This is a checklist for the first phase of the exit process. These tasks should all be complete before engaging with the first prospective buyer.

Exit Strategy

• Fully signed Exit Strategy document
• Discuss mechanisms to increase alignment

The Exit Team

• Engage an external accounting firm for a review or audit – ideally a ‘big four’ firm
• Engage an M&A Advisor (aka investment banker)
• Engage an M&A Lawyer – must be an expert in M&A transactions, not a generalist
• Review board appointments and board composition in the context of an exit transaction

Corporate Structure

• Review the company minute book and Share Register
• Review minutes from board and shareholder meetings
• Discuss the ownership structure to ensure optimum tax treatment in either a share or asset sale
• Review share structures to accommodate tax treatment of any type of purchase price payouts
• Complete corporate search – PPSA etc. (by the new M&A lawyer)
• Discuss Articles and shareholders agreement with M&A Advisor and Lawyer – especially in the context of an asset sale

Intellectual Property, Employment, Contractor and Corporate Protection Agreements

• Review employee and contractor agreements – especially in consideration of US laws and practices
• Conduct an initial patent search – similar to what a US buyer would do during due diligence
• Software audit – especially for open source
• Confirm IP ownership of all forms of IP
• Patent search for freedom to operate

Tax review

• Best possible review of possible tax liabilities – especially at the US state level
• Special focus on states where the company may have a nexus
• Explore tax loss carryforward strategies
• Discuss SRED implications of possibly becoming a non-CCPC
• Meet with tax advisors to discuss tax implications of various exit scenarios

Accounting Systems

• Review internal accounting systems to ensure accurate monthly financials within a few days of month end

Exit Sales Collateral

• Update the financial model to include at least 12 months, and three years, of projections
• Update the Confidential Information Memorandum – including the updated financials and a legal review
• Prepare two page Executive Summary
• PowerPoint – rehearse online presentation

Due Diligence – all in PDFs for electronic access

• All financial statements and tax returns including SRED claims
• Thorough review of any agreements with personal guarantees
• All material contracts, insurance agreements, etc.
• Review all contracts for assignability without consent and change of control clauses
• Sales funnel and CRM remote access
• Update Org Chart if necessary
• Trademarks, copyrights, and any patent related documents
• Business licenses, permits, etc. – especially at the state level
• Potential litigation (including employee related) or possible liabilities not in the financials
• Product warranties and support obligations and warranties
• Leases, guaranties, banking agreements
• Asset ledger – especially in the context of a possible asset sale
• Equity confirmations from all current and past employees and contractors
• Review employee share ownership agreements

Reps and Warranties

• Start to discuss reps and warranties with significant shareholders – typical terms, limits, periods
• Agree on who will sign which reps and warranties

How Exits Have Changed in 2012 -
Presented at the National Angel Capital Association Summit -
March 8, 2012 in Austin, Texas -

Highlights of Part 1:

• Investing is easy – getting our money back is much more challenging
• Three reasons why it’s more challenging to learn about exits than investing
• Exits just don’t happen very often – learning requires decades of experience
• Why the real estate market misleads us when we think about exits – how the markets differ
• The financial markets have changed – what’s motivating M&A buyers today
• The types of M&A buyers active in the market today and what each type is thinking
• Big company buyers, medium sized companies and private equity fund buyers

This is the Powerpoint for “How Exits Have Changed in 2012“.

The video for part 2 of How Exits Have Changed is here.

How Exits Have Changed in 2012 -
Presented at the National Angel Capital Association Summit -
March 8, 2012 in Austin, Texas -

Highlights of Part 2:

• Boomer buyers – a new category of buyers for companies in the $20 million range
• Family offices – not a term we heard much in North America until recently
• A surprising new type of buyer – Venture Capital funds operating like P-E funds
• International buyers – still small but increasing
• There has never been this much cash looking for acquisitions – well over $10 trillion
• How many acquisitions is $1 trillion?
• The number of buyers for most companies is practically unlimited
• These trends are all combining to create a fast moving, diverse, sellers market
• Prices are up about 20% over the past year

This is the Powerpoint for “How Exits Have Changed in 2012“.

The video for part 3 of How Exits Have Changed is here.

How Exits Have Changed in 2012 -
Presented at the National Angel Capital Association Summit -
March 8, 2012 in Austin, Texas -

Highlights of Part 3:

• Story of a Vancouver company that was acquired before it’s first year end
• A possible new record – the company acquired by AOL just four days after its product launched
• Ideal exit timing for your company and why most entrepreneurs “Ride it over the top”
• The financial loss is not the worst – it’s the part of your life you can never get back
• Why companies that miss the optimum time often end up never exiting
• Exit threats from competition, over-investment by VCs and negative momentum

This is the Powerpoint for “How Exits Have Changed in 2012“.

The video for part 4 of How Exits Have Changed is here.

How Exits Have Changed in 2012 -
Presented at the National Angel Capital Association Summit -
March 8, 2012 in Austin, Texas -

Highlights of Part 4:

• The most devastating reason that companies fail to exit
• A relatively new phenomena driven by the amount of cash available, number of buyers and the internet
• The buyers are smart too and how they start the beginnings of the wave
• When you can see the wave, it’s almost always too late
• What happens after the wave – killing the small companies
• My saddest job – explaining why an unsolicited offer is almost never good news
• How we can all be better angel investors – support the ACA and ARI

This is the Powerpoint for “How Exits Have Changed in 2012“.

The video for part 1 of How Exits Have Changed is here.

Highlights of Part 6 – Financing Strategy for Maximum Exit Value:

• Axel Christiansen introduction. And why is he so funny?
• What is Sub Debt and who is it useful to? In what types of exit transactions?
• Company value as a multiple of EBITDA. The “New Normal”.
• Seven reasons to create a financing package.
• Vendor notes and other financing tools.
• Case Study: Buy Me Inc.
• Subordinated or mezzanine debt. Cash flow based financing – no asset coverage required.
• The ‘glue’ in buy-out transactions.
• Vendor objectives, purchaser objectives, BDC objectives. The Perfect Deal.
• BDC Subordinate Finance – the largest national subordinate finance group in Canada.
• BDC for Management buy-outs (MBO), leveraged buy-outs (LBO), strategic acquisitions (roll-ups).

