Many company founders will eventually find they want or need to sell all, or part, of their business – but choosing the right exit strategy can be tricky.
So what are the issues founders should consider when planning an exit?
When will founders look to exit?
One of the main sources of exit transactions is company founders getting tired of running their business day-to-day.
Sometimes, founders might want out altogether, or they may no longer want to be majority owners while retaining control or influence over key business decisions.
Timing is also important. Sometimes founders or investors will decide to sell a business at a particular time because they think they can get a good price.
Others may know they want to exit, but will try to hang on in the hope that market conditions will change in a way that increases the value of the company.
Realistically, it is impossible to know when the best time will be.
Founders (and investors) do not have any control over external circumstances and these can change very quickly, for better or worse. Consequently, delaying a sale in the expectation of more favourable conditions later on can seriously backfire.
When will private equity look to exit?
All private equity investments are made with an exit strategy in mind.
The primary exit driver for private equity is earning the return investors expect from an investment in a business.
Typically, a private equity investor will look to achieve a return of two and a half times what it put into the business before it decides to sell.
This point is usually reached within four to five years, but the timeline can vary.
There are multiple factors that can influence whether an exit happens earlier or later than the four-to-five year mark, and it partly depends on the wider economic environment and whether the right buyers are interested at the time private equity wants to sell.
Company performance is obviously very important in any decision to sell, as is, to some extent, the readiness of the company – i.e. whether it has robust financial reporting in place and a full management team that can help see the transaction through and instil confidence in a buyer.
Often, there will be a clear point at which private equity will consider an exit, such as when a business needs more investment – for example, a company might require new cash to be put into a product, market area, or an acquisition.
What does a good deal look like?
What constitutes a ‘good’ deal, and equally a ‘good’ investor, will depend on the individual transaction and the buyer and seller’s respective objectives.
In general, a ‘good’ investor will usually be of a certain size and level of sophistication, who understands the deal they are doing. Investors of this calibre will not be shy in exerting a high degree of influence over the terms of the deal.
Valuations can be a point of strong contention, as low valuations can be hard for founders to accept and bad for staff morale.
However, one thing many first time sellers/investees struggle to appreciate is that the best deal is not always the highest priced deal. The deliverability of an offer is as important as the price.
Sometimes, strategic buyers may be willing to pay what seems like an excessively high price for a good reason; for example, the target may be a pre-revenue business but the buyer believes its product or service will transform the buyer’s business.
But in general, price should not be the sole deciding factor when choosing a buyer or investment partner.
Another common point of friction is that many founders have concerns about preserving the culture and values of their business post-sale.
While this can be difficult to guarantee, especially from relatively short-term investors, founders with conviction who are on exciting commercial paths may find that strategic investors are prepared to go along with their vision and play the long game.
Getting the right strategic partner can deliver a founder’s vision faster and smarter than they can on their own, but there is always the possibility that new priorities will emerge post-sale, such that the founder’s vision is no longer as important.
The key to a successful deal is that investor and investee are aligned to deliver a result that sufficiently satisfies everyone when it comes to the exit strategy.
How do you ensure a successful exit?
For investees, the time when they have most negotiating leverage is right at the start of the bidding process, particularly if they have more than one offer on the table. This is the time for founders to decide what they really want and evaluate whether their offer/which of their multiple offers comes close to delivering this.
This exercise includes considering issues such as incentives and balancing the demands of different shareholders.
Visibility and full disclosure are key to ensuring a deal does not go off the rails. It is important to get the right information to counterparties so that there are no disruptive surprises when it comes to the due diligence.
How can advisers help?
When a founder receives approaches from interested buyers, or thinks they might need a financing round, this is the time to get an adviser involved.
Advisers cost money, so founders should be serious about their exit or financing before seeking professional advice.
Once advisers have been engaged, founders need to make sure the advisers are sufficiently educated to represent them and their interests.
Good advisers can advocate for the founder to ensure their objectives are not lost in the deal process and help keep a deal on track.
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