point in the future. Understanding what your investor needs to see is an essential element of your presentation. For example, if your investor is looking for a 2-3 year exit, he will not show you a 5 year exit plan.

A well-conceived exit strategy for a potential investor will consider things like; who the potential stakeholders are for the business, what kind of professional assistance you will need 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 a lot of thought into your exit strategy can give you an edge when deciding on the next investment for your portfolio.

When planning an exit strategy, the valuation issue will inevitably come into question. While it’s possible for your business with $1,000,000 in revenue and breakeven to reach $500,000,000 in sales with 30% EBITDA at the end of year 5, it’s just not likely. A big “watch out” for any investor is when an entrepreneur with a vision wears rose-colored glasses. So be conservative and make sure your growth and anticipated business value are somewhere in the realm of possibility.

Be careful though… being too conservative can turn an investor away from your deal: no one wants to see flat projections with five years of losses ahead! If you honestly believe this is where your business is headed, do yourself a favor by closing the doors and starting planning your next venture; Never try to set an unrealistic return expectation to raise capital. Knowing that you are going to fail and take the money anyway will kill your reputation in the financial community and possibly even in your industry.

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

If you do manage to attract the interest of an investor who likes the exit strategy you’ve laid out, be sure to protect your ability to enjoy business success in the future. While a good attorney with extensive experience in M&A transactions is a necessary resource to protect your interest from a legal perspective, it is important to ensure 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 they are in a minority position, to insist that they have significant influence when it comes to business decisions or raising additional capital; this could be through a voting trust agreement or simply by taking a majority of the seats. on the board of directors.

They may also want to make sure they get their return of capital and any profits paid out in priority to the other shareholders (ie you and your other shareholders). If you are comfortable with the idea of ​​having an investor who is going to be selfish in this regard, 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 an investor, sometimes leaving remaining shareholders trying to create additional value in a company that is stripped of its book value and nearly insolvent. . In short, understand what your potential investor is looking for and make sure you’re not in a position to strip the company of the value you and your team have worked so hard for when it comes time to leave.