If you own any part of a ‘service’ business you must read “Built to Sell”.

John Warrillow has crafted an effortlessly readable, but incredibly important, book on business strategy for owners and decision makers in ‘service’ businesses.

I keep putting quotes around ‘service’ because I’m not sure John and I agree on the precise definition. From my perspective, almost every company is a service business. IBM thinks of itself as a service business. John uses the word to describe the huge number of businesses that provide non-physical products. These are usually small businesses, but in aggregate they’re a big part of the North American economy – and an even larger part of the healthy economy.

“Built to Sell” provides invaluable insight into the strategic dilemma faced by every service business owner when they start to think about their exit strategy. Traditional service businesses – using John’s definition – receive the lowest exit valuations of any type of business.

During his thoroughly enjoyable narrative, John describes the hypothetical transformation of a small service business into a ‘product’ business. Several times, I laughed out loud. John brilliantly led me down the path taken by most service business owners and let me smack my head right into the brick wall. I felt it in my gut as he described the agonizing decisions required to transform the business into a fundamentally more valuable, and sellable, model.

John also illuminates some of the pitfalls when selecting an M&A advisor. One of my favorite passages is:

TED’S TIP # 14 Avoid an adviser who offers to broker a discussion with a single client. You want to ensure there is competition for your business and avoid being used as a pawn for your adviser to curry favor with his or her best client.

“Built to Sell” also includes a vivid, and accurate, description of the emotional roller-coaster experienced by most CEOs going through an exit.

The book conveys valuable lessons that can only be effectively described by those who have lived painfully, and expensively, though them.

If you own any part of a ‘service’ business, and aren’t planning to bequeath the shares in your will, buy a copy of “Built to Sell” and visit John’s blog at www.BuiltToSell.com

Being an Entrepreneur in the 21st Century Video Series

Presented at New Westminster, BC  ByzHub Meetup on October 20, 2011

The PowerPoint for this talk is available here.

Highlights of Being an Entrepreneur in the 21st Century – Part 1:

• Everyone living here has enjoyed a very high standard of living.
• Unfortunately, that’s changing. The economy has changed. The whole world is changing.
• Why is this happening? Quite simply – global trade. The world has become a very small place.
• What about the big, great technology companies? Like Intel, Microsoft and Cisco?
• None of these companies have created any wealth for their shareholders for over 15 years.
• Startups are now where the innovation happens, where the excitement is and where the wealth is being created.
• The three big trends that entrepreneurs can capitalize on to create wealth today are:
• Innovation, Internet Acceleration and Capital Efficiency
• And the other good news is that there is no shortage of capital. Let me repeat that – no shortage of capital.

Highlights of Being an Entrepreneur in the 21st Century – Part 2

• Uh, Oh. These are our friends and family! And we really need their money.
• The solution: Fairness, Alignment and Governance. All built into the structure of the company.
• Angel Co-Investment – groups of angels now often invest $5 to $10 million in a company over several rounds.
• Tip: Why are they investing? Hint: This answer applies not just to the Friends and Family round but to all rounds.
• I believe exits are the best part of being an entrepreneur or investor.
• But it’s also the least well understood part of being an entrepreneur or private investor.
• One of my life goals is to provide information to help entrepreneurs execute better exits.
• Google wants even earlier exits!
• Google said: “we do prefer companies that are pre-revenue”
• Examples of these exits. Why this is happening now. How it looks from a Fortune 500 senior exec.

Highlights of Being an Entrepreneur in the 21st Century – Part 3

• Many big companies have so much cash that it’s a problem.
• A local really early exit: This is a Vancouver company but they asked me to keep their details confidential – for now.
• How early can you sell? Why selling early is often the optimum time.
• The most heartbreaking error I see is entrepreneurs waiting too long to start the exit. Here’s why.
• I believe this time will come to be known as a “Golden Era for Entrepreneurs”
• There has never been a time before when, it was so easy for entrepreneurs to create such valuable companies on so little capital,
• And sell them so early for so much money

You can also watch this series on YouTube, starting with Part 1 here.

Many of these lessons are described in my new book on selling businesses for entrepreneurs and angel investors – www.Early-Exits.com.

If you enjoyed this video, you might also like Selling a Business Guide, Don’t Blow the Biggest Deal of Your Life, Early Exits – Your Golden Opportunity or Start at the End – Your Exit Strategy.

Highlights of Being an Entrepreneur in the 21st Century – Part 1:

• Everyone living here has enjoyed a very high standard of living.
• Unfortunately, that’s changing. The economy has changed. The whole world is changing.
• Entire countries are bankrupt and more are certain to follow. Lehman Brothers is gone. GM was bankrupt.
• Why is this happening? Quite simply – global trade. The world has become a very small place.
• This has had a dramatic effect on many big companies. For a Canadian example: Nortel.
• What about the big, great technology companies? Like Intel, Microsoft and Cisco?
• None of these companies have created any wealth for their shareholders for over 15 years.
• Today big companies seem to be risky, and not very lucrative, places to work.
• The best and brightest are now often working in startups. And startups have been creating all of the new jobs.
• Startups are now where the innovation happens, where the excitement is and where the wealth is being created.
• The three big trends that entrepreneurs can capitalize on to create wealth today are:
• Innovation, Internet Acceleration and Capital Efficiency
• And the other good news is that there is no shortage of capital. Let me repeat that – no shortage of capital.
• Who actually finances startups? It’s not the Venture Capital funds.
• Angel investors finance 27x more companies than VC funds
• But the really big money is from Friends and Family. (Which can create some problems if we aren’t careful.)

Part 1 of the Being an Entrepreneur video series is also available on Youtube.

Click here for part 2 of Being an Entrepreneur in the 21st Century.

