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 Pulse
Before 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 Team
When 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)
Your investment bank will have many roles and responsibilities when it comes to your exit strategy, but their key purpose will be to “package” and market your business to potential investors. Your law firm, on the other hand, will assist with due diligence and making sure any contracts or agreements are written with your best interests in mind before you sign them. Finally, your accounting firm will also prepare you for due diligence by auditing your company’s financials and identifying any weaknesses in your financial reporting process.
With so many moving parts and different parties, having a strong financial partner to help you manage them and quarterback the entire process can be a key element of your success. Your CFO is typically the one filling that position, and if you do not have a CFO, you will want to bring on a seasoned finance personnel to help you through such a process. One caveat is that bringing on a full-time hire could be seen as a negative by the acquirer who won’t want to employ them in a role that will be redundant as soon as the acquisition is completed.
3. Understanding the Timeline
Transactions 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 Diligence
It’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
5. You Get To Say Yes, Too
Remember that selling your business to an investor is a two-way street, and you shouldn’t necessarily take just any offer that looks good on paper. Of course, you should want to see it going to the right investor, especially if your future financial success is tied to the continued success of the company itself through earnouts. But it’s more than just that. You put a lot of hard work into your business, and in many ways, it’s your “baby.” You built a team of employees who bought into your vision, and whose futures will be affected by their new employers. You created a brand and reputation that will be attached to you forever and will now be impacted by the decisions made by the new owners. With these considerations in mind, you’ll want to do your own due diligence when it comes to the investor or acquirer you end up working with. Make sure you agree with the direction in which they plan to take your business and be on the lookout for “red flags” that could indicate a bad deal, such as proposed last-minute changes to the purchase agreement before closing. Knowing when to walk away from a deal can be just as important as knowing when to sell.
By minding these best practices for business exit strategies, founders can ultimately make decisions that are right for their individual needs as well as the futures of their respective businesses and its stakeholders.