Are you building a multi-generational business dynasty? Probably not. At some point, you will probably want to exit the business to start the next chapter of your life. Founders who have successfully built their companies made them big and kept them growing to face these common questions.
If you are considering exit options, the question inevitably arises as to which exit strategies best suit your business and how you can best approach them. It’s important to remember that you can’t fight the market: not all companies are suitable for all exit options, nor are all exit options suitable (or palatable) for every owner. Considering this, let’s discuss the most viable options and review the critical steps to a successful exit.
Are You Ready for an Exit?
Many founders dream of a successful exit, but only a few manage to achieve it. Whether your business is “exit-suitable” or “exit-ready” can be assessed relatively quickly by addressing these questions:
- Can the business model work without the founder or owner?
- Is it the right time to sell?
- How viable is the investment?
- How well is the company prepared?
- Why does the owner want out?
- Does the company need fresh capital?
1. Can the Business Model Work Without the Founder or Owner?
If you left the business today, how well would it continue to function? The owner is almost always the decisive factor for the success of a start-up. Because of that, every potential buyer assesses whether the company can continue on its successful course after a potential takeover, even if the company’s founder is no longer on board. If a successful continuation without the founder looks infeasible, then it will be challenging to exit.
We refer to this concept as conveyable value or transferrable value. If you have built a high-performing business that simply cannot exist without you, then that business is valuable to you but not very valuable to a potential buyer. Building conveyable value is fundamental to getting the business exit-ready.
2. Is It the Right Time to Sell?
Determining the right time to exit is not easy. On the one hand, the company’s size should appeal to potential buyers. On the other hand, the business should have continued growth potential, which is very important for company valuation.
One should also bear in mind that an exit process can easily take between six and 12 months. The vast majority (over 80%) of companies don’t sell on their first attempt to go to market.
During this time, ownership and management are often focused on the exit process and unable to operate entirely. For this reason, it is usually advisable not to seek an exit during the fastest-growing phase of the company, as substantial company value could be quickly destroyed.
3. How Viable Is the Investment?
Viewed objectively, the founders should ask themselves whether the business could be of interest and who would be interested in it. In addition to the industry and company size, the potential for further growth, the scalability and sustainability of the business model, and, possibly, the strategic fit and the shareholder structure are also important factors. If there are questions about any of these factors, solutions should be worked out well before the initial discussion with the potential buyer.
4. How well is the company prepared?
To achieve a successful exit, prepare as best as possible for the exit process. This includes developing a convincing company presentation for the initial meeting and careful thought to the company’s value.
If a potential buyer decides to examine the potential investment, they will want to inspect numerous documents as part of the due diligence after signing the nondisclosure agreement (NDA). These documents, such as a partnership agreement, business plans, financial plans, business evaluations, contracts with essential customers, etc., should be available when the due diligence process starts. The potential buyer usually asks for a financial model to determine your company’s valuation. Involve consultants and lawyers in advance.
5. Why Does the Owner Want Out?
The owner must have a clear, convincing answer to this question to avoid raising doubts in the potential buyer’s mind.
Owners believe that to be a successful founder; one doesn’t necessarily have to be a good manager. We often think of this as the “craftsman problem.” You can be great at your trade or skill and develop a small, successful company through sheer effort and willpower, but that doesn’t scale. A potential buyer wants to grow the business, which cannot happen if the owner does not relinquish control to those with better expertise to manage the company.
Other responses include personal circumstances or strategic goals, such as a falling out among the shareholders, which is usually reason enough for an investor to keep his hands off a particular business.
6. Does the Company Need Fresh Capital?
Most businesses need continuous capital to finance company growth. A capital increase offers company founders the chance to achieve a partial exit. In the financing round, not only is fresh capital raised, but existing shareholders also sell part of their shares.
Planning the Exit
When each of these questions has been thoughtfully answered, planning the exit begins. The question of to whom you want to sell is essential. Accordingly, the specific needs of the founders must be precise before searching for investors. Such clarity increases the probability of success.
Four Exit Strategies
- Sale to a corporate buyer or merger with a competitor
- Sale to a private equity investor
- Leveraged buyout
- Initial public offering (IPO)
Sale to a Corporate Buyer or Merger with a Competitor
The “corporate culture” in the US is growing. Many larger corporations not only have their incubators and accelerator programs, but they also have specialized corporate development units that take care of investments and acquisitions of smaller businesses.
Consider whether your company fits the strategy of a large corporation or whether it occupies a business niche that is attractive but not yet covered by a larger corporation. When considering a corporate buyer, all existing shareholders should understand that this type of strategic investor is usually interested in taking over the entire business. They should be united in this decision.
A rather unconventional exit is a merger with a competitor. This strategy often serves a particular business goal. For example, if the founder of Company A wants to withdraw from operational management, merging with Company B may be an option. However, a merger only makes sense if other synergies (e.g., company culture) can also be achieved.
Keep in mind that the shareholders of Companies A and B will receive new shares in the merged Company C. In this respect, no actual exit has happened. However, suppose the founders of company A can withdraw from operational management (assuming the management of company B will run the new, merged company) and sell their shares in the new company. In that case, they can achieve a successful exit.
Sale to a Private Equity Investor
Selling to an institutional investor–such as a private equity investor–offers another good exit option. Most institutional investors invest through a corresponding fund, each pursuing a specific investment strategy.
Before deciding to approach a private equity investor, learn exactly what the investment vehicle is. The decisive factor is whether your company fits into the investment strategy of the respective fund. In this regard, criteria such as the industry, the company phase, and the level of participation are particularly relevant.
In this type of sale, it is advisable to prepare the sales process with an experienced advisory team, such as a specialized investment bank. In addition to realistic company valuation, a convincing financial model and all other due diligence documents should be available so that the sales process can efficiently occur.
Leveraged Buyout (LBO)
If the company’s shareholders have an interest and the company owner is seeking to exit the business, that shareholders may be willing to purchase the owner’s shares. This can be done via an LBO in which the investor buys out the owner with assistance from outside capital. This option requires the company to reach a stage where it generates regular cash flow that new management can use to repay the loans (and) used to acquire the business.
Initial Public Offering (IPO)
The ideal exit route is probably an IPO. To be realistic, one must recognize that an IPO is only possible for very successful businesses that have achieved significant scale and growth. Also, an IPO is often not a standard exit, as existing shareholders usually sell only part of their shares, if at all, in the IPO.
An IPO must be carefully planned and prepared. This, therefore, usually takes much longer than other types of sales.
For a successful exit through an IPO, it is important to select suitable partners (e.g., lawyers, investment banks, etc.) and the appropriate stock market segment and prepare a convincing presentation to investors. Factors such as realistic company valuation, comprehensibility of the business model, and well-functioning corporate communications are also crucial.
Deciding if you are ready to exit requires careful consideration. Planning the successful exit, regardless of whether you want to sell your company to another company or corporation, sell to a private equity investor, enter into an LBO, or go public, demands optimal preparation and professional implementation of the sales process.
The road to a successful exit can be rocky. Many businesses will have to make multiple attempts before signing the sales contract; however, a successful exit is nearly always possible if you put in the necessary effort.