Highlights of Being an Entrepreneur in the 21st Century – Part 2:

• Uh, Oh. These are our friends and family! And we really need their money.
• The solution: Fairness, Alignment and Governance. All built into the structure of the company.
• More good news is that there are lots of angel investors.
• Angel Co-Investment – groups of angels now often invest $5 to $10 million in a company over several rounds.
• Tip: Why are they investing? Hint: This answer applies not just to the Friends and Family round but to all rounds.
• I believe exits are the best part of being an entrepreneur or investor.
• But it’s also the least well understood part of being an entrepreneur or private investor.
• One of my life goals is to provide information to help entrepreneurs execute better exits.
• The media always reports on the really big exits.The ‘new’ big story is the large number of smaller exits.
• Google wants even earlier exits!
• “90% plus of our transactions are small transactions…less than 20 people, less than $20 million”
• Google said: “we do prefer companies that are pre-revenue”
• Examples of these exits. Why this is happening now. How it looks from a Fortune 500 senior exec.

Part 2 of the Being an Entrepreneur video series is also available on Youtube.

Click here for part 3 of Being an Entrepreneur in the 21st Century.

Highlights of Being an Entrepreneur in the 21st Century – Part 3:

• Many big companies have so much cash that it’s a problem.
• Big companies are not the only buyers. There are many more medium and small sized buyers.
• And an even larger number of successful, wealthy, boomers who have realized they aren’t ready to retire.
• A “weekender” is where entrepreneurs build an entire company in a weekend.
• In 2009 when I wrote “Early Exits” I speculated that one day:
• “They’ll probably define an early exit as selling the company before the end of the weekender”
• That almost happened in November 2009.
• A local really early exit: This is a Vancouver company but they asked me to keep their details confidential – for now.
• This company was successful sold less than 12 months from startup and they hadn’t launched the product yet.
• Here is a list of exits that happened in the 2 to 3 year from startup range – but they were also huge.
• How early can you sell? Why selling early is often the optimum time.
• The most heartbreaking error I see is entrepreneurs waiting too long to start the exit. Here’s why.
• What works best today: startups innovate and create new jobs, angels and friends and family finance them.
• Angels and friends and family finance them. If they really can’t be bootstrapped.
• Big companies, and others, buy and continue to grow the businesses. Entrepreneurs and angels to it all again.
• I believe this time will come to be known as a “Golden Era for Entrepreneurs”
• There has never been a time before when, it was so easy for entrepreneurs to create such valuable companies,
• On so little capital and sell them so early for so much money

Part 3 of the Being an Entrepreneur video series is also available on Youtube.

Click here to return to the Summary Page for Being an Entrepreneur in the 21st Century.

I was a little sad listening to President Obama talk about his job creation plans last week.

Most of us in North America would agree that our highest economic priority is finding ways to create more new jobs.

My take on Obama’s plans is that he proposes to borrow more, or tax more, to subsidize companies to hire the people who are least employable. He also plans to require companies to “buy American” as long as that won’t increase prices more than 25%. In my opinion, borrowing, taxing and raising prices are all going in the wrong direction.

I wish Obama, and our other elected leaders, could appreciate that startups create ALL the new jobs in our economy.

The Kauffman Foundation recently published some fascinating new research clearly showing that all of the job creation in the American economy over the past 30 years has come from startups.

From the Kauffman Foundation press release: “The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.” (A PDF of the study is also available at that link.)

If governments want to make a difference in creating jobs, they should focus on:

• encouraging more people to become entrepreneurs, and
• initiatives that will create more startups.

In a post last week, I discuss how big companies haven’t been creating wealth for their employees from share price appreciation. The graph above shows the same thing – in general, big companies in North America just aren’t prospering in the new, global economy. The economic growth, and wealth creation, is happening in startups.

My previous post discusses some of the reasons the best and brightest are leaving big companies to work in startups. One factor is that the employees in the world’s greatest software, chip and networking companies haven’t earned any significant wealth from options for over a decade. The result is that many of the most valuable employees have been choosing to work in startups where there is a better opportunity to do innovative work and make possibly make some significant equity gains.

The company examples in the previous article are some of the world’s very best, big companies – Microsoft, Intel and Cisco. This post continues on the same topic but looks at what happened to Canada’s most valuable company – Nortel.

100 Year Old Tech Company

Nortel was founded in 1882. In recent times, the company manufactured telecommunications and computer network equipment. Their customers were primarily telephone, mobile phone and cable TV companies.

In 2000, Nortel employed 94,500 people and had a market capitalization of $398 billion. Its value made up one-third of the entire TSX index – making it Canada’s most valuable company.

Most Valuable in the Country to Bankrupt in Under a Decade

By 2009 (less than 10 years later) Nortel was bankrupt. The bankruptcy trustee tried to find a buyer for the entire company but there were never any serious offers. Instead parts of Nortel were sold to the highest bidders.

How can this happen? How can a company that’s over 100 years old, employing close to 100,000 people, go from being the most valuable in our country to being bankrupt in less than a decade?

In my opinion, a large part of the reason is that the company was too big. Being a big company in the 21st century seems to have a similar outlook to being a big dinosaur 50,000 years ago. (That’s a good topic for another post or possibly a book. Perhaps a 21st-century version of Good to Great – but titled something like Big to Gone.)

Big Companies can be Risky Places to Work

When I graduated from university, many of my classmates in electrical and computer engineering went to work at Nortel.

I was determined to work in a startup after graduation. The majority of my classmates thought that was a risky plan. A good number of them wanted to work in a big company because they wanted stability and security.

Things didn’t work out as my classmates expected. It’s not just that almost all of the people who worked for Canada’s most valuable company lost their jobs. There was an even worse shock for those who worked for decades at Nortel, believing the contributions they were making to the company’s pension fund would support them during retirement.

There have been reports of $100 million missing from the employee’s Health and Welfare Trust and articles about billion dollar pension shortfalls. Even after Nortel’s assets were sold, pensioners got less than they had been promised and many actually had to pay back money they had already received.

