In this fifth and final presentation, Basil discusses some of the risks of delaying the exit. Many founders feel optimistic about their progress and reason that they can delay the exit and manage the company to grow and achieve a higher valuation before exiting.
This can be a dangerous strategy. It could result in a lower exit valuation or a failed exit altogether.
This Exit Strategies workshop was first presented at the Golden Triangle Angel Network in Waterloo, Ontario on May 8, 2015.
KEY POINTS FROM PART 5 – DON’T RIDE IT OVER THE TOP
A fully marketed exit takes between 6 and 18 months from the time the investment professionals are engaged until the money is in the bank. The time depends upon how well the company is prepared with a compelling value proposition and collateral, organized records, how extensive the search for candidate buyers is undertaken, and how well-managed the documentation and closing process. Even with perfect preparation and execution, the exit will consume many months.
The mistake that many entrepreneurs make is waiting until the company is at its peak before beginning the exit process. But trees don’t grow taller forever, and neither to most companies. The danger is that if you “ride the company over the top”, its growth rate slows and maybe even declines. Valuations decrease significantly when the growth rate slows. Then you may find yourself trying to sell the company as its value is shrinking. This will never lead to a happy result. Morale may deteriorate and indeed the company may die in the process.
Considering the time it takes to structure, prepare and execute an exit transaction, companies should start the exit about a year and a half before the anticipated peak, so that the peak value is achieved just as the company exits.
Another consideration in planning the exit are the financial and market conditions. If the financial markets are cold, valuations are down and buyers are not in the mood, so it is difficult or impossible to get any interest in acquiring your company.
But industry dynamics are also important. If a tech sector gets hot, larger strategic players and even financial buyers start to acquire companies in the sector. The markets move in herds, so that there may be a frenzy of acquisitions. Valuations are high. This is an ideal time to sell. Acquirers may find you on their own (the better mousetrap theory) but your chances of structuring an ideal exit will be enhanced if you hire an investment banker and be very pro-active in approaching potential acquirers. If you miss this wave of consolidation, you may not see another opportunity to exit in that sector, once the best companies have been acquired.
In the financial markets of the early 2020s, tech companies, especially agile fully-remote startups with no physical offices, can be founded, scaled and exited in as little as 2 – 3 years. In this accelerated timescale, companies may need to start on the exit transaction while they are still developing their technology and markets.