Whatever your business, product or service if you ever plan or are considering the possibility that one day you might exit your business by selling it, you need to develop an exit strategy as soon as possible.
An exit plan for business will help you to build and structure your business correctly, making it more likely to sell when it comes enabling you to successfully exit in the process.
I was recently invited to pitch my startup concept to a leading tech incubator based in London. Let me tell you, this was fish on bicycle territory for me. Pre-pitch and I tried on five different outfits (what do you wear at these super cool places?), practised some insouciance in front of the mirror, before heading off to ‘White Bear Yard’ in Clerkenwell. It could have been a humbling experience. Rather than my anticipated presentation to a coterie of key decision makers across a calm boardroom table, I found myself squeezed between a ferocious game of ping pong and a poorly organised scooter rack, trying to explain my ‘not quite cutting edge enough’ concept, to someone born during John Major’s reign. Worse, his contorted facial expressions indicated, that he found my concept to be as attractive as spending six months in an international space station with NASA’s most flatulent astronaut. “We’ll call you …. “ was his only contribution …
Related: How to sell your business
But actually, I loved it. If business is the new rock n roll, then White Bear Yard is our Sun Studio – walls quivering with the energy of ideas and the expectation of an acquisitive approach from Google. So my thoughts returned to what I know best – corporate deals – and how a lean startup can achieve a high-value exit.
“Today, the optimum financial strategy for most technology entrepreneurs is to raise money from angels and plan an early exit to a large company in just a few years for under $30 million” – Basil Peters, Early Exits.
Exit strategy planning for businesses
Here are the core tennats you need to think about in order to create an exit plan for your business, remeber its always better to prepared than not, especially when it comes to a business exit.
1. Why think about an exit now?
- Exit planning at the start; drives the best value at the end
- End game should be part of the investment pitch
- Entrepreneurs are creators; not managers
- M&A has become the new R&D
- De-risk, de-risk, de-risk
2. Why lean is good
- Much easier and cheaper to start and scale a company
- Rapid prototype and testing, multiple pivots, avoid big business model
- Lower risk, more return
- Shorter time to (fail or) exit = the new opportunity
3. Acquisition strategies
- For larger companies (UK and US) it’s about growth by acquisition
- Acquirers have cash and intent
- They don’t need all singing, all dancing model
- They often require little more than signs of validation and momentum
4. Why entrepreneurs should focus on exit
- Lean minimises the risk; exit gets rid of it completely
- Founders value diminishes over time
- Founders should be creating, not managing
- Reducing time to exit = reducing risk and enhancing IRR
- Minimise need for more investment rounds, dilution, longer-term strategies of VCs
- Start it, build it, sell it
5. What is an exit strategy?
- A vision, process and philosophy
- Anticipating and aligning startup with larger company strategy
- Picking the right conversations (“wrapping yourself around an acquirers axle”)
- Creating a great story + illuminating strategic value
- Strategy, Selection, Positioning, Pitch, Negotiation, Execution
6. Timing
- Always be ready for that knock on the door
- Get that business model proven and growth upward
- Create noise; generate press
- Get strong management team in place
- Align with a focus on who needs to buy
7. Doing a deal
- Companies are sold, not bought
- Optimum exits require an active sales process
- Time kills deals; Move decisively as deals quickly fragment
- Create milestones and deadlines in the sale process
- Trust and communication are crucial
- Get the house looking good (numbers, ownership issues, contracts, management)
- Goldilocks strategy for advisors (not too early, not too late)
8. Risk of not thinking about these issues
- Entrepreneurs often too focused on idea and growth; not on driving exit value
- Ongoing management decisions are pivotal; poor foundations will impact on value
- Don’t get greedy. You’re unlikely to be the next Facebook.
- Consider the ongoing risk and opportunity cost of not accepting that offer
- Stay friendly with the acquirer – even if unsuccessful this time, they may knock again
Are there any tax breaks I can use?
Quite possibly. The Enterprise Investment Scheme (EIS) if used properly, provides relief at 30 percent of the cost of the shares, to be set against the individual’s Income Tax liability for the tax year in which the investment was made. After that, if you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the appropriate period, any gain is free from Capital Gains Tax.
The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1st April 2013 from their patented inventions and certain other innovations. When you eventually exit your business you may also be eligible for entrepreneurs relief, making your company sale tax free up to £10 million.
Can I exploit my intellectual property?
Make sure if you have a patent, trademark, copyright (e.g., software) to transfer into your newco or have licensed some technology from a third party, that you have done so correctly and that all creators have duly signed appropriate transfers of their rights. Where you have third-party IP, do your due diligence on the third party, and if they are not the patent holder/inventor/creator, make sure that person is either an employee of the transferor or is a party to the licence or technology transfer agreement. At some stage, a potential investor or purchaser will do due diligence on your company, and they will look very closely at your intellectual property. That is not the time to find out you don’t own what you thought you owned.
Thanks to Venture Archetypes
This article is indebted to an excellent slideshow created by Venture Archetypes. They, in turn, were indebted to a chap called Basil Peters, author of Early Exits. Proof indeed that little in life is truly original (only one song from the Stones debut album was penned by Jagger/Richards). I’ll leave the pursuit of originality in the hands of those sexy startups at White Heat Yard.
Related: How to value your business