This is a common story for people who thought they had retired after years in large organizations. Many other big companies have gone bankrupt recently. After the bankruptcy accounting was finalized, many retirees received terrible shocks.

Startups for Stability and Opportunity

The world sure has changed. When I speak to young graduates today, I rarely hear anyone talking about working in a big company. They want the benefits of working in a younger company – an organization of a size more compatible with our new hyper-connected, hyper-competitive world. Somewhere they can do innovative work and where their business destiny, and future economic prosperity, is in their own hands and those of their close work friends.

These young grads also appreciate that working in a vibrant, younger company gives them the best chance to make some exciting money on their shares or options.

How Often Do You See Smart People Leaving a Big Company?

Here’s a typical article from a couple of days ago: Microsoft Loses Key Public Sector, Visual Studio and Bing Execs (UPDATED)

The article starts off with: “Several high-ranking Microsoft executives exited the company this week.” And ends with updates from tweets about other senior people leaving in the same week.

This isn’t just happening at Microsoft, it’s common in most big companies.

When I Graduated Everyone Wanted to Work in Big Companies

Back when I graduated from university in the 1980s many of the best and brightest grads wanted to get jobs in the big companies. That’s where the research money was, where the excitement was, and where the opportunities were to do really innovative work.

The Big Companies was Where the Big Money Was

The trend accelerated in the 1990s. Getting hired by Microsoft or one of the other big companies usually meant you’d get a sizable stock-option grant. With the buoyant markets in the 1990s, those options often created truly staggering amounts of capital gains.

Microsoft was Built on Stock Options

In the latter 1990s, the ownership of Microsoft was split about 50-50 between people who had invested money in the company – outside shareholders – and people who had invested human capital – employees and founders. Back then, over 35% of Microsoft’s fully diluted shares were options held by employees. I’ve met many software developers, and mid-level managers, who cashed out of Microsoft with tens of millions of dollars. Senior managers made much more. Is it any wonder the most innovative and most productive people wanted to get jobs at companies like Microsoft?

Big Doesn’t Seem to Work Anymore

But look what’s happened over the last 10 or 15 years. If you factor out the dot com bubble in 2000, Microsoft’s share graph is essentially flat. The greatest software company on the planet hasn’t made any real money for its shareholders, or its employees, for over a decade.

What about the world’s greatest chip company? Here’s Intel’s stock chart over the last 15 years.

Or the world’s greatest networking company – Cisco? (My first company was acquired by Cisco when they bought Scientific Atlanta. Some of my friends still have Cisco options.)

In the 1990s a good option position at one of these companies could give you enough to retire. But for the last ten years, they haven’t created any real value at all.

And this is what’s happened in the best of the big companies. To see an example of a less than excellent company, read my next post about what happened to Nortel over the same period.

Today the Best and Brightest Work in Startups

Why none of these big, great tech companies has had any stock price appreciation is a complex question. But what’s much easier to see is the effect on recruiting and retaining the really good employees. That’s a pretty simple, direct relationship.

The best and brightest either aren’t joining, or aren’t staying in, these big companies. Today, the best and the brightest are going to work in startups. That’s where the excitement, innovation and big capital gains are now.

“Exit Coach” is a new term. Today, many businesses are being successfully sold just two or threes years after startup. This has created a need for a new type of professional engagement to assist young companies with the early stages of the exit process.

The exit coach typically works with the CEO on exit strategy, planning and exit team selection. The engagement usually ends when the M&A advisor is hired and the exit execution begins. In some situations, the company may decide to complete the exit themselves with help from an exit coach.

The primary role of an exit coach is to assist the CEO with:

• The development of, and alignment around, a written exit strategy
• An estimation of selling price and probability of success
• A realistic plan, budget and timeline to complete the exit
• Identification of specific action items necessary to complete the sale
• The selection of the M&A Advisor and possibly other members of the exit team

Exit Coaches and Directors with Exit Experience

A decade ago, I rarely heard the word coaching used in a business context. Now, it feels like every CEO has a coach of some kind.

In some ways, this seems like a popularization of an old concept – the management consultant. But there is an important difference, driven by a fundamental shift in 21st century business.

In earlier times, most companies invested a lot of time and money into building a board of directors. As the company matured, the Chairman and CEO would start to recruit directors with deep exit strategy experience.

There are very few available directors who have been through a number of exits. So the recruitment process often took a year or two. And when they could be found, their compensation expectations, in both cash and equity, was more than most companies could afford.

Today, the scarcity of available director candidates, and the dramatically higher board compensations, make it much more challenging to build, and retain, an excellent board. The challenge is even greater when recruiting for directors with extensive exit experience.

Boards work for Shareholders – Coaches work for CEOs

Another difference is that boards work for the shareholders and have the responsibility for hiring, firing and managing the CEO. Coaches usually work for the CEO, or the CEO and a committee of the board.

Boards are hired by the shareholders at the annual general meeting and usually serve a two to four year term. Coaches work on a month to month basis for as long as the CEO finds the relationship valuable.

Most boards are primarily compensated with equity, and secondarily with cash. Coaches are usually compensated entirely with cash.

These differences create a very different business relationship – especially with the CEO. Many companies are finding that the knowledge necessary to design and execute an optimum exit can be applied faster, and more economically, with an exit coach rather than by recruiting directors with deep exit experience.

Everything Moves Faster Now

Today, it’s not unusual for a company to evolve from a startup to a successful M&A exit in just two or three years. Even if the team wants to build at a more leisurely pace, most of their competition won’t. With most new business opportunities, the big companies will have acquired the best young companies within a few years of the opportunity developing. Once this happens, it’s much more difficult for a stand-alone, small company to prosper and certainly to be acquired.

This means everything needs to get done faster than before. There just isn’t time to spend a year or two recruiting experienced directors to help the team design the exit strategy.

Exit Strategy

A good exit coach can also be extremely valuable when companies develop their exit strategy. For many companies, this essential first step in the exit process can be the most challenging.

