The decision to steer your company to an exit is a big one. While many of the activities that support an exit are healthy for the business anyway, the mentality shift into a state where an exit is a realistic possibility can be a significant one.
Even with that mental shift, an incredibly high degree of uncertainty remains. While founders usually have an idea of what a good exit would look like, it's often unclear whether the business will be able to fetch that number. Only actively running a process will reveal what's possible.
It can also be daunting to try to figure out what comes next. Running an acquisition process is highly intricate and specific to your company, but here are a few things that should be on your mental map as you proceed.
Ensure you have enough breathing room to run a good process
If you have less than 9 months runway and you have active strategic interest, it's time to start a process, like now. Generally it takes about 6 months to execute a process, and you need 3 months of buffer before you run out of money.
If you have less than 9 months of runway but not as much strategic interest, think about ways to give yourself some additional time. That could mean cutting burn, raising a bridge or some other methods. If you can’t do that, you can still run a process but it's going to be tough. Moderate your expectations accordingly.
Start building partnership momentum
If you have more than 9 months of runway, you have a bit more wiggle room to decide how you want to approach the process. Your next steps still likely involve building a target list and developing relationships, but additional runway grants you the latitude to approach strategics under the pretense of a partnership before starting a process. That will allow you to develop champions in different parts of the business and increase the chances of getting over the finish line.
Your goal should be to get as many of those strategics to have opened the door to M&A conversations before you officially begin your process. But that doesn't just happen – usually a significant amount of momentum-building is necessary prior to that point.
Build alignment with your cofounders and investors
It's easy to enter M&A conversations with lofty expectations about the value of your company, and it's true that some companies can deliver returns disproportionate to a company's progress. Generally, the more removed from the acquisition process a team member is, the more unrealistic their expectations can be.
In addition, exit planning can highlight differences in incentives between founders and investors. Before diving deep into the exit strategy sit down with your cofounders and build a matrix that looks like this (I recommend each cofounder filling out the matrix separately and comparing results):
| Unacceptable | Acceptable but not great | Great outcome | |
|---|---|---|---|
| Total deal value | under $xx | $xx-$xx | over $xx |
| Portion of deal value held as contingent | over xx% | xx%-xx% | under xx% |
| Lockup period | over xx | xx-xx | under xx |
While it's difficult to have conversations about value in absence of a real offer, and answers may also change depending on who the counterparty is. The goal here is to highlight and reconcile any major differences in expectation the founders might have before entering the process – the last thing that CEOs need when negotiating a sale is internal conflict.
Once the founders are aligned, bring the matrix to your board for feedback. However, exercise discretion when it comes to broader communication – it's likely too early to loop in other members of the team. Avoid fueling unnecessary rumors or anxieties within the larger team until the exit path becomes clearer.
Consider getting help
While your entrepreneurial journey equipped you with a plethora of skills, the intricacies of an exit might be uncharted territory. An advisor in some form can help you ensure against common mistakes, communicate correctly and ensure the process moves at a rapid enough clip. Their expertise can be the difference between a good exit and a great one.
If you expect your company to be able to garner over $100m, investment bankers are the traditional advisor choice. While bankers are expensive (2-4% of the deal value), For smaller transactions, consultants and coaches can help guide your deal strategy and ensure progress. And you can also likely lean on investors and existing advisors that have experience in the space.
As a startup founder, the potential exit of your company isn't merely a business transaction; it's deeply personal. It's the culmination of sleepless nights, relentless work, and unyielding passion. With strategic planning and the right support system, you can ensure a slow crescendo to a grand finale.
