The following was originally published by the Idaho Business Review on June 15, 2015.
Everyone who starts a company will need an exit one
day. No one can work forever; at some time you will want to (or have to) retire
and/or your investors will want to sell their stock. An exit is how you monetize the value you have
created in your company. You can either be intentional and plan for the exit,
or unintentional, and likely not have a satisfactory transition out of the
business.
I have a friend who is a dentist. He spent years building his practice and he
made a good living from it. He consulted with advisors and built an exit plan. When
it was time to retire, he sold his practice to another dentist. The acquiring
dentist purchased the building, the equipment, the patient list and the
reputation of the clinic. The sale
turned the value of my friend’s practice into cash he could use to fund his
retirement. Without that sale, he had no way to monetize the value he had
created. Worse, he might have been stuck with a specialized building and
depreciating dental equipment.
Angels invest in companies specifically designed
for an exit. They expect the company to be acquired by another company. This is
the way the companies create liquidity for their investors.
I’ve just returned from attending the annual
meeting of the Northwest Chapter of the Angel Capital Association where I
attended a exit strategy seminar with Dr. Basil Peters. Peters is a recognized expert on the subject,
and is the author of the book Early
Exits: Exit Strategies for Entrepreneurs and Angels.
According to Peters only 25% of saleable companies
successfully exit. Another 25% exit, but
for less than might have been obtained.
And 50% of those companies could exit fail to do so; that is they fail
to find a buyer and have to continue to operate, frequently in an increasingly
competitive environment. Many of them
ultimately fail.
Peters make a number of recommendations to improve the
possibility of a successful exit. While he is writing specifically for angels,
his advice is also applicable to cash flow type businesses.
1.
Every company should develop an exit strategy at
the time of its founding, not years later.
Company management should be intentional about how and when they intend
to exit. For example, an exit strategy may be as simple as “Our exit strategy
is to sell the company in about ___ years for around $___million.” My experience is most entrepreneurs have a
very vague strategy along the lines of “someday we will be acquired.”
2.
Make sure the management and the investors stay
focused on the exit strategy by making it the first item on the board agenda at
every board meeting. The board should
begin its meeting discussing the exit strategy to be sure the company remains
focused on the end game.
3.
Recognize that companies are sold, not
bought. Most people don’t wait for an
unknown buyer to knock on the door of their home asking to buy it. When it’s
time to sell it, they develop and execute a strategy. Yet many entrepreneurs seem to be waiting
until someone discovers them and makes an unsolicited offer. Research shows unsolicited offers usually
result in sub-optimal results, as it’s hard then to develop a plan to approach
multiple possible buyers.
4.
Engage an investment banker to help you bring
the company to the market. Just as most
of us engage a real estate broker to sell our homes, a banker knowledgeable in
mergers and acquisitions in your industry will help you package the business,
identify companies that should be interested, and approach them. The purpose is
to try to create an auction market among multiple buyers.
5.
Understand the threshold for selling an
early-stage company is not based upon size or profitability. It’s based upon proving the business
model. When management can reliably show
it knows how to acquire customers that produce a margin, at a cost of less than
the lifetime value of the customer, then it is ready to be sold to a company
with the resources to grow the company rapidly.
My experience as an angel investor suggests to me that most
companies are not nearly as intentional about the exit as they might be. For both companies built for cash flow and
for those built for exit, be intentional about the exit. Have an exit plan, and let the plan inform
the day-to-day decisions.