In some companies, with one or two decision makers, alignment on the exit strategy has literally been done in an hour. In other companies with more shareholders, or less homogeneous boards, I have seen alignment on the exit strategy take several quarters, including more than one weekend retreat with the entire board and management team.

This variability illustrates why exit coaching agreements should be flexible and scalable.

Valuation

An essential element in the exit strategy is valuation. This is another area where almost every company needs knowledgeable, objective external input. When boards start thinking about an exit, many make the mistake of paying for a formal business valuation. These reports are expensive, and are almost never required for a straightforward M&A exit.

The right exit coach can often give the CEO and board a more accurate estimate of the exit valuation as a ‘built-in’ part of the exit coaching engagement.

Exit Timeline

For many companies a more urgent question than “How much can we sell for?” is “How quickly can we complete a sale?” The standard (honest) answer is “about 6 to 18 months”. The reason for such a wide range is mostly due to the preparedness of the company and the resources available to get to fully prepared.

After a few sessions, a good exit coach will be able to work with the CEO to develop a realistic timeline and exit plan.

Recruiting the M&A Advisor

The most valuable contribution of the exit coach is often to assist the CEO and board with the selection of the M&A advisor.

Most companies do a poor job of selecting their M&A advisor. In the best case, this can delay the exit for several years or result in a sale for a fraction of what the company could be worth. In the worst case, selecting the wrong M&A advisor can be fatal.

The job of selecting the right M&A advisor is extremely difficult. There are many popular misconceptions and dozens of ‘dirty secrets’ about the industry. It’s extraordinarily difficult to get the information that’s really required to make the best decision. There is almost nothing written about the advisor selection process.

Every quality M&A advisory engagement will be exclusive. That means that once the M&A advisor is engaged, they are the only one who can sell the company. And regardless of how the sale occurs, they will be paid their success fee. The period of exclusivity is usually a couple of years.

This means that once the M&A advisor is signed, much of the future success of the company can depend on the success of the M&A advisor.

The Differences between an M&A Advisor and an Exit Coach

The M&A advisory engagement is long term and exclusive. It has a well-defined end – the sale of the business (or failure of that objective). An exit coaching agreement usually has no commitment and is completely scalable.

M&A advisory contracts almost always have a work fee and a success fee. The exit coach is compensated more like a professional accountant or lawyer – effectively on an hourly basis.

The Typical Exit Coaching Engagement

The variability in the time requirement creates a need for flexible terms in an exit coaching agreement. Financially, exit coaching engagements are very similar to the agreements with law firms or management consulting companies. The company and professional usually agree to a rough hourly rate, and the engagement only continues for as long as the company feels good value is being delivered.

The time that an Exit Coach devotes to a typical engagement is usually about one third ‘contact hours.’ This time might be face to face, or in phone or email communication with the company. Another third of the time involves communicating with other professionals, advisors or companies in the industry. A final third of the time is usually spent reading, writing and doing online research to evaluate elements of the strategy, ideas on prospective purchasers, and researching comparable transactions, etc.

The hourly rate for an exit coach is similar to senior securities lawyers or senior tax partners in accounting firms. A typical hourly rate for estimating this type of engagement is $500 per hour, plus taxes and travel. Most exit coaches prefer to make a time estimate and agree on a monthly fee and then adjust if necessary.

Typical ranges for an exit coaching engagement are from $2,000 to $8,000 per month, depending on what the company needs to accomplish, and how quickly they wish to accomplish it. Travel, expenses and taxes are additional.

The typical period companies will work with an Exit Coach before hiring an M&A Advisor ranges from a month to six months depending again on how quickly the company wants, and is able, to move. In some cases, companies will work with an exit coach all the way to the closing.

Exit Coaches Can Be Remote

To minimize transaction failures, M&A adivsors should be close to the company for exits under $100 million.

In contrast, exit coaches can be anywhere. The interactions with an exit coach can be done very effectively using Skype, phone, chat, email and screen sharing. In fact, this is so much more efficient that even when the exit coach is in the same city, most of the interactions will usually end up being electronic, rather than face to face.

Perception of Conflict

The knowledge and skills required to be a good exit coach are exactly the same as for an M&A advisor. Usually, the best people who will entertain an exit coaching engagement are the people who would also like to be selected as the M&A advisor for that company. Helping select the M&A advisor is one of the most important functions of the exit coach. This can create a perception of conflict but it is probably more of an opportunity.

The exit coach and the company will have a considerable period to get to know each other – to evaluate the ‘fit’ and to really understand the exit opportunity. If the fit is good, this will definitely give the exit coach an advantage in being selected for the M&A advisor. While this is, strictly speaking, a conflict it is also an opportunity for the company to really get to know one professional.

It also reduces the timeline to the exit because it allows the company to get started on the exit process before making a final decision on an M&A advisor.

Your Input on “The Exit Coach” Concept

The concept of an “Exit Coach” is very new. I’m in active discussion with a number of professionals on how this type of engagement is evolving.

Please let me know what you think.

When CEOs and boards begin to look for an M&A adviser, they often start in one of the big financial centers, like New York or Boston. It’s a natural mistake – and one that’s often expensive and regularly fatal.

One of the dirty secrets of the M&A adviser business is that many M&A transactions fail to complete. It’s impossible to find statistics on this. Every M&A advisory firm keeps their failure rate a closely guarded secret – many probably don’t even calculate failure rates.

For over a couple of decades now, I have been asking every CEO, board member and investor I know to share their M&A successes and failures. My twenty years in YPO also provided lots of perspective on M&A transactions gone well – and otherwise.

About One Third of Planned M&A Transactions Fail (under $100 million)

From what I’ve learned, about a third of M&A transactions fail. This is a rough percentage, but I am pretty sure somewhere between a quarter and a half of planned transactions never complete.

Failure Increases with Distant M&A Advisers

After hearing about the success and failure of around a hundred transactions, I realized there was a pattern. The M&A transaction failure rate increases as the distance from the company to the M&A adviser grows.

