Why There’s No Such Thing as An Overnight Exit Strategy
It’s highly unlikely that you’re going to wake up one morning, hear a knock on your door, and open it to find an acquisition partner with a briefcase full of cash ready to buy your business. The reality is that successful exits—whether through an IPO, a buyout, a strategic acquisition, or a merger—take years of planning, preparing, and strategizing. And sometimes even all of that can’t prevent good deals from falling through.
So, what should the early stage CEOs be doing to put their businesses in the best position for a successful exit?
Whether an IPO or acquisition, both require significant preparation. And the longer you wait to prepare, the more complicated and expensive it gets. I recommend that CEOs start laying out their company exit strategy 18-24 months before a desired event. They need to proactively architect that exit long before they ever think it will actually happen.
Ultimately, that’s a multi-year process that involves numerous important steps, including:
• Hiring a CFO—You need your partner, and this partner will be doing most of the heavy lifting.
• Building a sound economic model—Acquirers want to buy a solid company with solid economics.
• Undergoing financial and legal audits—This is the cleanup without which acquisitions can stall or be really expensive.
• Setting up meetings with investment bankers—You need feet on the street promoting your company to prospects.
• Getting your board of directors in order—Your directors need to be aligned with the decision to help you make it.
Of course, those steps should be preceded by first studying your various exit options and deciding which one best suits your company’s aspirations and long-term goals.
As a general rule of thumb, your goal shouldn’t be to accept the first exit deal that comes across your desk. Tempting as it might be, that offer isn’t likely to be the best one you’ll receive if you’re building your business the right way, and it may not align with your business’s long-term aspirations or plans.
One of the best examples of patience paying off for a growing company is Zappos, which turned down a multi-million-dollar deal from Amazon in 2005, only to have Amazon come knocking again four years later, this time with an offer that exceeded $900 million in cash and stock.
It’s also critical to do these three things before you engage in creating or executing any sort of exit strategy:
1. Ensure that your investors are aligned with your desired exit: Don’t do this after you’ve accepted investment capital from them. Do it before. The factors that drive an investor’s desired exit are based on the number of years they’ve been invested in your company, the life of their fund, and their return expectation. It’s very important to ensure their desires match up with yours.
2. Clarify your aspirations for the desired exit: Are you looking for a quicker exit? Is your ambition to go public? Do your managers, employees, and investors share that same aspiration? There needs to be alignment, otherwise you’ll have trouble keeping everyone focused on the same goal.
3. Validate exit ambitions and assumptions with the market: Find a few M&A bankers that cover your sector and involve them in your thought process. They can provide valuable insight into what the market will bear, what acquirers are looking for, and the likelihood of reaching your desired outcome within a specific time frame.
It’s important to note that the process I laid out above should be completed at least 24 months prior to an actual exit. Those steps are more preparatory in nature, helping set the stage for the actual solicitation and execution of the exit in the year leading up to it.
Once you have each of the three things above ironed out, you should spend at least 12 months focusing on these activities:
1. Identify a banker that covers your market: He or she will help you uncover and engage all potential acquisition prospects, and better understand their priorities and appetite.
2. Start building relationships with prospects: Start with product integration and follow it up by joint selling and engaging a prospect’s sales team.
3. Retain a banker for the “soft sell” process: Have that banker begin by soliciting interest in a partnership with a prospective acquirer, without giving the impression that you’re actively looking to sell.
4. Take an inbound offer and shop it: The best companies are bought, not sold. So, if you receive an inbound offer for acquisition and it’s not the perfect offer, don’t be afraid to ask your banker to shop it around. Doing so will create a competitive bidding situation that maximizes your outcome.
Sounds like a lot of work, doesn’t it?
Truthfully, successful exits are. And they should be. Very few companies’ products or solutions are so obviously valuable that they don’t have to lift a finger to pursue an acquisition. So, for the rest of us, that means cultivating and executing an exit strategy requires long, hard thought, followed by deliberate action to achieve it.
Translation: If you want to wake up tomorrow to a cash windfall and the wildly successful exit you’ve been dreaming of, you better have spent the previous year or two working to achieve it. Otherwise, you’re probably chasing an exit strategy pipe dream that will never actually happen.