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.