The reason is that the relationship between an M&A adviser and a company, CEO, board, their accountants and their lawyers is intimate and intense. It takes even the smartest M&A adviser a long time to really understand the value in a company, its strategic value and to determine who the best potential buyers are.  Much of this work has to be done at the company.

The middle part of an M&A adviser’s job can be done remotely – that’s the prospecting, qualifying and sales funnel building. But in the latter stages of the M&A process, during the auction, negotiation and closing the M&A adviser will be working close to full time to help the CEO and board close the transaction. Most of this work has also to be done in the same city as the company. This is in part because the selling company’s lawyers and accountants are usually in the same city as the company.

Another reality of M&A transactions is that inevitably, ‘stuff happens’. In some of the transactions I’ve been involved with, the deal looked dead several times. These ‘near death experiences’ require immediate action to rectify. It could be to reconsider the strategy, work through an unexpected change in the agreement and/or to work through the business – and psychological – implications of whatever has changed. This type of work is almost always unexpected, but requires face to face action on short notice. That’s often not possible if the M&A adviser has to get on a plane.  Failing to bridge even one of these potentially fatal changes  usually means the transaction is doomed.

The really good M&A advisers know this and will plan to spend half of their time in the same city as the company during the first third of the process and most of their time in the same city during the last third.

There are other M&A advisers who think they can do most of that work remotely -  with only weekly visits to the company. Those are the ones that CEOs and boards have to be very careful of. Even in today’s hyper connected world, you cannot do a really good job as an M&A adviser without a great deal of face time.

From the data I have gathered, I believe the failure rate doubles with distant M&A advisers. In other words, a hypothetical company using a remote M&A adviser might have a failure rate of 50%, but with a local adviser the failure rate might only be 25%. For another company, the failure rates might only be 40% and 20% respectively.

Distance Matters Less When Transactions are over $100 million

From what I have been able to learn, this effect is reduced when transactions are over $100 million. When an M&A advisory firm is working on a transaction over $100 million, the fees involved are usually a few million. There are also often two or three senior individuals involved with deals over $100 million.

When the fees are in the multi-million dollar range, the M&A advisers can afford to fly to the company almost every week and spend most of their time in hotels for many months. It’s also easier on their lives if they can split this between two or three senior people.

But this just doesn’t happen when the fees are below a million dollars. For sub-million dollar fees, there is almost always really only one senior person on each transaction. The economics, and human costs, just can’t justify more people, or the travel required, on these smaller deals.

Reputation is also More Heavily Weighted Locally

There is another dirty secret of the M&A adviser relationship that comes into play here. Professional M&A advisers know that every deal doesn’t end up closing. They build their business models, and manage their sales funnels and calendars, based on their knowledge that somewhere around a third of the deals they sign up to do will probably fail. These M&A advisers will still do OK on the deals that fail because their direct costs will be covered by the work fee.

Part of optimizing their business is knowing when to stop working with a company because the probabilities of success are too low. This is usually 6 to 9 months after they sign on.  At that point, if the transaction looks like it’s not going to close pretty soon, many M&A advisers will start to reduce the amount of time they spend on the company. Instead they will devote their time to other companies with new work fees and where they feel the probabilities of success are higher.

This is Especially Likely When the First LOI Doesn’t Close

In every M&A transaction, the company has to select a single prospective buyer when it’s time to accept an offer and sign a binding LOI (letter of intent). At that point, they have to contact the other interested parties on the short list and tell them they cannot continue the process with them.

From the time the LOI is signed to closing is often around three months. If the deal falls apart after a month or two, the other prospective buyers have usually moved on to other opportunities and it’s usually very difficult to get them back to the table.

When this happens, the M&A adviser has to go back and rebuild the sales funnel. This is when I have seen many M&A advisers throw in the towel – especially when they are busy. (If it was purely a matter of economic self interest, they shouldn’t – they have already invested a lot of time with the company.)

The challenge is that they will usually have already contacted most of the best prospects. If they have to go back to the same buyers, the perception will be that they did not succeed the first time. This makes it much more difficult to build momentum on the second pass. It’s also psychologically much more difficult for the M&A advisor. So they usually move onto a ‘fresh’ deal and blame the failure on the company, valuation expectations or a ‘difficult’ CEO or board.

It’s Much Easier to Give Up on a Remote Company

Part of the dirty secret is that it is much easier for the M&A adviser to give up on a company when they are further from the company’s location. When M&A transactions fail, quite a few people will hear about it. But those people are usually geographically close to the company. The negative impact to the M&A adviser’s reputation will be similarly localized.

If the M&A adviser is geographically close to the company, they will be much more likely to stick it out to protect their reputation.

This is another factor that is much less important for transactions over $100 million. With these  larger opportunities, local effectively translates to most of the country.

For Under $100 million You Really Need a Local M&A Adviser

Many CEOs and boards engage remote M&A advisers because they think that somebody from New York or Boston must be better than someone who lives within driving distance. In my experience, the real factors are mostly psychological – it’s like that old adage about a consultant just being a regular guy a long way from home.

The difference in a simple consulting job might not be significant, but when it’s your company being sold, and it’s under $100 million in value, you really need an M&A adviser that is close to home.

This is an updated excerpt from my book: Early Exits – Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists).

Several people have mentioned how much they appreciate this section of my book. It’s surprisingly difficult to get information about M&A advisor fees for selling a business. Few professionals post their rates. I am not sure why this is, and even less sure that it makes sense in today’s hyper-connected world.

Part of the reason I am posting this excerpt is to gather more data.

M&A Advisor Fees and Transaction Size

M&A advisor and business broker fees increase with the size of the transaction, but not in direct proportion. The amount of work required to sell a larger business can actually be less than that to sell a smaller company. Where this becomes interesting is at the smaller end of the transaction size range.

The professionals that sell businesses fall into three rough size categories:

1. At the upper end of the range, there are the big investment banks and accounting firms with teams devoted to M&A.
2. In the middle range there are mid-sized firms that usually include three to seven professionals.
3. At the smaller end of the transaction range, most businesses are sold by boutique, two to three person firms.

