Top 5 Tips for Prepping Your Exit Strategy (Experts Never Forget #2)
When you start a company and are deep in the day-to-day operations, exit strategies might not be top of your to-do list. However, having a strategy in place is always a wise decision for business founders and entrepreneurs at any stage of the game. By having an exit strategy in place, you will have done your homework and will be prepared with a framework around a potential sale of your business or public offering. And while specific exit options and goals may vary from one business model and one founder to the next, there are some basic best practices to keep in mind that can help you get through the process as smoothly as possible. We sat down with Peter Massey, a seasoned finance guru who has supported a multitude of companies through pretty much every type of transaction. Peter has a background in finance and was the CFO of a media company which he helped through multiple mergers and acquisitions and finally taking it public in 1999. Today, Peter works as a CFO consultant providing everything from strategic advisory to financial due diligence. Given that Peter has helped many companies successfully navigate their exits, we wanted to share some insights on how management teams should prepare and think about exit opportunities.
1. Having a Market PulseBefore you start thinking about shopping for deals, make sure you know what the economic landscape looks like. Survey the market for transaction volume and the sizes of those transactions in your industry, especially for companies similar to yours. This will give you an idea for the appetite for deals and the range of prices you might get for your company. You want to make sure you enter the market when the opportunity is right and not get caught in a situation where you are willing to take any offer available. As an example, here’s a situation we’ve seen before. We worked with a company whose competitor was acquired, and as you looked into the landscape, there were more potential targets than potential acquirers. It was unlikely a company would roll up more than one competitor as the benefits to that would be marginal in this space. While the executive team could have continued to try and grow the top line of the company another 12-18 months to increase their valuation, they risked seeing the potential sell-side market vanish.
2. Building Your TeamWhen you head into a transaction, it’s incredibly important to make sure you have a solid team in place with the kind of experience to help maximize the offer and reduce the due diligence and closing process. The core of the team should include the following team members:
- An investment bank and lead investment banker
- A law firm and your primary counsel
- An accounting firm and financial advisor (i.e., CFO)
3. Understanding the TimelineTransactions can feel painfully slow once you start, and understanding the "typical" timeline when it comes to your business exit strategy should help mitigate that. Keep in mind, for example, that even once you select your investment bank, you will likely be waiting anywhere from three to six months before your business hits the market. From there, you may end up waiting another three to six months to start receiving LOIs (letters of intent) from investors. And even once you have an agreed-upon deal, it will easily be another three to twelve months until close, depending on the complexity of the transaction. After you’ve received an LOI from a potential investor, recognize the urgency with which you should move forward if you're serious about wanting to close the deal. The quicker you can move from that LOI to closing, the better off you'll be. Otherwise, numbers can easily soften over time and your investor will have more opportunities to scrutinize or change your proposed valuations. The best way to keep the process moving forward is to always be thinking a few steps ahead. If you've just received your LOI, you should already be asking for the due diligence request list. But even before then, your investment bank should have been able to give you a “typical” list that will cover the majority of items you’ll need to tackle despite the fact that due diligence terms can vary from one transaction to another. And if you work with your CFO to compile the materials in a data room in advance of going to market (see the next bullet), then you can push through the process even faster.
4. Due DiligenceIt’s one thing to provide financials that are accurate and timely, but it’s a much more intense process to have those financial statements and the operations that generated them audited by a CPA firm and signed off on. Having these prepared well in advance is just the beginning of the Due Diligence process. In addition to making sure to have your company's audited financials, you'll also want to make sure you've documented everything there is to know about your business as part of your data room. Your data room includes documentation for everything from cap tables to employment agreements. Any gaps will be discovered during due diligence which could cost you serious dollars in the best case or derail your entire deal in the worst. One real world example is nearly every potential investor will want to see your customer contracts to understand the terms and any potential risks or liabilities. If you fail to procure actual documentation of customer contracts for them, it's going to be discovered during due diligence and valuation numbers are going to soften or (even worse) your investor will back out of the deal altogether. Being strong in these three areas will improve your chances of success:
- An easy to navigate financial model
- Solid and reasonable three-year forecast
- Numbers are trekking close to your current forecasts as the process moves forward