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  • Writer's picturePhil Kearney

For a Successful Exit for Everyone, Understand Everyone’s Definition of Success

As a founder and/or CEO, it’s critical that you understand each key player’s exit goals to put everyone on a shared path to the finish line.

When you think of a successful exit for your business, what do you picture? How would your business partners – from your co-founder to board members – answer that same question? Chances are, each of you would imagine something different. Understanding this difference is critical to making a successful sale.

If you’re a founder or CEO, your first job in an exit is to ensure all key stakeholders are aligned toward stewarding the company together toward a successful next phase. But to create that allegiance, you need to start by understanding how each party’s very different roles and responsibilities can translate into a competing vision of the path the exit should take. By understanding where missions, goals — as well as emotions  —  diverge, you’ll be far better positioned to make sure everyone is in sync to build a shared, successful exit for everyone. 

To help you start planning a smoother exit now, I’ll outline below how the different members of your “exit team” each view a successful strategic event. Then, I’ll offer four critical steps you need to take to ensure to keep everyone in lock-step toward a shared best outcome. 

The Three (Plus) Members of Your Exit Team

When it comes to exits, there are at least three key parties in the mix throughout. And while they’re all interested in making the exit a success, each one comes at that success with a different goal in mind. 

  • CEOs and Founders: Let’s start with your own role – and your own ambitions. You’ve dedicated years of grueling work at a “venture” salary, driven by a dream of an upside tied to your company’s exit valuation. You rely on that upside to support an exciting next phase – a phase which likely includes much more philanthropic giving, a new level of comfort for your family, and possibly powerful credentials to get faster funding on your next venture. From this perspective, your goal for your exit is simple: Get the deal done at the highest valuation. To bring about the best possible outcome for yourself as well as your employees, co-founders, acquirers and the board, you’ll need to balance your personal aims for the exit with the needs of the many others who are along for the ride with you.

  • Acquirers: To understand the role of acquirers, it’s helpful to start by recognizing that whoever acquires your company does so as part of their broader mission. Whether that acquirer is a strategic or a Private Equity firm, they need their acquisitions to support overarching enterprise or fund goals, show a strong return on investment, and pursue every move with complete fiscal responsibility. To be sure, they’ll often set an optimistic tone at your first conversation with a “blue sky” number of what your company might be worth. However, they simply wouldn’t be fulfilling their duties if they don’t take you through extensive due diligence. Often, this diligence leads to painful (to you) “clawbacks” where every new detail can drive your price down, and their extensive knowledge about your business gives them leverage in negotiations. Equally frustrating to many founders, earn-outs are typically set up based on performance over a set period (often three years), with the minority of the payout in cash and the majority in equity in the acquiring company. As standard practice, this equity can only be cashed out when the acquiring company has its own strategic event. As with the clawbacks, these terms can be very rough for founders to swallow. But for the acquirer, it’s all a part of cushioning the enormous risk of acquiring a company.

  • Board: Every board member has invested directly in the business and is waiting for the exit to see upside. In this sense, a board member’s view on the exit is very similar to yours. One nuance comes in the time factor around when a given member joined the board. All things being equal, early members tend to feel ready to put the company up for sale. Late members may prefer to wait longer for a sale, so the valuation can continue to rise and their investment will have proved more worthwhile.

Four Steps to a Better-Aligned Exit

With this clearer understanding of your “exit team” in mind, you can do far better work of aligning and managing them. Start by focusing on each of the four steps below.

  • Stay realistic about valuation. Many times, I’ve seen founders turn down objectively excellent terms and walk away from a deal. The founder is so focused on their goal of a big exit, they’re not ready to consider the possibility that they may have overestimated their true valuation. Meanwhile, walking away may be seen as a red flag about the founders judgment amongst PE’s and strategics – pushing future offer prices down as a result. To avoid falling into this trap, it’s crucial that you consider that your own expectations might be unrealistically high – and that it’s your acquirer's fiduciary duty to bring too-high valuations down to earth. If you’ve ever sold a house, you’re likely familiar with dynamics like these already. For many perfectly good reasons you may go in with a particular number in mind — but at the end of the day, it’s the market, not you, that determines what your house is worth and what buyers are willing to pay. As with house-selling, you need to keep an open mind to the objective and rigorous diligence coming from the other side of the table.

  • Don’t quit your day job. Much like looking for a job can be a full-time job, preparing for an exit can become a business of its own. Often founders get distracted by their goal of making a sale, and neglect the core business along the way. Over the many months of due diligence, that neglect can turn into multiple quarters of poor returns – forcing the acquirer to re-evaluate, and then devalue, the company. For the highest valuation possible–and to make sure you’re protected if your deals fall through – never lose focus on keeping your business strong.

  • Prep your relationships. In any endeavor as stressful as the exit process, tensions are bound to rise amongst you and your partners. Two points of potential conflict in particular are worth preparing for ahead. The first potential flashpoint is with your co-founders. Especially as acquirer clawbacks keep shrinking the perceived “pie”, tension over money – and who gets how much equity or cash –  are all but inevitable. The second potential flashpoint is with the board.  You and your longer-term members may be ready for a sale, but – for the reasons described above – your newer members may not feel that their fresh investment justifies a sale that, to them, feels too soon.  It’s important to start communicating about these issues before they happen, and to forge agreement about foundational issues before you enter any process. Establish open conversations, talk through the “what ifs,” and set up an acceptable valuation range guidance with your co-founders and board as needed. Meanwhile, be sure to construct your board with members who are aligned with your approach and perspective  — or at least be open to your point of view — so you can work with confidence as you talk to prospective buyers about opportunities to exit. 

  • Do your own “pre-diligence”. You may have noticed that many of the points above are emotionally driven, or at least fraught with emotion. You and your teammates each anticipated their own particular version of how the exit should and will play out, and issues arise and tensions rise when expectations conflict and anticipation runs up against reality. The best way to avoid the tension is to get a clear-eyed assessment of your business up front. Set up an honest external audit of what the business is really worth, what the flaws are, and where the risks lie. Focus on finances, operations, tech, sales, and marketing – the key areas that your acquirer will likely examine. Having an audit in place will benefit you in your exit process in two ways. First, it will help everyone better understand what they can reasonably expect, eliminating surprises and providing the facts that can set the foundation for compromise and consensus across stakeholders. Second, an audit gives you crucial next steps towards the best possible event outcome. Based on your audit results, conduct a prioritized “clean up.” Returning to the house-selling analogy: You wouldn’t simply stick a “For Sale” sign on your front yard and hope for the best – you’ll fix it up (perhaps extensively) before putting it on the market. Treat your business the same way. Decide which problems you inevitably uncover are worth addressing, and which aren’t, and “fix” your business accordingly before you engage potential acquirers. Conducting this process will allow you to go into your deal with a clear understanding of what you’re really worth, fewer surprises during the diligence process – and far fewer resulting conflicts all around.

By putting these four steps into play, you’ll set yourself on a firm path toward a more successful exit for everyone. Keep in mind that this is a long process, so start at least six months ahead of when you plan to reach out to acquirers. 

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