There’s no shortage of stories out there about how successful companies start up. But if you’re an entrepreneur, what you should really be paying attention to is how those companies—and their founders—end up.
An exit strategy is an essential part of any business plan. I’d even go so far as to say it’s a good idea to consider your eventual exit from day one—or, even better, in advance of launching your company. By holistically planning your organization’s future at the outset, you establish a clear framework for making and assessing decisions, thereby reducing your sense of uncertainty while improving your ability to lead and communicate your vision.
Think of it like looking at a blueprint before you start building a house. If you have no idea what you’re working toward, you’re not going to know how to get there, let alone what “there” is. Moreover, you’ll have a hard time convincing others to join or invest in your long-form, high-stakes improv exercise.
This is all fairly (if not exceedingly) obvious. So why do 48% of business owners lack formalized exit strategies? Likely because many of us learn from experience, and very few of us have experience in exits. Outside of serial entrepreneurs, most founders cash in once and only once.
That’s where tempCFO comes in. As seasoned financial executives, the members of our team have rare, firsthand familiarity with exits (Hipmunk, RocketGames, and World Golf Tour come to mind). To help you effectively plan ahead, I’d like to share a few key lessons we’ve learned, and offer some guidance about when and how to exit.
Exit Planning: 5 Overall Considerations and Tips
1. Check your expectations and assumptions early and often. Business owners can often believe their companies are worth more than they actually are. Set your expectations correctly and get objective valuations and projections at various points throughout your business’s lifecycle. The fastest way to undermine a conversation with an investor or buyer is to put forward an unrealistic valuation not supported by data.
2. Never lose sight of what makes your business special. Your talented employees, your intellectual property, your customer relationships—whatever comprises your business’s “secret sauce,” hold onto it and develop it. Every business has a different value driver: some are sold on the backs of their skilled workforces, while others go public and remain profitable on the strength of their brands. Sometimes—in fire sales, for instance—a company’s worth comes down to its technology, equipment, or even real estate.
3. Potential partners are closer than you think. The people back your company now have the potential to become the most valuable players during your exit. In fact, your current customers or investors might end up buying the company from you. The same holds true for your executive team, business partners, advisors, and board members. At the very least, these parties understand your mission, support your product, and know how to sell what you’ve built. One advantage of thinking of your investor relationships in particular as long-term exit vehicles is that you can set yourself up for success early: you can retain control over your company now while providing ownership interest to a potential downstream acquirer. The bigger a potential acquirer, and the earlier they invest, the better.
4. Time is the enemy once the exit process begins. Whether leaving a company to retire or launch their next venture, an owner needs to commit to the exit process as soon as it begins. As soon as you say, “it’s time for me to go,” the clock starts ticking and cash starts burning. Resources get diverted from sales, marketing, product development, and customer relationship management. Owners should also look out for the effects of the process on employee morale. If an owner wavers or wastes too much time, the exit can become a downward spiral. During acquisitions, for instance, we’ve seen sellers run out of money in three months—just half or a quarter of the time the transaction usually takes.
5. Work with financial services providers who are familiar with your marketplace. Clients who use tempCFO frequently tell us they’ve chosen to work with us because of our experience taking similar organizations through to exit. A financial partner who understands your industry has familiarity not only with your business model and valuation, but also your potential acquisition base. Additionally, to the extent that your business faces industry-specific regulations, an experienced partner has the skill set and knowledge base to meet your compliance requirements quickly, thoroughly, and cost effectively.
Exiting via M&A
What is M&A?
Mergers and acquisitions (M&A) are transactions in which a business’s owner or owners transfer partial or complete control of their organization in exchange for cash, stock, or a combination of both. A company may sell off its equity or assets—e.g. to an outside party, a group of purchasers, or the company’s existing employees—or combine with one or more similar companies. In some cases, a buyer or seller forms a shell company for the exclusive purpose of the transaction. Suffice it to say, M&A takes many different forms, and deal structures vary.
M&A activity has surged recently thanks to the strong U.S. economy. The 2018 tax reform also had major implications for transactions: the lower corporate capital gains tax rate—now 21%, down from 35%—has increased buyers’ inclination and ability to engage in asset purchases. In other words, companies not only have more money to fund transactions but can further reduce their tax burdens after closing. And more potential competition between buyers is good news for sellers as well. There’s a reason so many financial professionals are advising their clients to sell now, if possible.
You might want to consider M&A if…
- your business isn’t huge and isn’t likely to ever be,
- you’ll be ready to retire after running your business,
- you have a small pool of investors,
- you already have—or are confident you’ll have—a buyer lined up,
- your industry will be on the cusp of change by the time you exit.
We can help…
- Minimize your tax burden: Many of the same tax opportunities available to buyers can benefit sellers, too. Our experts will help identify your opportunities and proactively address tax and financial issues that may hurt your business’ value in the eyes of a buyer.
- Lengthen the runway: When you’re burning through cash to make deals happen, we can keep your business afloat through loans, fundraising, and other financing activities.
- Organize your financials and respond to due diligence requests: Even in an explosive M&A market, buyers are always looking for reasons to say “no” or negotiate for lower prices. We can help address any issues upfront, get your key financial documents in order, and develop detailed projections—so you can avoid losses and build trust with your buyer.
Know Your Options: Alternative Exit Strategies
Although a majority of founders exit via M&A, you do have other options. Some especially ambitious business owners enter the big leagues by undergoing initial public offerings (IPOs). By conducting an IPO, you give millions of investors the opportunity to buy shares in your company on the stock market. IPOs are filed with the Securities and Exchange Commission and underwritten by investment bankers. A founder may stay with their company post-IPO (think of Mark Zuckerberg or Elon Musk), either because they want to or are perceived to be essential to their brand’s image. Other founders move on but continue as entrepreneurs, investing the capital they’ve earned in other ventures.
An IPO could be the ideal option for a company poised to become a household name, as going public has the potential to generate massive returns. Keep in mind, however, that but also an extraordinary risk: even with a seemingly perfect plan, detailed projections, and a highly skilled team in place, an IPO can flop—and sink a company overnight.
Another emerging alternative is an initial coin offering (ICO). An ICO is a young alternative to an IPO: rather than selling shares in your business through stocks, you fundraise by selling cryptocurrency in the form of branded “coins” or “tokens” to investors. Investors can hold onto your coin in the hope that it will gain value over time, or exchange their holdings for cash or a more general-use cryptocurrency (such as Bitcoin or Ethereum). And did I mention how popular ICOs are becoming?
One benefit of issuing your own coin is that your customers can use it for exclusive products, services, or discounts. Music-streaming startup Moozicore, for example, will soon release an app that allows users to play songs at gyms, restaurants, or clubs, jukebox-style—by paying a small fee directly from their phones. To fund the app, the company issued MooziCoins, which listeners can use in lieu of money within the platform. (Our parent company, inDinero, helped Moozicore structure their ICO—read the full story here.)
At tempCFO, we have the experience and capabilities to keep your financials exit-ready. Wherever you are in your entrepreneurial journey, and whatever your plan looks like, consider us your financial partner from seed to exit. Drop us a line to learn how we can help.