Although you've already learned that entrepreneurship requires a lot of flexibility and long-range planning, you also know the pains associated with failing to plan and looking far enough into the future.
You may never plan to sell your company. Or maybe you've had your eyes set on an IPO. Yet, if you build a great company, then it's likely an M&A deal will come looking for you. It may prove to be the best exit for many reasons.
If you build your business in a way that sets it up for an attractive acquisition, you'll also be building a strong company that will have great long-term potential as a private business or that is poised for an IPO or further fundraising. Having a merger or acquisition as a possible exit strategy will give you the most flexibility and strength for several possible outcomes.
Most startups don't think far enough ahead to position themselves for an M&A exit. When it does become an option (or a necessity), that lack of planning is going to take a big bite out of the price tag. Inadequate planning means inferior terms in a sale. The whole process will be a whole lot more intensive and stressful.
Think of it like returning a leased Maserati. If you ensured proper maintenance, kept it in pristine condition, washed it, did oil changes on schedule, put in the right gas, avoided any damage, and didn't exceed your miles, then on returning it, the dealership would be more than happy to upgrade you to something even better. Perhaps with just a signature, you could be in and out of the dealer in an hour.
However, if you let your teenagers use that Maserati as their first car, and they decide to use it like an old 4×4 off-road center-of-the-party Jeep over three long years, you can expect a completely different outcome when you go to the dealer. The dealer is going to ding you for every scratch and dent at several hundred or several thousand dollars a pop, and the bigger issues may cost you a whole lot more. You could get a bill for tens of thousands of dollars just to turn it in and get rid of it. And when the dealer sends that car to auction, it will sell for a tiny fraction of its original value.
Smart startups plan for the exit from the start, even before day one. They craft their company with the end in mind, as well as what their plan B or plan C exit might be.
This can include the way you incorporate the business and where, the legal documents you use, compensation packages offered, who is offered equity, how capital is brought in, how well-rounded the company is, and on down to the software and systems used for daily operations.
If you hope to play and exit at a high level, then it just makes sense to create a company that is ready to do that on its own or that can easily be evaluated and integrated with another company at this level.
It's like landlords who want to grow a portfolio of rental properties and sell them to a big fund for a grand exit. If they haven't kept good accounting records and they don't have records of all the rents they have or haven't collected, the bills on the properties, documentation of improvements made, or copies of leases, a big fund is going to have a hard time making sense of it all. They are probably just going to walk away—or at best maybe a slumlord will offer a deeply discounted cash price in the worst-case scenario.
Compare that to another landlord with sets of apartment buildings in Brooklyn or Miami who has professional management in place and uses the same terminology and accounting calculations and software as the big fund. It makes a world of difference in the price and speed of the deal and the ability to choose a buyer who will take good care of the legacy, communities, and tenants.
Curate your company well, and the process of selling may only be weeks-long instead of a year. The valuation is going to be much better. There will be far fewer sleepless nights, wrinkles, bald spots, and therapy sessions needed when you are done.
You'll also have a much greater choice of acquirers, and that could make all the difference in how happy you are with the outcome of the venture.
There may be several reasons you eventually decide to sell your business. Some you may plan for. Others will emerge years down the road. Some may create the right timing to sell your business.
Here are just a few of the most common reasons business owners end up selling.
You might get to a point where growth is leveling off and it will take a lot more investment, know-how, and a bigger team to get to the next level. (That may be going national or expanding to international markets.) Expanding may be a big risk and long path and will require a lot more capital.
Merging with another company to combine forces or to leverage its expertise in these markets can be a great move.
You have to keep on growing, but you also need to be able to grow efficiently and profitably. Imagine plugging your product or service into Google or the equivalent in your industry. Google can take it to millions or billions of users instantaneously. Some may add it to their catalog, bundle it with theirs to offer more value, or vice versa.
Selling or merging your company may be the best way to continue the mission you set out on. It may be the most effective (or only) way to enable the company's full potential and fully realize your vision.
If you really want to have the maximum impact and create change at scale, then putting your product or service in the hands of someone who is more equipped to do this may be necessary.
In many cases, the reason companies sell or go public is that they have peaked. There may be room for slow and steady growth in the future, or in the right hands it can be a cash-producing asset to keep in a portfolio—though often, the best growth and value has been reached, and investors want to cash out before things stall or decline.
If you are doing everything right, you may attract offers that are just too good to turn down. It may be foolish to turn them away. Or you legally may not have the ability to choose to turn them down on your own. Of course, that doesn't mean you have to take the first offer. You might be surprised how much more you can get by holding out for their second or third offer or by shopping around with that offer in hand.
If you thrive on a challenge and learning, then rolling your company into another larger one can bring those opportunities. You may not want to work for someone else again for very long, but many founders love the experience of being able to learn what great looks like at the highest levels and to work alongside and learn from those at the very top of the game. It may be just what you need to take your next venture to even greater heights.
The market can change on you. Surprises in the economy can emerge, and your industry or operations can make it very difficult to raise another round of financing—or, at least, to raise a round on terms that are appealing and make sense. This might be a good time to explore your exit alternatives.
