How to Plan a Successful Exit
For many an entrepreneur completing a successful exit and sailing off into the sunset is the reward for the long and challenging journey. In this article I am going to share with you my experience and suggest 6 key actions to enable a successful exit.
1. Plan early
When should you invest time and effort in looking at the exit strategy? Typically, at the seed investment stage you will be asked by investors about the exit plan. You will need to be able to articulate the exit options and ideally be able to give examples of any recent transactions.
Things start to get more serious as you progress through the funding rounds and move away from the angel investor to the institutional investor. In the early days investors are looking for you to prove the business concept and to get the company making a profit. By the time you reach the institutional investor the conversation will change to “how do you scale and accelerate the business?” At this point you will need a well thought out exit plan. You will need to be able to provide several proof points from similar exits, demonstrate evidence of the multiples and also reference any meaningful interactions with potential acquirers.
The detailed exit strategy should be integral to the business plan. Investors will be impressed if you have a specific exit plan section rather than a slide at the end of the Investment Memorandum (IM) that states: “Trade Sale” or “IPO”. This is an area where many entrepreneurs fall short. Having an impressive exit section on your IM will help you stand out from the competition!
2. Engage early with potential targets
I believe founders should identify target acquires/investors early in the process. When you have some market traction, a great couple of client references and a strong sales pipeline, this is the time to start thinking about engaging with your target acquirers. Find the right contacts in the organisation, (easy with LinkedIn), connect and send some relevant content such as a recent press release and then ask to meet up. Be clear you are not seeking for an exit imminently but looking to build a relationship. If you flatter your contact with: “would you mind giving me some pointers?”, most people are happy to meet for a coffee and give their opinion!
Don’t forget to engage your team early as well, don’t keep the plan solely with the founders. The management team will be integral to the exit process so involve them in the planning. Make sure they understand that when the exit does happen then there will be much due diligence and the quality of the management team will be put under great scrutiny. Sell this as a benefit and a chance for them to work on their own profile. Make sure they have a strong LinkedIn profile and that they create content to come across as a thought leader in your industry. Speaking at industry events really helps too and will definitely make your management team stand out.
Financial motivation is also required and seen as a must from investors. Make sure you have a plan in place for the management and winder team to share in the reward. Share options are a fantastic tool for recruitment and staff retention and are often the best way to reward the years of hard work, loyalty and dedication.
3. Focus on business value
Can you articulate your business value in a concise and clear manner? One common mistake is for founders not to explain the value in the right way. You would be surprised how many companies I see who do not have a clear value proposition. It is an area well worth getting external help on. This process is not easy but when you do have a well-crafted value proposition, elevator pitch and tagline, you can use these assets across the business. When you come to exit you will be able to position your company in a concise, logical and unique way that will inspire confidence. Remember investors buy into why you do it, not the what and the how. Watch a great TED Talk on YouTube by Simon Sinek – Start With Why.
VC’s love looking at growth figures. However, do see it from my side. How many companies do you think I have seen during my career which have failed and under delivered on the numbers? You do become pessimistic when looking at future projections. So how do you convince me? It is all in the execution and the detail. It is important to articulate how and why the growth is going to happen and back that up with evidence. No investor will move forward with the deal if they are not convinced by the numbers. Balance is so important and you want to show how growth can be accelerated. However, being too conservative is also counterproductive. If the projections look poor and uninspiring they will put the deal into question. There is no right answer but use your judgement and if you can link your numbers to evidence and proof points from within your industry, then the more credible the deal becomes.
4. Have a great investor pack
You will need to have a winning IM that clearly conveys the value proposition. Investors receive large numbers of pitch decks every week. Only the very best will stand out and get their attention. Make sure the key points are covered in the most concise way possible. Providing a one or two-page executive summary and a detailed financial model will be essential.
It really helps if you can get a friendly VC or investor to review your IM before you start the exit process. I have seen great companies struggle to secure investment because they are unable to pull together an impressive IM. Consider paying for outside expert help to support this process. As well as content, pay attention to the look and feel of the pack. A high-quality IM goes a long way and it may be the first time an investor comes across your brand. First impressions count.
5. Sell the long-term vision
One common issue can be that the founder is unable to articulate the long-term vision. The investor will need to see that although the founder may be stepping back there is still a driven management team working towards a bigger goal.
A clear plan could involve moving into new markets. Positioning of strategic acquisitions and expanding into new geographies are good examples of having a long-term vision.
6. Closure and walking away
When you get to the negotiation phase keep calm and have an open mind. There always needs to be some room for negotiation. Remember that there are many terms to be agreed. Take professional advice and try to make decisions based on fact rather than on emotion.
When the deal is complete you will usually have an earn-out period depending on your management team and the structure you agreed in the deal. I have seen several founders struggle through this period. There can be changes made to the company that you do not agree with. New members could be added to the management team. The emotional challenge of letting go can be very hard for some people. I believe you need to leave with two things: money and your reputation. If you have a one or two year earn-out period, do keep the same motivation and work ethic. This is a great time to consider what you will do next and time to set up a new venture. I know of investors who stay in touch with founders and then become investors in their next venture. So this is a perfect opportunity to impress!
Exits are difficult but if you plan the process, engage early and have a great value proposition, produce a professional looking IM to deliver fantastic results, plus sell a vision and a dream that will live on long after you have gone, you will definitely improve your chances.
At Venezia Capital we work on both the buy/sell side and use our detailed knowledge and contacts within the technology industry to facilitate successful exits.
If you would like advice or support on any of the above topics, please contact me firstname.lastname@example.org.