Ever heard this advice: “Just run the business well, and the exit will take care of itself”? Nothing could be further from the truth. Many businesses sold based on this type of foolish thinking probably caused their technology entrepreneurs to leave billions of dollars on the table. Many entrepreneurs had worked for years building their companies, not realizing that more value is created at the exit than at any other time.
To maximize the selling price of your technology company, you need an exit strategy, an exit plan that you diligently execute and lots of advance preparation. The exit will not take care of itself, even if an unsolicited offer comes in. It is a fundamental business process like development or marketing.
There are two other chapters in the Exits series:
These chapters discuss how to maximize the probability that your company will actually sell, how to negotiate the best price, and when in the cycle of your business and industry is the best time to seek and exit. If you are asking, ‘how do I sell my business?’, start with preparation.
In this article and the attached presentation, we will focus on the detailed preparations you need to make to be ready for an exit.
There are several steps in preparing for an exit.
Build Alignment Around the Exit Strategy
The founders, executives, investors and other stakeholders must all agree on the exit strategy. If they don’t, the exit will surely crater, and worse, it may permanently impair the company and the relations among the stakeholders. You need to develop a written exit strategy which is signed by every stakeholder. The act of writing, discussing and signing a formal agreement forces any hidden disagreements on the exit to the surface where they can be addressed, and alignment built.
Documentation and Due Diligence
Once the terms of the acquisition have been negotiated, the prospective buyer will begin due diligence, which involves the detailed examination of every important document in the company. If the target company has all of its documentation in order, the due diligence will proceed more smoothly.
You might be able to sell your business in 6 months. On the other hand, disorganized and missing records stall the sale process and sale of your business, drive up the legal costs, and in the worst case, can kill the deal. It might take 18 months to sell your business.
The longer the exit takes, the worse it is for the business owner of the selling company. Many company developments are on hold while the exit takes place, which impairs the pricing of your business. What your business is worth vs. the sale price for can change based on an exit stretching into a long term deal.
Following the guidelines in the attached presentation, you can organize your documentation in advance to facilitate the potential buyer’s diligence and shorten the time frame of your exit.
Virtual Data Room
To begin, create a virtual data room. You can use Dropbox or any of the popular online data room applications. Create folders and sub-folders to store all the documents.
Although the organization of the data room is specific to your type of business, most of the required documents are common to all companies. Use Table 1 as a starting point:
Table 1: Organization of a Virtual Typical Data Room
- Corporate Records
1.1 Articles and Bylaws
1.2 Directors
1.3 Security holders
1.4 Stock Option Plan
1.5 Insurance
1.6 Shareholder Agreements
- Human Resources
2.1 Organization Chart
2.2 Employment Agreements
2.3 Stock Option Agreements
2.4 Severance Agreements
2.5 HR Manual and Policies
2.6 Benefits Plan
- Financial Information
3.1 Financial Statements
3.2 Tax Returns
3.3 Government Assistance
3.3 Financial Model
- Finance
4.1 Share Purchase Agreements
4.2 Loan Agreements
4.3 Term Sheets
4.4 Pitch Decks
- Material Physical Assets and Inventory
- Intellectual Property
6.1 Patents
6.2 Trademarks
6.3 Trade Secrets, know-how, show-how
- Material Contracts
7.1 Lease
7.2 Customer Contracts
7.3 Supply Agreements
7.3 Development Agreements
Then populate the folders with electronic versions of all the corporate documents.
This can be a massive amount of work. To make it simpler, in the presentation, we separate the mass of documentation into three categories:
- Category 1: Basic documentation you need to bring up to date once and may never need to review again (e.g. company articles, stock option plans, etc.)
- Category 2: Simple documentation you need to keep up to date on an on-going basis, but should not require an abundance of time (e.g. monthly financial statements)
- Category 3: Documentation which you prepare only once you start an exit transaction (e.g. Financial Model, exit collateral)
Start now to create the virtual data room and begin to populate it with the required documents. Once Category 1 is complete, then regular attention to the category 2 will keep the data room continuously updated, ready for an exit. The founders and acquirers will be very pleased that you did this. It will save time and simplify the exit.
Note: the email address is now: dave@exits.partners. All addresses ending in @exits.com no longer function.