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Exit Execution, M&A Misperception

Only 25% of Saleable Companies Exit

by Basil Peters on January 26, 2013 · 9 comments

I’m convinced that only about 25% of the businesses that could be sold actually end up successfully exiting.

Yes. I believe that about three out of four times when a company could have been successfully sold, a sale did not end up happening – ever. And most of the time, it was avoidable.

The Frustrating Lack of Data on Exits

One of the most frustrating aspects of researching exits is the lack of data on transactions under $50 million, which are about three quarters of all exits.  I have spoken with most of the organizations that manage databases that include information on entrepreneurial companies, early stage investments and exits, and I am certain the data does not exist.

There are now a few groups who are just starting to accumulate some of this data, but we’re at least a decade or two away from having a sample large enough to be useful in developing best practices on exits.

This lack of valid data means that while something may be true, and even fairly obvious, most of the time we just can’t prove it.  For now, the best we can do is develop best practices based on empirical observations.

This article is about one of these truths. Based on my observations and hundreds of conversations with entrepreneurs, investors and M&A professionals, I have no doubt that what I have written here is true, but I wish we had the hard data to prove it.

My Observations on Exits

Since the early ‘80s, all I have done is start, grow, finance and sell technology companies.  I have invested in about fifty companies, sold several dozen and had a front row seat to watch more than a hundred grow from their early stages to their eventual conclusion.  I believe I’ve developed a pretty good understanding of which companies were saleable and when.

I Believe Only 25% of Saleable Companies Actually Exit

I’m convinced that only about 25% of the businesses that could be sold actually end up successfully exiting.

Yes. I believe that about three out of four times when a company could have been successfully sold, a sale did not end up happening – ever. To be clear, I am not including unsuccessful exits – for example, where the company has not succeeded and another entity acquires the assets for a low value. What I am writing about here are ‘successful’ exits where the investors end up with a smile on their face.

It is also possible that a single company will end up creating more than one saleable business. The best example is our recent understanding of how many startups pivot. Often pivots are the result of failing to exit the prior business when there was an opportunity. It’s not uncommon for persistent management teams to build two, or three, saleable businesses in one company before they actual exit.

Of course, I’m not saying this happens exactly 25% of the time.  We just don’t have the data to be anywhere near that accurate.  But I’m certain it’s less than half the time, and I’m pretty sure it’s less than a third of the time.

What gets me excited is imagining how much wealth could be created if we could improve our best practices to increase this percentage of saleable companies to even 50%. That would double investor returns and create twice as many wealthy founders and entrepreneurs.

Increasing the rate of successful exits to half would also create a lot more economic activity. Investors would invest more capital, more entrepreneurs would create startups, and more successful early stage companies would be scaled up by cash-rich corporations and private equity funds, all of which would create more economic growth and good quality jobs.

Why Do Only 25% Exit Successfully?

Why do so few companies that could be sold actually exit successfully?

Like many parts of business, or life, there is no single, simple explanation.  Each case includes a different combination of factors which combine to end up in either a successful exit or not. Following are some of the main reasons companies end up failing to successfully exit.

1.    The Exit Team Failed to Execute

In a depressing number of cases, the board of a company will decide that they would like to exit but the team they assemble will fail to execute.  I believe there are two primary reasons this happens:

- The company wasn’t actually saleable (at that time), or

- The team that was assembled didn’t have the skills and experience to successfully execute the exit.

I used to think that when a board decided to assemble a team and execute an exit, they were successful about half of the time.  More recently, though, as I have observed more attempted exits and spoken to at least a hundred more M&A professionals, I have revised my estimate, and I now believe attempted exits under $50 million only succeed about 25% of the time.

This summer, I spoke at the national AM&AA conference in Chicago, and another speaker there said that she thought the percentage of time companies successfully executed their exit was only 5 to 7%. Here statement was based on the often referenced study from the US Department of Commerce that reported only 20% of the businesses that are for sale will successfully transfer hands to another owner.

2.    Boards Don’t Realize the Company is Saleable

I’m surprised to see how often an entire board will fail to realize that a company is approaching, or has even passed, a saleable stage of development. I think there are two reasons why boards miss this so often:

- Experienced directors are very difficult to recruit and retain today. Very few boards have even one member who has been closely involved with more than a few exits.

