The Exit Conundrum!
Is this word (“Exit”) familiar? Especially, if you are an entrepreneur? Maybe “Yes” or “Maybe No”. I say “Maybe” not because of the word itself but the associated journey. Having gone through the rigors of this process once, I might be able to make few pertinent points that may help the readers of this article to gravitate from the zone of ambiguity (maybe) to the zone of clarity (shall we/shall not).
Let me start by drawing out a few boundary conditions; I am not an investor, I am not part of an investment firm, I am not an investment banker, I am not an Auditor. So, what authority do I have to write about this subject? I have gone through this process once in my entrepreneurial journey and hence the authority (with all humility).
This essay may make more sense for an entrepreneur who runs a bootstrapped start-up, started-up, or an established company. The reason I say this is because entrepreneurs who run funded companies has gone through the journey of giving “away” something for funds e.g. equity or any other equivalent instrument. The first category of entrepreneurs (and that’s my pedigree) typically don’t have the habit of giving away (sometimes it’s good and many times it’s bad and short-sighted:) the idea behind this essay to offer some tips for my kind of entrepreneurs:
- Tip 1: Let’s say someone wants to buy your business, what would be your answer? Assuming that you have done all due diligence, how will you respond to the ask? In my view, it has to be a confident Yes or a confident No, it cannot be fuzzy logic or you cannot drag it forever. It neither helps you or the potential buyer.
- Tip 2: If you agree then understand the acquisition model. E.g. 100% acquisition and total cash payout, 100% acquisition, and part cash/part equity in the parent company, 51% acquisition (and the rest with the current owners), 100% acquisition and no cash (equity in the parent company), Acqui-hire (which means lucrative jobs in the parent company), the options are pretty much endless. At the least, you must be clear about the model, understand the associated nuances and agree on a model (internally and with the buyer).
- Tip 3: Assuming that you are ready to go, you must know your worth. In other words, know what is that NUMBER? It is imperative to have this number ready so that you are ready for negotiations later.
- Tip 4: How do you calculate that NUMBER? In other words, what the key business parameters that determine that number? If you are a product company then parameters like your financial parameters (revenue e.g. ARR/MRR, profitability, margins, etc.), customers centric parameters (e.g. customer acquisition channels, cost of acquisition, customer retention, customer lifetime value, customer growth rate, etc.). If you are a service company then revenue, profitability, customer base, cost of acquisition, the risk associated with business from one/more customers, operational efficiency, etc.
- Tip 4: Who can help you calculate the number? There are two options, Financial valuation by your Chartered accountants or Business valuation by an investment banker. The difference is subtle yet deep, sounds oxymoronic but it is what it is:) Chartered accountants are trained to compute the value of your business keeping your finance as the center of gravity whereas business valuators are trained to do the same using your business (and future promise of your business) as the center of gravity. I prefer the latter but it will come at a price that the entrepreneurs must be willing to pay (sometimes, as heavy as a % of the deal which many entrepreneurs of my type don’t like hence settle down for financial valuation).
- Tip 5: Now that the basics are in order, the most important aspect is coordination amongst founders. The consistency in communication, the alignment in thoughts, the coherence in decision making will be tested during this phase. Any loophole will be very effectively leveraged by the buyer to their advantage. Hence, more coordination amongst founders will lead to a better experience hence better results for the founding team.
- Tip 6: Finally, founders must contemplate onboarding professionals to support them in this journey. This could range from an investment banker to help with the current valuation to an M&A lawyer to represent the founders (when it comes to validating the finer terms of acquisition). This is very critical for successful closure.
Whilst this is not comprehensive, I am sure this will give entrepreneurs a good starting point when this discussion comes during the lifespan of their business.
Originally published at https://www.raghsforte.com on October 25, 2020.