I’m convinced that only about 25% of saleable businesses end up having successful exits.
Yes. I believe that about 75% of the time, when a company could have been successfully sold, the result was either a transaction at prices or terms below market – or even worse – no sale at all. Most of the time, it was preventable. The biggest reason this happens is simply due to a lack of knowledge.
The Frustrating Lack of Data on Exits
One of the most frustrating aspects of researching exits is the lack of data on transactions under $50 million, which represent about three quarters of all exits. I’ve spoken with most of the organizations who manage databases that include information on entrepreneurial companies, early stage investments and exits, and I am certain the data does not exist.
There are now a few groups who are just starting to accumulate some of this data but we’re at least a decade or two away from having a sample large enough to be useful in developing best practices on exits.
This lack of valid data means that while something may be true, and even fairly obvious, most of the time we just can’t prove it. For now, the best we can do is develop best practices based on anecdotal observations.
This article is about one of these truths. Based on my observations, and hundreds of conversations with entrepreneurs, investors and M&A professionals, I have no doubt that what I have written here is correct but I wish we had the hard data to prove it.
My Observations on Exits
Since the early ‘80s, all I have done is start, grow, finance and sell technology companies. I have invested in about a hundred companies, sold several dozen and had a front row seat to watch more than a hundred grow from their early stages to their eventual conclusion. I believe I’ve developed a pretty good understanding of which companies were saleable and when.
What I Mean By 25% and Successful
To be clear, when I say “25%” I am not including “unsuccessful” exits – for example, where the company has not succeeded and another entity acquires the assets for a low value or does an “acqui-hire.” What I am writing about here are ‘successful’ exits where the founders and investors end up with a smile on their faces.
And of course, I’m not saying this happens exactly 25% of the time. We just don’t have the data to be anywhere near that accurate. But I’m certain it’s less than half the time; and pretty sure it’s less than a third of the time.
The Exciting Opportunity
What gets me excited is imagining how much wealth we will create when we’ve increased this percentage to even 50%. This will double investor returns and create twice as many wealthy founders and entrepreneurs.
Increasing the rate of successful exits to half will also create a lot more economic activity. Investors will invest more capital, more entrepreneurs will create startups and more successful early stage companies will be scaled up by cash-rich corporations and private equity funds – all of which will create more economic growth and more good quality jobs.
Why Do Only 25% Exit Successfully?
Why do so few companies that could be sold actually exit successfully?
Like many parts of business, or life, there is no single, simple explanation. Each case includes a different combination of factors which combine to end up in either a successful exit or not. The following are some of the main reasons companies end up failing to successfully exit:
1. The Exit Team Failed to Execute
In a depressing number of cases, the board of a company will decide that they would like to exit but the team they assemble will fail to execute. I believe there are two primary reasons this happens:
(a) The company wasn’t actually saleable (at that time), or
(b) The team that was assembled didn’t have the skills and experience to successfully execute the exit.
I used to think that when a board decided to assemble a team and execute an exit, they were successful about half of the time. More recently, though, as I’ve observed more attempted exits and spoken to at least a hundred more M&A professionals, I have revised my estimate. I now believe attempted exits under $50 million only succeed about 25% of the time.
Recently, I spoke at the national AM&AA conference in Chicago. Another speaker there said that she thought the percentage of time companies successfully executed their exit was only 5 to 7%. Her statement was based on the often referenced study from the US Department of Commerce that reported only 20% of the businesses that are for sale will successfully transfer hands to another owner.
2. Boards Don’t Realize the Company is Saleable
I’m surprised to see how often an entire board will fail to realize that a company is approaching, or has even passed, the optimum time to exit. There are two reasons why boards miss this so often:
(a) Experienced directors are very difficult to recruit and retain today. Very few boards have even one member who has been closely involved with more than a few exits.
(b) Many of ‘the rules’ about M&A exits have changed dramatically in the last ten years. Very few entrepreneurs, directors or investors appreciate how much this part of the economy has changed. Experiences from a decade ago can often lead to entirely wrong conclusions.
These factors often lead boards to develop strategies to:
(a) delay starting the exit process,
(b) accept additional financing because they believe the company needs to scale before exiting, or
(c) accept licensing or partnership offers.
A valuable case study on one company that had all of these options is Pacinian. Their board had several mutually exclusive options resulting in them having a very difficult time agreeing on an exit strategy.
3. The Board was Waiting for an Unsolicited Offer
This is one of the exit failures I really hate to see. Surprisingly, some boards still believe the right exit strategy is simply to wait for an unsolicited offer. This almost certainly ensures an exit valuation significantly below market. But worse, this strategy also dramatically reduces the probability that the exit will actually complete.
As I have said many times, I think it’s almost always bad news for shareholders when a company receives an unsolicited offer. Yes, just receiving the offer is usually bad news.
4. Riding it Over the Top
“Riding it over the top” is an increasingly common way to fail to exit. This is a relatively new factor in our economy and the importance of not riding it over the top has increased significantly in the last few years. Here’s my guide on how to ensure you don’t ride it over the top.
This talk also describes why exit timing is so critical and why missing the optimum time to exit doesn’t just mean exiting later and probably for less money; it often means not exiting at all.
How to Improve Your Probabilities of a Successful Exit
What can your company do to improve the probabilities of a successful exit?
There are quite a few elements in a complete answer. The most important are:
– Education – Read all the good information you can find, and talk to as many knowledgeable people as you can get in front of. If you have the opportunity, attend some of the new workshops on exit strategies. (Here is a link to an excellent exits workshop coming soon.)
– The Right Exit Strategy – I strongly believe every company should have an exit strategy. This one best practice alone will dramatically increase your probabilities of a successful exit.
– The Best Exit Team – The quality of the exit team is a significant factor. Part 6 of this workshop has more on how the team can increase your probabilities of success.
Section 1 of this workshop provides more background on why only 25% of companies successfully exit and why you probably haven’t heard this before.
What Do You Think?
Please post a comment below if you disagree with my 25% estimate or if you have additional suggestions on ways entrepreneurs and boards can improve the percentage of successful exits. Thanks.