-  Many of ‘the rules’ about M&A exits have changed dramatically in the last ten years. Very few entrepreneurs, directors or investors appreciate how much this part of the economy has changed. Experiences from a decade ago can often lead to entirely wrong conclusions.

These factors often lead boards to develop strategies to:

-  delay starting the exit process,
-  accept additional financing because they believe the company needs to scale before exiting, or
-  accept licensing or partnership offers because they feel like a bird in the hand.

In a short while, I will be sharing some very valuable information about the Pacinian exit.  This was a good example of where directors and stakeholders had a variety of mutually exclusive opinions about the best strategy for the company.

3.    The Board was Waiting for an Unsolicited Offer

This is one of the exit failures I really hate to see. Surprisingly, boards believe the right exit strategy is simply to wait for an unsolicited offer.  This almost certainly ensures an exit valuation significantly below market. But worse, this strategy also dramatically reduces the probability that the exit will actually complete.

As I have said many times before, I think it’s almost always bad news for shareholders when a company receives an unsolicited offer. Yes, just receiving the offer is usually bad news.

4.    Riding it Over the Top

“Riding it over the top” is an increasingly common way to fail to exit. I don’t’ want to be too hard on the decision makers in these companies. This is a relatively new factor in our economy, And the importance of not riding it over the top has increased significantly in the last few years.  Here’s my guide on how to ensure you don’t ride it over the top.

This talk also describes why exit timing is so critical and why missing the optimum time to exit doesn’t just mean exiting later and probably for less money. It very often means not exiting at all.

How to Improve Your Probabilities of a Successful Exit

What can your company do to improve the probabilities of a successful exit?

There are quite a few elements to a complete answer, but I think the two most important are:

-    Education – Read all the good information you can find, and talk to as many knowledgeable people as you can get in front of. If you have the opportunity, attend some of the new workshops on exit strategies. (Here is a link to an excellent exits workshop coming soon.)

-    An exit strategy – I strongly believe every company should have an exit strategy. This one best practice alone will dramatically increase your probabilities of a successful exit.

Please post a comment below if you disagree with my 25% estimate of if you have suggestions on other ways entrepreneurs and boards can improve this percentage. Thanks.

{ 9 comments… read them below or add one }

Maureen Sharib February 27, 2013 at 6:16 am

I don’t disagree with it – in fact I think that 5 to 7% might be closer to the truth.

It takes a very mature individual (both buyer and seller) to conclude a successful sale.
In addition it takes advisors who (only) have their own clients’ interests at heart.

It’s an odds-against bet more times than not.

Maureen Sharib
Phone / AcquiSourcer
513 899 9628
513 646 7306

Reply

Basil Peters March 1, 2013 at 9:36 am

Maureen, you might be right. I’ve been doing this for many years, and I am still seeing new ways that saleable companies can fail to exit. One of my personal goals is to help investors and entrepreneurs improve their exit rates.

Reply

Ben Goldberg March 30, 2013 at 7:37 am

Basil,

I believe your estimate of 25% is supported by anecdotal, if not statistical, evidence that organized angel groups get virtually all their return from 20 to 30% of their investments. No exit – probably little or no return.

Reply

Basil Peters June 12, 2013 at 4:09 pm

Ben, that’s what get’s me so excited about this. Just imagine what the angel returns would be if we increased the percentage that successful exit to 50%.

Reply

From refurb on Hackernews May 13, 2013 at 3:01 pm

refurb:

Great presentation! It gets right to the point and offer advise you can use.

I think it’s a good read for any entrepreneur. Selling your company requires planning from the start, before you’ve even made your first dollar.

Reply

From LinkedIn May 13, 2013 at 3:04 pm

Pino L. Bacinello

That’s about right Basil!! could even be lower…

Reply

Basil Peters May 13, 2013 at 3:05 pm

Thanks for confirming, Pino.

I know your team of professionals are also working hard to improve the percentage for BC companies.

Reply

From LinkedIn May 13, 2013 at 3:38 pm

Jay Brennan

I would agree with your statement. The reason for the lack of successful exits is usually very simple: false expectations. Business shareholders and advisors have false expectations of the value, timing, and saleability of their company. Their expectations for M & A and business brokers are incorrect. Business buyers and their advisors expect perfection. As an advisor to business buyers, I teach and counsel realistic expectations.

Reply

Basil Peters May 13, 2013 at 3:40 pm

Excellent points, Jay. I can’t even imagine what our industry would be like if sellers all had realistic expectations.

Reply

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