In part 1, I covered “exits 101” and how we ensure our exit interests are aligned with those of the founders we invest in. We help founders get their pre-exit affairs in order and benchmark long-term goals every year.
If you made it to part two, you are here to learn what happens when you are ready to exit your company. Here is my advice as a serial founder turned investor…
1. Timing is key
Timing is key: do not sell too fast. As an investor, we don’t want to sell a year after our investment for a multiple of two. We are looking for an ROI of minimum 10 times the amount we have invested. However, at the same time, you don’t want to sell too late. The ideal moment to sell is when you’re experiencing high growth and your valuation is close to its peak. As a founder running your company day and night, you should be able to feel when the timing is right, like a market-shifting event in your industry.
Sometimes external factors push you towards an exit. I still recall when the most likely buyer of my company bought my biggest competitor 🤔. Ouch…this forced me to adopt new strategies. Perhaps you find a new buyer or run into the fact you cannot raise any funding. Maybe a strategic buyer approaches you, meaning a player in the market wants to buy you. These circumstances will force you to make a decision fast.
2. Always “be exiting” towards an exit
The best exits happen when your company is approached by the other. When and if they think of buying someone, you want to be on the list. The easiest way to do this is to be the best player in the market (not only by having the best product but also by being a market leader). So spend wisely on marketing, but also a great UX. Not to mention, it helps if you have planted some flags in the territory of your potential buyer: win some big of their client names, attract some key staff or open your service in their region.
Apart from this, it is key to stay connected with relevant people in your buyer’s industry. Regardless of your company’s life cycle, growing your network can only increase your chances of finding an exit opportunity. You should get to know your competitors too. Of course, you don’t have to share your trade secrets, but you can learn a lot from them (as they most likely know the market as well as you do). For instance, the founders of United Wardrobe knew the Vinted founders personally. This connection helped us sell the company, without a doubt. When the time comes to sell, it is good to have established relationships with potential buyers, even competitors.
On the other hand, your investors can help in connecting with the investors of your potential buyer. In line with the motto, “always be raising, always be recruiting”: “always be exiting”.
If the topic of an acquisition arises, beware of getting exclusive with one party too fast. Even if you personally know this person, one potential buyer is not a buyer. In an ideal world, you will receive multiple offers to weigh against one another. As this doesn’t always happen, you want to make sure you don’t close any doors and keep as many open as possible. This is why it is even more important to hire a specialist when you have one party approaching you to make an offer.
3. Hire an investment banker (trust me, it’s worth it)
An investment banker will help you (and your shareholders) find the right price to sell your company on other terms. The only way you know this is when you have bids from different partners. With external help, you can set up a fast and efficient process within weeks while staying in talks with potential buyers. As this party prepares a bid, you can negotiate with multiple parties who have the same interests and avoid being pressed against a wall. After all, “one” term sheet is no term sheet 😉
Once you have decided on the right timing, we advise founders to hire an investment banker. They’re not cheap, but they’re worth it (and so is your company). They will cost you a fee between 2 and 5% of the exit value plus a retainer. Investment bankers will get a better offer out of the market and will put you on the right track. As a founder, you’ll not only be very involved in the exit process, but you will also have to continue growing your company. An investment banker can help take some weight off of your shoulders during this critical time.
Another reason to bring in an investment banker is to align the interest from founders and investors (as interests could differ in this phase). For example, a founder may want to stay with their company post-exit and convert their founder shares into new shares. When investors want to cash in, an investment banker can help to align financial interests.
4. Set an exit deadline, pick, and choose
As a team (the investment banker, the founders, and the investors), we create a long list of potentially interested parties. We split up this list and decide who contacts who. From our long list, all interested parties receive a one-pager with key characteristics of your company. If you’re contacting a competitor, you could always anonymize some of this information. Interested parties then sign an NDA and receive further information.
Always give a clear deadline for offers with the intention of evaluating several offers at the same time. While the valuation of the company is important, we also ask:
- Is the offer in cash or in stock (or a combination)?
- Is there a so called “earn-out” (meaning the company needs to hit certain targets to be paid out)?
- Does the acquiring party offer bonuses if the founders stay on for a certain period?
We need to discuss these topics because earn-outs and retention bonuses don’t always work out the way you would expect. When a company is acquired, we often see the growth rate slow down, while costs increase, as the company needs to be integrated with the acquirer. Founders also don’t want to linger in the new company, since it can be a completely different company than the startup they spent years building.
Once we pick an offer, we sign a letter of intent (LOI) with this party and inform the others that they’re out. This LOI includes the official offer and the terms we’ve agreed on. Once we’re in agreement, it’s time for due diligence.
5. Do your exit due diligence
Your buyer will want to know if the company is still in the prime shape you presented it to be in. They need full access to your books. Your buyer will examine your financials, contracts, and any skeletons you may have in your closet. Due diligence can last anywhere from two weeks (especially if your buyer is American) to two months. Be prepared for both extremes.
During this process, you need to get a few things right:
- Make sure you have all your data in order. The best way to scare off a buyer is by presenting them with a shoebox full of receipts by means of a financial administration.
- Use a platform like Virtual Vault to share data with your buyer. You can keep track of what documents are being read, by whom, etcetera.
- Keep a close eye on the process. You will want to check in with your buyer for any concerns after each section of due diligence is completed – like contracts, the books, etc.
You want to avoid a scenario where a buyer comes back after weeks of due diligence and sees so many issues that you have to renegotiate the entire sale. For example, we have seen private equity firms use this as a trick to renegotiate. They will initially offer a large sum to weed out the competition, but will severely lower their offer after due diligence (when you’ve already let go of the other interested parties).
If everyone is happy after due diligence, the acquisition is ready to be finalized (phew…almost there!). Thank you’s are now the priority. These are the people who carried you to your milestones and the people that will most likely now work for a new boss. When the money finally hits your bank account, it is finally time for champagne and, hopefully, some time off! Take a well-deserved break and when you’re ready, do it all over again with a new company (don’t forget to call Peak for funding 😉).
Looking for an investor or exit partner?
Get in touch with us! No warm intro needed 😉
For your convenience, I also attached the form below. You’re busy building a company – and we don’t want to keep you hanging. Using this form helps us to streamline our process and get back to you as quickly as possible. We look forward to knowing more about your big idea and the team making it a reality!