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You’ve reached the last chapter of this handbook. This is the place we talk about the rewards of all your hard work. You’ve created your business plan, successfully attracted the appropriate investors at each stage of growth, and managed cash more tightly than Scrooge. You can deliver your Elevator and Business Plan pitch in your sleep. You’ve built strong relationships with your board of directors and with business leaders in your community. You have solid contracts with customers who are more than satisfied with your products. You feel like you could teach a class on market development and risk management. You’ve learned how to hire, motivate, and reward talented people. Your business is better than profitable, it is cash flow positive. You are paying yourself a decent salary–maybe for the first time since you became an entrepreneur. You’ve done what you told your investors you would do. You’ve reached the Growth Stage of the Entrepreneurial Path. What’s next?
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Your EXiT STraTEGY
What were your expectations when you set out to build a company? Did you plan to run it for the next 20 or 30 years? Or did you expect to go off and do something else? From the moment you set your entrepreneurial toes on the starting line, answering these questions need to be part of your strategy. Once you know what you want for yourself, that will define what you want for your company. You may or may not be able to achieve your desire, but you will be able to communicate it honestly and openly to your employees and potential investors and work together to build a strategy to achieve it.
FACTOID
Mergerstat database shows the median price of private company acquisitions is under $25 million when the price is disclosed.
If your personal objective in building your company doesn’t match your investors’ or your key employees, then you will either have to change your goal or establish different relationships.
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If this turns out to be the case, the sooner you and they recognize this, the better. There is no margin in a successful entrepreneurial company for misaligned goals. So as the entrepreneur-founder of a company that successfully reaches the Growth Stage, what are the possible choices that may be available to you? • Continue as owner and CEO • Sell your company to a larger company and stay involved in some capacity • Recapitalize the business and partially or fully cash out • Get invited out Your board of directors, your investors, and likely your spouse or significant other will all have input to your decision. You may be about to discover what many entrepreneurs already know. Building a business can be more fun than selling it. Considering Exit Scenarios
When your company reaches the Growth Stage, you take a breath and enjoy the success for a little while, but eventually you are going to need more capital. To capture more market share, companies in the Growth Stage invest in product development to create new lines or in business development to reach new markets. Maybe you even have a requirement to invest in bricks and mortar to expand manufacturing.
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What are your options for raising that money, and how do they match up with your personal goals? To continue on as owner and CEO, you will need the support of your board to: • Raise more private equity capital – possible, though not likely as the investors you have are probably more than ready to get their money out or • IPO – even less likely. Between 2007 and 2010, there were fewer than 120 total IPOs in the U.S. • To sell your company to a larger company, you will need: A funded acquisition strategy agreed upon by your board of directors and supported by key employees and all investors and A buyer • To cash out, you will need one of these: An acquistion An IPO An investor who wants to purchase your shares • To get invited out, one or more of these will probably accomplish your goal:
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Fail to grow with the company Fail to make the transition from entrepreneur to CEO Mislead your investors and employees about your true goals Create an adversarial relationship with your board Ignore your investors’ desires regarding timing and ROI Make some other really big mistake
Big IPOs are rare. Big merger and acquisition transactions are infrequent. This is a good era for entrepreneurs because it costs less than ever to start a technology company. Product development in fields like software can be faster than ever before. Big companies have cash reserves and would rather buy than build innovation.
Acquisition deserves serious consideration
In case you haven’t noticed, we don’t spend much time in this handbook talking about IPOs. That’s because they aren’t an option for most entrepreneurs. These days, only the very best companies, and very few of those, have a shot at an IPO. An acquisition on the other hand, is a very good option. Odds are, your investors will point you in this direction. Listen to them. They understand the entrepreneurial path much better than you. Acquisition has been a predictable part of the strategy in life sciences for a very long time. Now it’s becoming the norm in other high growth industries as well with big names like
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Microsoft, Google, Apple, and IBM acquiring small companies with interesting technologies, applications, or market traction. You don’t hear a lot about these deals, but they are happening. Every day. Big companies spend $10 to $30 million on companies with plans to grow them into business units of $100 million or more. Big companies know that they aren’t good at innovation. They know that small companies are.
Read these to become more knowledgeable about exits and to gain an understanding of angel and VC perspectives. Early Exits, by Basil Peters Berkonomics and Extending the Runway by Dave Berkus Strategic Entrepreneurism by Jon Fisher Invest to Exit; The Ultimate Deal 2; Ultimate Exits; and Ultimate Exits Workbook by Dr. Tom McKaskill
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The trend toward acquisition creates an opportunity for entrepreneurs to make an outstanding return in a relatively brief timeframe. Remember our earlier example, $10 million in 4 percent tax free bonds generates $300,000 per year. Identify strategic buyers; express your firm’s value add
The secret to a successful acquisition is to find a strategic buyer. As you are growing your company, consider partners, key suppliers, and even competitors. Create a “shopping” list of what you would want in a buyer for your firm. Create another list of the value your company could deliver to such a buyer. Engage your investors and board. Work with them to build appropriate momentum. Use the same approach thinking about potential buyers as you did when you were first analyzing the markets for your company. Use the same tools you used in your valuation process to hunt out industry comparables. Think of ways to make your company the first choice of a bigger player in your industry. Cultivate and showcase customers that are attractive to them. Think about your business as a product. What is the best way to package it? Build your products so that they integrate with potential buyers’ solutions. Hire people your potential buyer would want to hire. Understand how your company solves customer problems that an acquirer would want to solve.
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Exiting the Exit
Most of the successful entrepreneurs we know start multiple companies. Some of these are more successful than others. Just remember that once you’ve navigated a successful exit and have all your learned experience and that $3 to $10 million in the bank, you are in the ideal place to hatch your next big idea. Conclusion
An entrepreneur has to think with two minds. On one hand, your goal is to found a company that can gain traction and grow. On the other hand, you have to think about the appropriate exit for your investors and yourself. There is no one right answer; the most important thing is to be honest and realistic about your objectives. Your job is to keep your company, investor, board, and personal objectives aligned. That can be a real balancing act, even for the most experienced entrepreneur.
Key Points
Develop exit scenarios early in the company’s life. Be honest and open with your investors and board. Your company will only be successful if your interests are aligned. This may mean that you leave and/or sell the company before you are ready.