It’s easier to understand the pricing mechanisms for M&A advisor fees when selling a business if you look at it from the perspective of the professionals doing the transactions. Very large firms have offices in downtown towers with human receptionists and assistants. The mid-sized firms have smaller offices in less expensive buildings and have automated phone attendants and no assistants. The individuals in boutique firms answer their own phones.

For a transaction to make sense for the big firms with downtown offices, the total fees have to be in the $1 to 2 million range. For the mid-sized firms, the minimum fee size is in the $500,000 to $1 million range. Boutique firms can afford to do exit transactions where the fees are only a few hundred thousand dollars.

Typically, the big firms will compete most aggressively for exit transactions above $100 million because these transactions will produce several million dollars in fees. The $20 to 75-million range is the optimum range for the mid-sized firms. Smaller transactions are usually done by specialized boutique firms. These numbers shift up or down depending on how busy the firms are.

The standard M&A advisor fee model includes a work fee and a success fee. In some cases, it may also include a contingency or break fee.

M&A Advisor Work Fees

Work fees are paid by the company up front or, sometimes, monthly over the first four to twelve months. This can also be called a “retainer fee.” This covers the M&A advisor’s direct costs during the initial stages, as well as their contribution to the preparation of the selling documents and due diligence materials.

For larger transactions, the work fees are usually $100,000 or more. For boutique firms working on a $20 to 30-million exit transaction, the work fees are usually in the $50,000 to $75,000 range. At the lower end of the transaction spectrum the work fees don’t usually go below $50,000 because, no matter how small the transaction, there is still a fixed amount of early work that has to be done.

There are firms that will charge lower work fees, sometimes in the $30k to $40k range. Most use highly templated documents. Some firms – even on Wall Street – produce selling documents that are surprisingly inadequate.

It’s very unusual for a firm, or even an individual practitioner, to undertake an exit transaction without a work fee. Part of the reason is that anyone involved with exits has seen a situation where, at the time of the initial engagement, the shareholders and board are enthusiastic about an exit, but by the time an offer gets to the table the shareholders have reconsidered.

Often this happens precisely because the M&A advisor has done a good job, and has shown the current shareholders that the company is worth significantly more than they thought. This alone can often result in shareholders changing their minds and deciding to continue to own the company for a while longer.

The work fee is a fair way for the professionals to protect their initial investment in helping to facilitate a transaction. It is also a test of how serious the sellers are to actually sell the company.

M&A Advisor Success Fees

Success fees for selling a business in the $10 to 30-million range are typically 5 to 7% of the final value. This means that the M&A advisor who successfully completes a $25-million exit transaction will usually be paid a fee at closing of about $1.5 million.

For transactions over $100 million, success fees are usually in the 2 to 3% range. This means that a broker executing a $100 million exit will typically receive a success fee in the $2 to 3-million range.

Where success fees become more challenging is in the smaller size transactions because the amount of work required to sell a $5-million business is not significantly less than the effort required for a $25-million exit. It takes just about as much manpower in either case and, in some ways, the smaller sales are actually more work.

Why Smaller Transactions Are Often More Work Than Larger Ones

It can be even more difficult to sell a $5-million company than a $25-million company because the buyers for smaller companies tend to be either the junior people in the large company acquisition teams, or the CEOs and CFOs of medium-size companies. Their relatively lower experience levels, or lack of availability, means that these transactions often require more time and effort from the M&A advisor.

So even the smaller boutique firms will not usually want to undertake an exit transaction in which the selling price will be less than $10-million. Even at a 8% success fee, a $10 million transaction will only deliver a $800,000 success fee. This is approaching the minimum economic size that even the smaller firms can undertake.

This is why transactions in the $5 to $25-million range are often done by boutique firms or individuals who have developed expertise in this area.

Because of the amount of work involved in a $5-million transaction, the success fees are usually in the 8 to 12% range.

While the amount of work required to perform exit transactions is similar whether the company is valued at $5 million or $100 million, the fees for large brokerage houses are higher due to their overhead and perceived prestige.

Please Share Your Data

I’d appreciate hearing from you about your experiences with M&A Advisor fees. The only way I have been able to aggregate this information is by asking CEOs, board members, investors and M&A advisors that I meet. If you have a data point you can share, please either leave a comment below or email me directly.

I’m not sure I should be typing this. It’s something I hate to admit about myself.

But the reality is all investors are subject to the same psychological imperfections. It doesn’t matter whether they are grannies buying ten shares of Google, or hotshot CEO’s acquiring billion dollar companies, none of us are so perfect that we are not susceptible to a great sales pitch. This is a really important consideration when selecting an M&A advisor.

None of us are so perfect we can’t be sold

I can admit it…. it just happened to me… again. I consider myself an astute investor focused on the fundamentals. I’d recently been watching a local company with a good CEO, but wasn’t absolutely convinced on the model or that it was a good investment.

One of my close business friends was working with the company to syndicate a financing. We had lunch to discuss a variety of topics. When I brought up this company I still thought the chances of me investing were one out of three.

My friend told me it was too late. The financing was sold out. I immediately took the bait. All of a sudden I really wanted to invest. I heard myself calling in favors and almost begging for an allocation. I wanted twice as much as I thought my maximum investment would be before I sat down. My friend wouldn’t promise me anything, but said I could talk to the guy managing the ‘book’ (the list of investors).

When I contacted the fellow who actually knew how the financing was going, he wasn’t even sure when it was closing. He showed no sense of urgency and seemed really happy to ‘pencil me in’ (add me to the list of investors.)

Right then I knew my good friend had sold me using one of the oldest tricks in the book.

We all want to buy something everyone else also wants. Even more, we want to buy something that is in such demand it’s hard to get. All (us) investors are herd animals.

I was a little unhappy with my friend for using such crude tactics on me. I knew exactly which of my human imperfections he used to close me, but I didn’t reconsider, or even reduce my investment. I guess I’m just not that perfect.

