Exit. The Entrepreneurial Holy Grail
For many entrepreneurs, a successful exit that delivers financial independence and an incredible sense of achievement is the ultimate dream.
In my entrepreneurial career, I’ve had the good fortune to be part of two successful exits. One with the company I founded and the one with the company that acquired my firm, which was subsequently acquired. I’ve also been able to see a number of exits from the other side of the table as part of the management team of an acquiring company.
Along the way I’ve spoken to many entrepreneurs who have had both successful and less successful exits.
Now in my coaching practice, I get a lot of the same questions about exits from my clients and prospective clients. I see a lot of misconceptions about exits and how to approach them.
So in the spirit of helping other entrepreneurs, here are five critical points about exits that I think every entrepreneur should know:
1. Either Be For Sale or Not For Sale
One of the most common questions I get from founders is “what should I do if I’m approached about being acquired?”
Of course it all depends on your specific situation but I think the biggest thing to keep in mind and to think about is, are you, in fact, really in a position where you want to sell right now? I don’t mean in the sense of “eventually I want an exit” but in the near term, say in the next 9 to 12 months.
Going through an acquisition process is one of the most distracting things a business can take on. There are a lot of demands on your time and attention: initial negotiations, dealing with brokers and lawyers, and most of a constant requirement for your mental energy and focus. At the same time you are also running your business. Inevitably, an acquisition process takes your eye off the ball when it comes to the core needs of the business.
So it’s not something to step into lightly. You really want to be intentional about whether you are for sale right now. If it doesn’t feel like the right time for you, then if you are approached you can say, “we are focused on accelerating our business growth right now, but would love to connect in six months.”
When you are for sale you want to go out to the market and find out who’s possibly interested, who might be a good fit for acquiring your company. It’s a consuming process and if you’re not really willing to go through that process then it’s probably not the right time.
Now the one exception to negotiating with a single buyer is if you’re in dire straits or you are really wanting out at this moment, then it may be something to look at.
But if you do you want to sell, it’s important to run a process, not simply engage with the company that approached you.
2. If You’re For Sale, Run A Process With Experienced Help
If you decide you are for sale, it’s to your disadvantage to be negotiating with just one party (i.e. a company that approaches you). If you are serious about selling your company and maximizing the value of a potential transaction, you need to to run an acquisition process, ideally with the guidance of an M&A professional with experience in your category.
Running an acquisition process entails getting all your operational ducks in a row, especially your financials and then packaging your company to take out to the market. You do research on which companies might be interested in yours, do a roadshow where you present your company and then set a date where you will be accepting bids.
Should all go well, you will have a number of people or entities that may or may be interested and there’s more of a competition. Then if there’s an offer you want to accept, an LOI gets negotiated, drafted and signed the process moves into due diligence and ongoing negotiations, until a deal is signed or it falls through.
If you have never been through an exit process before, it’s crucial to have experienced help. There are so many facets of negotiating your company’s value that unless you’ve been through it before, you may be missing out on maximizing your value.
When I went through my first exit, my M&A professional was able to identify areas of value in the company that I hadn’t even considered.
Finally, as I mentioned before this is really a time consuming process and you need to continue to run your company. Having someone else lead the process frees you to keep your focus on keeping the core business performing – which will definitely help maximize your company’s value.
3. You’re Worth What Your Leverage and the Market Says You’re Worth
If you read stories in the business press you will likely have seen people talking about multiples of revenue or EBITDA (earnings before interest, taxes, depreciation and amortization). You will see a wide range of multiples. Some companies with no profits get incredible exits, while others with solid profits get less spectacular valuations.
While there are some rules of thumb on multiples, there’s really just two things that will determine your company’s worth: the market for your company, and the leverage you have in negotiation. If there are a lot of buyers bidding on your company, you are likely in good shape and may get a better multiple. If there are few buyers, then you will get less. If your company is strong and solid, you have more leverage than if your company is struggling.
Leverage also depends on the buyer. Is it a financial or a strategic buyer? Is your revenue recurring or episodic? How dependent is your company on you to operate? How is the overall economy and stock market doing?
Before going out to market, you should get clear on the aspects of your business that will increase value, and understand what weakness could hold it back. Again, this is where experienced help will be of tremendous value.
4. Run Your Business As If You’re Going For An Exit
Don’t wait until starting an exit process to run your business as if you were. The more you can evolve your company so that it can run on it’s own, the more you can create recurring or more reliable revenue streams, the better you systematize your operations and maximize profits, the more you are increasing the value of your company. This has amazing benefits for the health of your company, and also creates more leverage when you are creating for when you decide to exit.
Having a systematic approach to your business is extremely helpful even if you are not contemplating an exit, and can boost your valuation if you are. If you aren’t sure what it means to truly systematize your business, there are a number of systems out there including EOS and Rockefeller Habits.
Remember that exits are just the world putting a value on what you’ve created. A lot of the things you do when running the company for an exit actually help build the value of your company, even when you are not.
5. You May Not Need An Exit To Exit
The reason exits are such a powerful attraction is that they are ultimately about freedom. Financial freedom is a big part of this, but I find many of the entrepreneurs I talk to are dreaming about freedom from stress and the overwhelming demands of their company. Many times these owners are especially talking about exits when they are at a low ebb (which is often the worst time to sell).
However, one of the questions I often ask is, “if you were able to have your ideal business, would you still want to sell?” Many times the answer is no. They love their business and it continues to inspire them.
In these cases, we explore more deeply what they really want. Many times, they want to exit the stress and worry of running their company. They often realize that they find themselves miscast in a role that takes them away from their true talents.
Once we sit down and really look objectively at their business, we often find there’s a pretty clear path to getting the founder much better aligned with their business, and feel much more free.
In a sense, we create an exit without having to sell the company.
So really think about why you want your exit. Is it because you believe it’s time to sell your company? Or is it more that you want escape the stress of running it?
If it’s the latter you don’t need an exit to get an exit.