The value of a ‘runway’ and exit strategy in business plans
“You got to know when to hold ‘em, know when to fold ‘em, know when to walk away and know when to run.”
These might be the lyrics to a Kenny Rogers song, but the words hold significant truth in the business world. Whether a company is in its early stages, or a business owner has decided after years of success that it’s time to step back, business mergers can be the best way to convert the hard work put into building the company up to that point into wealth for the founders, investors and employees.
Elle Kaplan, CEO and founding partner of Lexion Capital Management wrote a contribution piece for technology and business blog Inc. about how entrepreneurs need to understand the value of having an exit strategy and accompanying timetable in place before a business is even launched. It’s important for business decision-makers to understand that a company merger needs to be considered as a viable option.
“Your initial business plan should always include a ‘runway.’ If your business hasn’t taken off by the time you reach the end of the runway, you don’t keep driving,” wrote Kaplan. “You can calculate the length of your runway by taking a close look at your burn rate: How much cash do you burn through in a month, and how long is that sustainable, given your savings?”
Once a business owner settles on a merger, the next step is to determine the value of the company, which can be an opaque and confusing procedure. Partnering with a firm that specializes in mergers and acquisitions (M&A) can help in this process.
Boutique investment banks can take precedent deals, public company comparables and discounted cash flow into account to help determine the company’s valuation in a M&A process. Through a step-by-step process, business owners will never be kept in the dark and will be made aware of how numbers are being compared. That way, both parties can be satisfied with the final business valuation.