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Why Every Company Should Have an Exit Strategy
This is the first in a series of articles on how to design and execute an optimum exit for your company. Future installments will discuss: how exit strategy drives financing strategy, corporate DNA, who the buyers are, secondary sales, building an exit plan, the exit timeline and ways to maximize your exit value.
This article was written for the Acetech newsletter: CEO Snapshots.
Every company needs an exit strategy. Ideally, the exit strategy should be signed off by the founders before the first dollar of investment goes into the company. This is especially true today when early exits are such an attractive option for many technology companies.
These days, tech companies are often sold only two or three years after they’re founded. Flickr was a year and half old when it sold for $30 million. Club Penguin sold for $350 million when it was just two years old. YouTube sold for $1.6 billion when it was two years old.
Of course, in many cases it will take longer than two or three years to optimally exit. But this doesn’t reduce the need for an exit strategy and continuous work on the exit plan – right up until the day the company is sold.
It’s just another business process – the most lucrative one
Selling a company is just another business process. Designing and executing the exit well can easily make half again as much money as all the hard work that goes into every other business activity – so it is often the most lucrative of all business processes.
Every manager knows that large business goals need a strategy, plan and regular monitoring. The exit is no exception.
The entire purpose of the company
Looking at it in the simplest terms, or as an investor would, the company is simply a black box with the inputs being entrepreneurs’ effort and investors’ cash and the only output being the purchase price paid by the ultimate buyer.
Everything else that happens inside the black box is simply a component contributing to the single output – the successful exit. While this is no doubt an enormous simplification, it is clearly the most purpose of most companies with external investors.
Build It and They Will Come – Not
The classic joke for managers involved in product development is ‘build it and they will come’. In the 80s, there were several well-known management gurus who wrote books and made good livings on the lecture circuit advising entrepreneurs and managers to listen to their customers before starting to build new products or services. Today, almost everyone agrees that a strategy of ‘building it and they will come’ is laughably ill-advised.
Even so, many entrepreneurs still go happily along building companies hoping that one-day a ‘buyer will come’. It’s an equally bad idea. To succeed in any business process you have to start at the end – clearly articulate the desired outcome and then plan the intermediate steps needed to achieve the goal.
For most technology companies with external investors, the ultimate objective is to sell the company. To achieve that goal, the exit strategy should become part of the corporate DNA. The exit strategy should be clearly articulated, signed off and reviewed regularly. With a good exit strategy, and reasonable attention to the process, your company will exit earlier and for a better price.
The First Step – Your Exit Strategy Rev 1.0
An effective exit strategy can be pretty simple. Here’s a real life example from a company that I can talk about – Parasun Technologies which was in New Westminster. At the company’s second strategic planning retreat in September 2005, the board and management agreed that “Our Core Purpose” was to sell the company for more than $10 million by late 2006 or early 2007.
That’s all you really need: a target date and a price. Exit strategies can be more complicated, and might include statements on maximizing strategic value, target customers and even sales tactics. But the two essential elements are when and how much.
Parasun’s simple exit strategy worked perfectly. In February of 2007 the company agreed to be sold for $14.8 million. The transaction closed in May. The story of how the price grew from $10 to $14.8 million is the topic of a future article in this series.
