How can financial projections help you plan your business exit strategy?

I say build models from the ground up, using levers that your business can control or understand. Top-down, x% of TAM type models are indicative of an opportunity set, but not a path of revenue using strategies you can deliver on using your resources.

Straight line for me is not the way to go - do some work , create some projections, put some thought in to it - and have a reason to justify it and help others break it apart. Don’t be the if we get 1 % of a 1 trillion dollar market and sales increase 50 % a year.

Here's the thing... projections are made up numbers as they're, at best, a prediction of future events. Having said this, a well thought out business plan and properly forecasted financials help to make informed decisions and financial investments at the right time. For instance, how can you know it is safe to make a significant capital investment if you haven't properly understood the projection both with the investment being made and what the business looks like without the investment being made? Working backwards, if you know what you would like your exit valuation to look like then well prepared financial projections will help you understand and make the right investments to help achieve that exit value.

The decision on how to exit a business is one of the most challenging dilemmas faced by company leaders. It involves balancing financial considerations with ethical obligations and the long-term repercussions on the company's reputation and relationships. Regardless of the chosen strategy, thorough financial planning and strategic foresight are paramount. This entails a comprehensive understanding of the company’s financial position, legal obligations, and the potential impact on stakeholders. Ultimately, the chosen exit strategy reflects the company's values and its legacy, underscoring the importance of careful consideration and planning in this critical juncture.

Financial projections can be helpful when the main product or service offered by a business is no longer in demand, or when there is no room for growth with the current resources, and additional funding is not feasible. Financial projections can alert the business owner to potential problems, such as a decline in revenue or a significant change in government policies that could impact the business. A business owner can plan to exit the business at its peak level by analyzing financial projections prematurely.

Essentially, a purchaser is buying your future revenue and profits. Yes, it's an investment, but it's also a big gamble for them. All they have to go on are your financial projections (upon which they will base the valuation) coupled with your proven financial performance over the preceding 3-5 years.

It will be a good idea to model optimistic, pessimistic and realistic scenarios. This will give you a number of potential futures to consider. This level of preparation will showcase the business' resilience. Also, depending on the nature of the exit, you may be kept on board for a period to see through some of these projections. Part of your exit payout may even be tied to achievement of targets based on these projections, so keep them real!

Acknowledge that these are just projections, and they are based on assumptions. They may not materialise as planned. But, in order to reduce this gap you should continually review and adjust any projections to reflect the changing business and landscape. It maintains accuracy, even if it's not as rosy as you hoped, and this in turn maintains trust and transparency.

Be conservative and realistic with your projections. Experience showed me again and again that projections always tend towards the optimistic side. There will be unforeseen hurdles, changes in the economy and your own business landscape. If you fall short of projections, it looks bad. If you keep them realistic and exceed them, it looks much better.

Discounted cashflow DCC method is still a well known way to valuate your future value. In that sense there are specific elements what decides the value when you exit. So if you have solid underlying long term contracts, automatically the value of the company increases. Also the active user value can be of interest in your projection, take Linkedin as a good example, MS has a direct interest in increasing their company base and services, plus high value paying users with excellent data profile to target, transparent and loyal financial forecast. The exit was at a discounted rate:-) and an excellent deal for the buyer MS, because the return and add on earnings on the valuable user base....makes it a great example case for an exit