An opportunity to exit may come at any time. It could take years of building products, launching new services, hiring and training staff, securing rounds of fundraising and thousands of conversations. It could also happen tomorrow, with an unsolicited proposal to acquire your company from a competitor, collaborator or client.
Regardless of when your exit event occurs, it’s important to exit gracefully, armed with the knowledge and resources to ensure you maximize your opportunity.
That’s why we’ve sat down with Wells Fargo wealth advisor Philip Cave and senior private banker Susan Jessup to discuss what entrepreneurs need to think about now in order to prepare for an exit, whenever that opportunity emerges.
Here’s their advice:
Plan early, think strategically
An exit doesn’t always happen according to an entrepreneur’s ideal timeline. Too often, entrepreneurs don’t get any choice in the timing of their exit, says Jessup. This is why it is critical to plan early, and think strategically about the exit process.
Particularly, business owners need to be thinking about what an exit means to them. Does it involve selling the company to a client or to a partner? To a private equity firm? To an unrelated third party? Does the exit take the form of a merger with another startup? Do you wish to take the company to an initial public offering (an IPO) and offer shares of stock in your company? Do you have a plan for if you need to, all of a sudden, shut the company down?
Those are the questions to think about as you first grow and organize your business, says Jessup. Based on how you and your founding team answer these questions, it may change how you’ll want to set up your company, both from a legal basis and a financial one. These choices have long-lasting implications, so choose wisely and be willing to ask for advice along the way.
“What an entrepreneur needs to understand is that they’re always exiting,” says Cave. Every decision that you make and every step along the way is a step toward exiting in some capacity.
“Most entrepreneurs don’t get this,” says Cave, “because they’re only focused on the product.” And yet this understanding is critical. Entrepreneurs would do well to ask themselves, even daily, what they can do to advance the potential for their company to have a successful exit based on their ideal exit strategy.
Many companies will receive unsolicited offers, says Jessup, which result in a founder or founding team needing to make a decision in a relatively short period of time. This is a daunting task if the entrepreneur has not considered an exit strategy or the potential impact on him or herself and team.
It’s not a bad thing to get an unsolicited offer, says Jessup. It won’t always work out and sometimes it will make absolutely no sense to exit. However, if you’ve already thought about exiting, you’re better positioned to take advantage of the opportunity.
Consider all outcomes: An IPO might not be the best one
We’ve seen about a dozen prominent technology companies complete initial public offerings (IPOs) in recent years, notably Facebook, Twitter and just recently, Snapchat.
An IPO is the process by which a company offers shares of ownership (stock) in the company to a marketplace of public investors. Financial institutions often serve as the intermediary agency for an IPO, and will underwrite the stock offering by agreeing to purchase a set number of shares of the new stock, which it will then resell through a stock exchange.
Because of the huge financial implications of taking a company public and the investment that a bank makes early on in the process, a significant amount of time is spent by the bank in evaluating a company and determining a reasonable price at which to initially offer the shares.
If an entrepreneur has an IPO in view, it’s critical to have good financial information and processes, Jessup says. A company must have a good team in place, especially with financial experience and knowledge. This team must possess deep knowledge of the business, products and competitors.
Also, an entrepreneur who wants to go public must understand that this is the ultimate process of giving up and yielding control of the company, says Jessup. If a company is to file an IPO, the founder must be willing to shift his or her mentality from “this is my company” to “this is a company in which I have a role.”
Accountability and reporting will need to change dramatically too, points out Cave. You’ll want to hire and train a staff prepared to go through the reporting and accountability processes needed once you become a publicly-traded company.
“It does work beautifully for some companies,” says Jessup. “We hear about the ones that are very successful. We also hear of others that come out of the gate great, but falter over time.”
If you truly want to build a company to the point of an IPO, make sure you’re investing time, energy and resources into building a company that will not falter on the public markets.
Get your numbers right, always
When you exit, you’d better have your numbers right. If not, you could be in for quite a shock.
If you’re considering an exit, you and your company must be a completely open book, says Cave. Your acquirer will want to see all of the financial information for the company, both current and historic.
“An exit is all about future cash flow,” says Cave. “They’re not buying just a product or set of products.”
There’s another reason to understand and know the numbers: you.
“From a personal point, you need to be thinking about you and your family, and what you will need from the transaction financially,” says Jessup. No matter what type of exit you experience, it is critical that you negotiate an exit package that makes sound financial sense for you personally.
One way to think about this is to determine your “replacement rate,” says Cave. This is an exercise to determine what is needed upon exit to cover the entrepreneur’s current standard of living, as well as pay off debts, outstanding invoices and settle any other outstanding financial transactions.
“I had a guy that was making $2 million annually, and sold his company for $20 million,” says Cave, “But this essentially resulted in reducing his $2 million life to $1 million based on the terms.”
The entrepreneur still did very well, however, he didn’t consider how the exit terms might impact his replacement rate.
“Don’t just plan for the business, plan for yourself”
It sounds selfish, doesn’t it—ensuring that you set up a financial plan so that you benefit from the successful exit?
It’s not. You’ve invested thousands of hours and probably thousands of dollars in your business. You’ve built a solid company, launched new products, changed the market landscape. If you’re considering an exit, it just makes sense to maximize your personal gain as a result of the exit, whatever form that may take.
In short, “don’t just plan for your business, plan for yourself,” says Jessup. Be prepared to understand how an exit of your company might impact and affect you and your family.
“The most important advice that we can give as a part of this conversation,” says Cave, “is do not—do not, do not, do not—sign any letter of intent until you’ve completed a planning process with a financial advisor.”
Once you sign a letter of intent, you are limited by the IRS on a lot of items. If you sign a letter of intent before considering all of the options available to you, you could end up losing access to a large amount of capital that could be deployed for other purposes.
The most common failure of entrepreneurs who exit is focusing too much on the present scenario and not on the future.
“We’ve seen millions of dollars left on the table,” says Cave, to articulate the issue.
Consider how will you give back
If planning to maximize your personal returns as you exit strikes you as a little bit selfish (remember: it’s not!), you may want to think about how you plan to give back to those who supported you in your venture: your team, advisors, partners, community, and importantly, your family.
There are a myriad of options available to entrepreneurs who are selling their companies, says Cave. Entrepreneurs can set up philanthropic foundations, for example, and secure a legacy by allocating a portion of the funds for charitable causes. Or, they can set up a trust for their children or other family members.
The best way to learn about the full range of opportunities is from a wealth advisor that you trust. That’s yet another reason why it’s so important to build relationships with bankers in advance—when there’s a lot of money on the line, you know they understand your interests and can advise you on the best mechanisms to achieve the outcome you want.
There are many ways to give back that go beyond finance, too. Entrepreneurs may decide to mentor new companies or other entrepreneurs. You may wish to teach courses on coding, business management or entrepreneurship. Those are important ways of maximizing your impact after exit too.
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As you finish reading this advice, take 15 minutes to imagine your future: What will your exit look like? What form will it take? What is the most likely scenario, and what scenarios would you accept? What will result from your exit? How would you want to give back to those that helped you along the way?
We wish you the best possible outcomes as you envision your future and plan your exit.