Some Salespeople are Truly Great

The valuable outcome of the fact that we all susceptible to being sold is that in every business there are a few salespeople who are truly great. My friend is certainly one. These greats are usually about 3x better than the average salesperson. Even when they have exactly the same pool of suspects (potential buyers) and exactly the same product or service to sell, they will close three times more than the other salespeople. I have seen this first hand in dozens of companies and situations.

The reason these ‘great’ salespeople are that much more productive is because they can connect to those universal parts of human psychology that make us susceptible to a good sales pitch. Some of these great salespeople do this with an unconscious competence – in other words, they don’t even realize what they’re doing. If you ask them, they just shrug their shoulders and say they are just ‘connecting with the buyer’ or ‘having fun selling’. But what is really happening is much more subtle.

These great salespeople can more effectively build a relationship, and interface at an almost non-verbal level, with the prospective buyer. They often know intuitively when and how to close the transaction.

When It’s Your Company Being Sold – Find a Great M&A Advisor

In industries with inefficient markets, and more elastic pricing, these great sales people regularly get much higher prices for exactly the same product. These are the sales people who are often described as being able to sell ‘ice to Eskimos”.

These ‘greats’ are the M&A advisors you want on your team when it’s time to sell your company. A great M&A advisor can account for a significant part of the additional 50 to 100% increase in price that is possible in most company sales.

Once you appreciate how an outstanding M&A advisor can make that much difference in the sales price of your company, no matter how much you have to pay them, it’s an attractive return on investment.

Every company needs an exit strategy. Ideally, the exit strategy should be signed off by the founders before the first dollar of external investment goes into the company. A good exit strategy, well matched to the characteristics of the business and market, will:

• improve the probabilities of success
• shorten the time to exit, and
• often significantly increase the ultimate exit valuation

This is especially true today when early exits are such an attractive option for many startups. These days, companies are often sold only two or three years after they’re founded.  Flickr was a year and half old when it sold for $30 million. Club Penguin sold for $350 million when it was just two years old. YouTube sold for $1.6 billion when it was two years old.

Of course, in many cases it will take longer than two or three years to achieve an optimum exit. But this doesn’t reduce the requirement for an exit strategy and continuous work on the exit plan – right up until the day the company is sold.

It’s Just Another Business Process – Often the Most Lucrative

Selling a company is just another business process. It’s a process just like a product development, financing plan or marketing campaign. The biggest difference is that the exit process often makes more money for the shareholders than any other process during the company’s lifetime. This is not just because the exit monetizes all the work and investment that went into the company.

Designing and executing the exit well can easily increase the entire value of the business by fifty percent, or more. Yes, designing and executing the exit well, can make half again as much money as all the hard work, and investment, that goes into every other business activity. That is why the exit is often the most lucrative of all business processes.

Every manager knows that large business goals need a strategy, plan and regular monitoring. The exit is no exception.

The Entire Purpose of the Company

Looking at it in the simplest terms, or as an investor would, the company is simply a black box with the inputs being entrepreneurs’ effort and investors’ cash and the only output being the purchase price paid by the ultimate buyer.

Everything else that happens inside the black box is simply a component contributing to the single output – the successful exit. While this is no doubt an enormous simplification, it is clearly the most purpose of most companies with external investors.

Exit Strategy is a Prerequisite to a Financing Strategy

A clear, signed exit strategy is especially important before developing a financing strategy. Most entrepreneurs, and a surprising number of investors, don’t fully appreciate the degree to which different types of investors are only compatible with certain exit strategies.

Inadvertently creating a misalignment between the types of investors and the exit strategy often results in a complete failure of the company. This is particularly heartbreaking because it usually happens years after the company has already become a significant success. This is a core message in my book Early Exits.

Build It and They Will Come – Not

The classic joke for managers involved in product development is ‘build it and they will come’. In the 80s, there were several well-known management gurus who wrote books and made good livings on the lecture circuit advising entrepreneurs and managers to listen to their customers before starting to build new products or services. Today, almost everyone agrees that a strategy of ‘building it and they will come’ is laughably ill-advised.

Even so, many entrepreneurs still go happily along building companies hoping that one-day a ‘buyer will come’. It’s an equally bad idea. To succeed in any business process you have to start at the end – clearly articulate the desired outcome and then plan the intermediate steps needed to achieve the goal.

For most technology companies with external investors, the ultimate objective is to sell the company. To achieve that goal, the exit strategy should become part of the corporate DNA. The exit strategy should be clearly articulated, signed off and reviewed regularly. With a good exit strategy, and reasonable attention to the process, your company will exit earlier, for a better price and with better terms.

Exit Strategies Don’t Need to be Complicated

An effective exit strategy can be pretty simple. Here’s a real life example from a company that I can talk about – Parasun Technologies. At the company’s second strategic planning retreat in September 2005, the board and management agreed that “Our Core Purpose” was to sell the company for more than $10 million by late 2006 or early 2007.

That’s all you really need: a target date and a price. Exit strategies can be more complicated, and might include statements on maximizing strategic value, target customers and even sales tactics. But the two essential elements are when and how much.

Parasun’s simple exit strategy worked very well. In February of 2007 the company agreed to be sold for $14.8 million. The transaction closed in May. The story of how the price grew from $10 to $14.8 million is one of the case studies on this blog.

Companies certainly have cultures.

They also seem to have DNA. Corporate DNA is formed early on in a corporation’s life-cycle. But unlike most living creatures, a company’s DNA can change later in life.

Corporate DNA, like all other DNA, determines, to a large extent, the characteristics and success of the organism.

Flaws in the DNA can lead to infant mortality, or failure modes, that might not be apparent for many years.

When investors, or other new partners, join a company, their DNA is effectively combined with the original entrepreneurial DNA – resulting in a new hybrid organization.

It’s absolutely essential to the health of the organization to think hard about whether this new DNA is complimentary to, or even compatible with, the original organizational DNA.

This slide is from the PowerPoint presentation: “Early Friends and Family Financings” available at www.BasilPeters.com/Speaking_Engagements.html