5 Keys to a Successful Exit Strategy
Gallup CEO and Chairman Jim Clifton revealed that “for the first time in 35 years American business deaths now outnumber business births.” And it’s not just small and medium-sized businesses feeling the pinch. In 2015 the number of publicly traded U.S. companies filing for bankruptcy in a first quarter was reported to have reached a five-year high.
Having successfully navigated two startups from inception through successful exit, as well as having been involved in Private Equity-backed transactions, exits, and M&A, I’ve seen several characteristics that have led to both successful as well as unsuccessful exits. I remember clearly when I was in the early stages of my first startup, when my business was self-funded and relying on a fundamental basic business strategy to move forward…sell something to somebody and sell it at a profit if we wanted to keep the lights on.
To most of us, especially those of us involved with large and/or public organizations, operating at a profit appears to be a fairly straightforward business premise. However, counter that with the perspective of one of my first employees. She had come to us from a “dot com” VC-backed start-up. We listened to her as she talked frequently of her prior employers’ fantastic culture, really smart people, great pay, and weekly happy hours and employee birthday celebrations. This culture contrasted starkly with our more mundane day-to-day grind of staying on task to generate profitable sales in the tech sector during the dot.com implosion.
Why would someone work for our company, with tighter operating controls and measurements, when her prior employer provided such a cultural Utopia? When we asked her why she left such a wonderful company and culture, her response was commonplace at the time. “We ran out of money and everyone was let go.”
How fascinating that a company that essentially burned through one hundred percent of their investor money and terminated the employment of all of their employees without warning was so revered! We were merely a company that worked hard to make a monthly profit and provide long term employment and opportunity for personal and professional growth. Our strategy prioritized a path of generating profitable revenues that resulted in being selected one of the Top 100 Fastest Growing Companies in the Dallas-Ft.Worth area.
There were a number of reasons that led to the distinctly different outcomes for these two companies. Following are five keys that my company addressed that ultimately led to a successful exit six years after inception, all of which are excerpts from my forthcoming book, Failure Is Not an Exit Strategy.
1) It’s never too early to think about your exit plan Understand the odds of various exit scenarios and determine what may be most suitable to your industry, investor/ownership base, and intended timing. It’s important to spend time learning about your potential exit options regardless of when or how you are planning for an exit to occur. Exit plans can have significant influence over your company’s product development, technology deployment, staffing, pricing, and financing decisions. The exit plan for a start-up technology business is likely to be materially different than that of an established company, private equity backed firm, public companies, family business, etc. Incorporating what value the business brings to the marketplace, and over what timeframe that value can be maximized can be a key determinant of what exit, if any, is most appropriate.
2) 10% Vision, 90% Alignment Alignment of the company’s people, assets, marketing, operational and financial resources is critical to successful outcomes. Leadership needs to be responsible and held accountable for clearly and succinctly communicating the vision for the business. However, this vision should be easily understood among all departments and all levels within the organization, in a form that enables operational departments to use the vision to generate aligned actionable and measurable deliverables. Being clear about the direction, even if it involves adjusting along the journey, requires alignment and clear communication among all resources within the organization. Poor management and a lack of communication between departments often results in rapid growth of costs, a commensurate decrease in operational control, and a misunderstood action plan for the employees.
3) Performance Metrics that Matter Understanding the best metrics for managing the business is crucial when it comes time to exit. Net promoter scores, churn rate, and agreement duration may be essential measurement tools for technology companies. Assets under management may be more relevant for financially-centric firms, while EBITDA is going to be a key metric for traditional enterprises. Determine early on what metrics will drive your business value, and ensure they are communicated frequently throughout the organization.
As an example, one of the most valuable yet difficult-to-calculate metrics for startups and high-growth firms should be the customer acquisition cost, (“CAC”). Venture backed start-ups should be understanding the true cost of customer acquisition, and be able to clearly demonstrate to existing and potential investors how this cost is derived. How long does it take to acquire a customer? How many resources are engaged in both the pre- and post-acquisition sales process? How much ongoing support does a specific client require? The significant increase in subscription-type business makes the understanding and management of this metric critical to both business valuation as well as business continuity. For subscription-based businesses, traditional measures of business health don’t work, but the lifetime customer value/customer acquisition cost ratio does.
4) Let business purpose determine the exit and timing As suggested in the first key above, the exit and timing may be different for different businesses, as well as being specifically aligned to the company leadership. For start-ups, is the business being built with an IPO in mind, or is it intended to be an ongoing legacy to be transferred to family members or other insiders? Some firms are managed in line with quarterly financials, while others may be on a multi-year or even generational duration. Understanding what the business purpose is, and managing against that timeframe and expectation, will result in operational actions that align with the exit expectations.
When implementing an operational plan for my first startup for example, we made operating decisions based upon planning for 1) the need to provide our own internally-generated capital for growth and not having to rely upon capital markets, and 2) no planning would dictate that we would have to have a short-term exit plan, which would enable us to not have to sell during a period of weak market demand and thus we could run the business indefinitely. We operated on that conservative basis the first several years of the business, and it enabled us to navigate through the internet bubble and subsequent crash without relying upon outside investment capital. Many startups fail today because their entire business model is built on the assumption that they will obtain more capital tomorrow to fund the unprofitable business model they operate today.
5) Stakeholder alignment Who are the investors? Are your goals aligned with theirs? Are you an owner/operator, or do you have other investors? Even if it is “friends and family,”, is there a clearly laid out exit plan, either in its entirety or for the individual owners? From personal experience, I can assure you that the perception and interests of the stakeholders are vastly different on the first day than they will be in year three! Understanding and preparing for these differences early on can avoid significant disputes and potential litigation later in the business lifecycle. Private equity owners and public stockholders will likely have clearly defined parameters of goals and expectations. Understanding and ensuring there are ways to accommodate the needs of various stakeholders will facilitate strategic and exit plans later in the business lifecycle.
There is unfortunately no “silver bullet” that dictates an exact answer at the outset for some relatively unknown future exit plan. Markets, strategies, competitors and personnel often shift over the lifecycle of the business causing material changes to the original expectations. However, addressing as much of this with the stakeholders sooner rather than later can dramatically increase your odds of success.