(Note: This is an Executive Summary version of a six-post series, available here.)
If you are the CEO of a startup or scale-up company, it would be natural to aspire to lead your company to an initial public offering (IPO). However, at according to a study reported on TechCrunch of over 15,000 companies determined that companies were 16 times more likely to exit by acquisition than by IPO. Taking those odds into account and bearing in mind the old adage that success equals preparation meets opportunity, there are at least 5 things you can START doing now to prepare for and to maximize the eventual acquisition value of your business:
- S – Define your growth strategy
- T– Identify and form relationships with your targets
- A – Choose your advisor(s)
- R – Always be transaction-ready
- T – Consider the right timing
S – STRATEGY: A good starting point in developing a proactive approach to your exit planning is to define a clear and sustainable long-term growth strategy. In your business ecosystem, what market space do you operate in? In what ways can that market space be divided and conquered? What are your strengths and weaknesses in those respective segments of the market? What is the core segment that you have the requisite differentiation to be able to claim and defend against competitors? Once you dominate that segment, what are the next directions and steps that you can realistically expand into? And if you won’t be able to expand into them, can you set yourself up down the road as an attractive acquisition candidate for others who may have taken those spaces but where it would be a negative ROI to try to win share from you in your space?
Ultimately, there will be numerous companies operating in your ecosystem that may be competitors or offer substitutes for your product. On the other hand, many are heading in different directions than you are and could serve as valuable partners as you grow, and potential future acquirers.
T – TARGETS: Building off the market map you outlined with your growth strategy, you will want to form hypotheses for the kind of relationship to develop with the companies you have identified. To enter their space, will you build (compete), partner or buy? And which of those are potential acquirers? Very generally speaking, a larger company with greater market reach is more likely to be the acquirer – which means that to position yourself for possible acquisition down the road, you want to be selling into them.
If there are numerous companies in your extended market who could be potential acquirers, you can prioritize them using criteria such as strategic fit, acquisitiveness and ability to pay. As you refine your prioritized list, your goals at this early stage are to make contact, get to know one another, and ideally start to sell to them or sell together in some capacity. Your reaching out to them as CEO is generally most effective: Sales sells the product, the CEO sells the company.
A – ADVISORS: Even if you have sold a company before, and especially if you haven’t or you are running a larger company, there are individuals who have much more expertise with the M&A process than you do. At a minimum, you will want a lawyer who has extensive M&A experience to represent and assist you. In addition, you will want someone by your side to guide and assist with the sale and negotiation process. In the case of larger companies, that may be an investment banker; in other cases, a trusted Board Director or Advisor with prior M&A experience will be the better fit. Finally, in some cases, you may want an external accounting team to assist your CFO and Finance team, or a tax planner to assist with personal tax planning. Irrespective of who you choose as your expert advisors, you want to build a good relationship with them well ahead of the time when you will actually need them.
R – READY: The best way to maximize the outcome for your business is to have time on your side and to attract multiple, competing offers. And the best way to attract multiple offers is to run a great business that is ready to be acquired at any time.
When I reviewed businesses for acquisition, I would typically filter in stages that would include financials and metrics; strategic fit and opportunity; and finally operations and technology. Top acquirers see a ton of deal flow. What differentiates the sellers that get past the initial filters and on to the next stage of a management presentation are those that already have an existing productive partnership with your company (see Targets above) and/or those that are running a great business with compelling metrics for their industry and a strategic fit.
Keeping your house tidy is also very important. This includes making sure you have all of your legal and financial documentation in order and easily accessible. The key here is to not only run a tight ship, but also be perceived to be running a tight ship. Time is the enemy of all sales deals and having your materials ready will help move the process along quickly and seamlessly.
T – TIMING: There are a number of different factors that will influence the timing of when you might want to sell your business. Some are planned, or internally motivated, while others are triggered by external conditions. Regardless of whether or not you attract an incoming offer, there are ways to signal to prospective acquirers your willingness to explore strategic options without quite putting out a “for sale” sign on your front lawn. And however well you may plan for an eventual exit, expect that there may be exogenous events (think COVID-19, for example) that can impact and potentially accelerate your timing.
Planning for your company’s exit is a no-regrets move: either you pick up some great habits that enable you to better grow your business, or you end up in a situation where you get a great outcome by acquisition because you put yourself in the right place when the right time came along. Like all things in life, success is a matter of preparation meets opportunity. When it comes to an exit for your company, START now to get the most out of all the efforts you are putting in now to scale your business.
(You can find the extended version of this post starting here.)
(Subscribe to be notified of new posts.)
My name is Alexander Rink. Drawing upon over 20 years of experience growing early-stage companies, my team and I help CEOs and Boards of Directors of companies from $1M to $25M in revenues identify and resolve strategic and organizational challenges to accelerate their company’s growth in a capital efficient manner.