Those who have experienced what a great exit can do for their team members get excited about replicating that outcome for others, and they want to repeat it.
A successful exit is a great way to reward your team for their belief in you, the sacrifice for the mission, and all the hard work. It can also be game changing for them, their families, and others they touch through their lives and legacy.
Starting, scaling, and selling startups is a fantastic way to keep multiplying that impact.
Crises can arise that mean you need to be there for your family. Or you may just be burned out and you crave or need a lifestyle change for your health. Or it could just be an opportunity to cash out and secure the gains you have created.
You may see an opportunity to completely change your finances and stability, where you can go on to do new things from a position of being able to pursue what is important to you, and not just to make money.
Maybe you just need to free yourself up to move on to the next thing. Perhaps you are excited about a new project or problem and just want the freedom to go all-in. You could just be bored, and you crave starting something new from scratch.
In other cases, it becomes clear that the business is going to be capped in potential. It may be a great business, a meaningful one, and a profitable one. It just may never be a multibillion dollar giant. Others sell because the dynamics of the company change. They run into disputes with partners and investors and become unhappy with the direction, values, and culture that has developed. In these scenarios, it can make sense to just move on.
Whatever leads you to sell, you can take several steps to organize and clean up in order to ensure you maximize the exit.
Buyers don't like unknowns. When they encounter them, it just makes sense to price in the worst-case scenario, which usually means big discounts off the real situation for the seller. Do as much as you can to close up any potential risks and remove question marks.
This includes cleaning up operating agreements, intellectual property registrations, employment contracts, and contracts with outside vendors, as well as any pending lawsuits or complaints. Make sure everything is organized and up-to-date.
There is more than one way to structure a sale. Debts and financial liabilities can be viewed and handled differently depending on whether the sale is a stock sale or asset sale and how different assets are treated.
If you started off scrappy and bootstrapping, you may need to pay off any debts that you have personally guaranteed. You don't want those liabilities in someone else's hands.
In addition to looking at debt-to-equity ratios, keep in mind that debts are always a form of risk. Although it may seem logical to just deduct liabilities from assets, it is also worth considering that the buyer may be able to buy some of these assets that are financed much cheaper. They may also be able to finance them cheaper or they may find it better to use excess capital.
Paying off debt can definitely make your business look stronger—providing you don't leave too little working capital and runway, which could bite you if negotiations are drawn out.
One of the big differences between true hyper-growth startups that are scalable and salable and businesses that remain smaller lifestyle businesses and are more likely to close down than to be acquired or go public is how expendable the founders are. Contrary to what you may have been taught, in an acquisition, being expendable is a good thing.
Why is this so important, and how do you do it?
Many entrepreneurs have a difficult time delegating and empowering others. They struggle to step back to let other people do their best work and make decisions. They end up building the business all around themselves and making the business rely on them to work.
Not only does that mean this approach doesn't work if you get sick, want to go on vacation, or need to go on leave, it doesn't really make a salable business. You are the business. It would make a whole lot more sense for them to simply employ you than to buy your company.
Traditionally, there's something good to be said about buying businesses with good management teams. Yet, when it comes to buying and selling startups, it is better to have a machine that can work just as well in anyone's hands—especially a new team that specializes in taking the business to the next level and phase of its life cycle.
There is clearly a massive difference in the value between an autonomous and scalable company and acquiring a salesperson or technologist who generates revenue, has incorporated him- or herself, and may have built a team of assistants.
Even if you do pull off a big exit, if you haven't made yourself fully expendable, then your acquirer is going to demand you stay on for several years to run it.
As much as half the price of your acquisition may be reliant on you sticking with the new company, successfully hitting their KPIs, and ensuring the business is integrated. So why not tackle this earlier and get a better price and more freedom in the first place?
There are a variety of ways to set things up right from the beginning and avoid expendability becoming an issue.
Be sure you are branding the business in its own right and not just yourself. There may be ongoing benefits of building up your own brand, but it is all about you. If you focus on yourself, there is little differentiation from your personal brand and the company. You are throwing away a lot of equity value and sabotaging a potential sale.
Athletes have their own personal brands, but great teams worth the most money don't rely on any one player's brand. The Lakers and Heat are worth a substantial amount of money. Teams at that level are bought without any guarantee of a certain player being on the court next season. They come and go. Most people don't even know the coaches' or owners' names.
Virgin may be a standalone brand without Richard Branson, but it was really difficult for people to believe Apple could be as good without Steve Jobs. Right now, few may believe Berkshire Hathaway will keep its appeal without Warren Buffett.
One of the top pieces of advice from successful repeat entrepreneurs is to hire a high-quality executive team as early as possible. Hire from the top down, not the bottom up. Let your department heads run their departments and teams, rather than just recruiting the equivalent of a bunch of assistants, and then trying to insert a new manager over them and between you later.
Build your company with the end in mind. Build it as you want it to end up, right from the beginning, rather than hoping you can switch it up at some mythical date in the future. That should be at least from the CEO level, if not chairman of the board—someone overseeing things from above, not the lead salesperson or technologist.
Start as the owner and be interchangeable with another owner. You don't want to be a doer in the trenches or the sole superstar.