Exit Does Not Happen, It Is Made

Exits do not just happen. While many companies are bought, the best exit requires that the company is sold. And selling a company requires the very same things as selling anything else.


Before starting my career as an angel investor I work as a consultant in hundreds of M&A transactions. Thus, I have seen exits on both sides of the table, from startups and purchasers. In this article we take a look at how the shareholders can maximize the return of their investment by driving the exit of the company.


Making the Company Exit Ready

You cannot sell anything that is not ready to be sold. With startups, it means that the company can function as a standalone entity, also without the founders. While the founders are typically required to stay for one to three years with the company after the transaction, after the exit the founders have less incentive to push 60-hour weeks to keep the company running.


With respect to scaling, it is often reminded that it is of utmost importance to have the company ready to be scaled, i.e. to have the critical elements of the company ready: Operations need to be scalable, sales need to be scalable, technology needs to be scalable. The same applies here: Once you have all of these elements on a level that they do not require founders input, the company is not only ready to be scaled, but also ready to be sold.


Deciding When to Sell

Every now and then I get asked when the company should be sold. From an investor's point of view, the answer is rather simple, at least in theory: When the returns you are likely to get from holding the investment are likely to be below on the returns you would get from alternative investments. But the potential returns are hard to estimate and this is just theory, one might want to exit in order to balance the portfolio while some might want to stick in with a company that s trending well.


From the founder's point of view, the exit should take place once you are satisfied with what you have achieved with the company. Because once you become satisfied you are unlikely to have enough ambition to take the company to the next level. While in theory pushing the company to 100 million valuation might sound tempting, but how much more are you prepared to do after knowing that you could bank 5 million with an early exit?


Of course, also psychology comes into play: Once you have grown the company to a certain size are you still brave enough to keep all your eggs in one basket or would you prefer to diversify. In these cases, a partial exit might be the answer.


While it is difficult to determine beforehand when an investor would be satisfied with the returns or when a founder would be satisfied with what has been achieved, it would still make sense to try to establish some sort of exit plan or exit checkpoints already when the investment is made. This helps in aligning the expectations of founders and investors regarding the exit and, thus, helps to decide when to sell the company.


How to Sell

Selling a startup means that you are selling a unique item. Thus, you can only sell it once. And selling it once means that you can sell it only to a single purchaser.


In order to maximize the price of exit, you should have competing offers. And in order to get multiple offers you need to ensure that there are multiple potential purchasers who 1) know about your company, and 2) know that the company is on sale.


In order for the potential acquirers knowing about the company you need to first develop a shortlist of potential buyers: Bigger competitors, corporations interested in expanding in this business, other startups interested in expanding in your markets, companies interested in your technology and private equity firms doing buyouts in this domain.


The next step is to keep these companies in loop on what you are doing: Put them on your newsletter, connect on LinkedIn and meet in events. In a nutshell, you should market your company as you should market your product: With the right way to the right audience.


Once it is time to sell, you can approach these companies and inquire about their interest. And the interested companies get to bid. You should always ensure that you have at least two bidders in the process; otherwise if there is only one player in the competition, they will set the rules.


Exclusivity Trap

As a word of warning: Quite often the potential purchaser tries to get exclusivity on some excuse (e.g. "the due diligence will cause us expenses"). While it is tempting as there is a proposal on the table and a pile of money just around the corner, you should not accept it (unless the proposal is exceptionally good). The exclusivity is a trick that the interested purchaser is using in order to get the deal without having to compete with other players.


Even if the exclusivity would be only for a short period of time, you can be certain that in some way or another (e.g. another exclusivity period follows the first one on some excuse, an MOU needs to be signed, etc.) you are dragged into exclusivity until the deal is either done or gone. You are likely to deal with experienced purchasers whose job is to make as good deals as possible; you can be certain that they will be aggressive in using these tactics.


Point of View

Having an exit plan in place helps driving the company towards an exit. Knowing the potential purchaser and most importantly them knowing your company helps to bring them into the table when the time is right for sale. And when the time is right you want more than just one player in that table.


As a tip for the founders: The purchaser has more experience in acquisitions than you do. Do not let them define the rules of the game. Bring along someone who has experience in transactions; maybe some of your investors or employ outside help if you do not have the right experience in your broad team.

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