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The Exit Coach

by Basil Peters on September 3, 2011 · 1 comment

“Exit Coach” is still a relatively new term. Today, many businesses are being successfully sold just two or three years from 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, or Chairman, on exit strategy, planning and exit team selection. The engagement may end when the M&A Advisor is hired and the exit execution begins. In some situations, the company may decide to complete the entire exit themselves with help from an exit coach.

The primary role of an exit coach is to assist 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 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 $4,000 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.

{ 1 comment… read it below or add one }

Daniel A. Guglielmo May 6, 2012 at 5:03 am

Basil, this is an excellent article that rings true to my experience with entrepreneur, which is often in the role as a coach. There is only one important adjustment I would make to the your article, at least from my experience and approach. Exits are high stakes engagements and usually with owners who have little to no experience with exiting a business. It is both intellectually challenging as well as emotionally charged. As a result, the arch of the engagement is one level higher than you suggest. It appropriately should include all of the owners’ issues and concerns as well as those of the CEO. As a result, the Exit Coaching role might be better thought of as an owners-managers’ coach. This small nuance can have very powerful results, as it opens the conversation to motivations which transcend and can drive the exit planning. Here’s how I describe my role: http://www.trustdesign.com/pdf/Exit_Planning_Coach_v1.pdf, which I may edit to include some of your excellent comments – I especially like the “everything moves faster” comments. Thank you.

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