All investors greatly desire and are motivated by a clear picture of a company's exit strategy, or the timing and method through which they can “cash in” on their investment. This picture best comes into focus when the key valuation and liquidity drivers of the company are clearly delineated. An excellent method to accomplish this is through descriptions of comparable firms that have had successful liquidity events, either through acquisition, merger, of initial public offerings (IPOs).
It is helpful to show other companies in your market, or similar companies in other markets, who have successfully exited, and how and why these companies were successful. For instance, were they successful since they acquired a large customer base? Or were they successful since they accomplished fast growth or high profit margins? It is also important to tie their success to their exit price. Was the exit price based on earnings or the number of customers the firm had at the time? The business plan should tie these metrics (e.g., exit price of $X per customer) to the business to determine its future price.
The most common exit strategies in business plans are IPOs or acquisitions. While the method of exit is not always crucial, the investor often wants to see the decision to better understand the management team's motivation and commitment to building long-term value. If acquisition is the selected exit path, then the business plan should detail potential companies that might want to acquire the firm in the future and why. Likewise, if an IPO is expected in the future, the business plan should document the financial metrics of the company that make it ripe for this type of exit.
In most cases, investors only make money when the business reaches a successful exit event. As such, it is critical that business plans explain the expected exit, detail why this exit was chosen and validate a realistic exit price.
Exit Strategy Business Plan
As a real estate investor, you'll constantly need to be aware of the economy in your area, the job situation, and interest rates, all of which can affect your ultimate profit when you go to sell your property. You'll also need to be thinking ahead about whether you want to take your profits and use them to buy a new piece of property with even more investment potential. How much money are you ultimately hoping to make? When will you need it? What will you be using that money for? All of those questions should be considered on a regular basis, since a person's needs and desires will change over time.
It's also wise to give some thought to what you'll do if real estate values begin to decline. If you can't find a buyer for your property right away, or within a reasonable amount of time, what will you do then? Can you add a second mortgage to the property to help carry the investment? Cam you refinance the current mortgage, without a prepayment penalty, to lower the payments so they match rental income? Setting up your initial financing with the future in mind can be critical if you find yourself needing to hold a property longer than planned.
Choose your partners carefully in the beginning, as well, to protect yourself when it comes to selling the property. If one of your partners gets into serious trouble and wants out, how will you handle that? This can happen due to many things, such as ill health, but it needs to be considered as part of your exit strategy.
Another consideration: income taxes. If you buy investment property and make a substantial profit, you can sell the property using the 1031 tax exchange to defer taxes. However, this must be planned for and included in your sales contract.
Knowing how and when you plan to get out of a piece of property begins even before you write the offer in the first place. Take care of the details, and you'll be well on your way to achieving the real estate success you're seeking. Remember: buying real estate BEGINS with a well thought out plan for your exit strategy!
Both Dave Lavinsky & Jeanette Joy Fisher are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.