As experts in selling companies for successful entrepreneurs, we’re frequently asked when is the best or right time to think about an exit. We are often asked to attend board meetings and strategy sessions to help ensure exit timing is on the agenda and entrepreneurs are considering the relevant factors, such as:
Within the company itself: for example, if you’re facing a major decision – whether to enter a new market, or reposition a product – it may be time to explore an exit before deciding definitively which way to go. Doing so keeps the strategic options open – both for you and your potential acquirers. As you commit yourself to a specific direction, you potentially narrow the universe of acquirers which might be interested. Of course, in order for these strategic options to be credible and for an acquirer to buy in to them, the company has to have sufficient scale to be a meaningful platform for such expansion. And it can be taken too far; at some point, a multiplicity of options simply looks like strategic incoherence.
In its financial performance: often a proxy for scale. Certain revenue and profit levels act as psychological levels, below which acquirers are less enthusiastic. It’s a commonplace that a £5m deal and a £50m deal require the same amount of work; for many acquirers, the opportunity cost of a sub-scale acquisition is too high. Make sure you’re above certain key levels – for startups, revenue-generating, break-even or profitable; for larger mid-market players, EBITDA of £1m, £3m, £5m or £10m. Presentation of financial information is key here – if you’re below a key threshold in the current year but have good visibility of next year’s growth, it can help to focus an acquirer’s attention on the certainty of future performance. And don’t forget non-recurring items and other adjustments or add-backs which can tip you over the line.
In its marketplace: harder to predict and control than the first two. Particularly in a rapidly-evolving sector like technology, content or marketing services, you may be offering the market something it isn’t yet ready for. If you feel you have to educate the market in order to make a sale, you’ll probably need to educate an acquirer as much as you do your clients/customers, making the whole exit process harder and putting you at the mercy of the strategic insight of an acquirer. Once the tide has turned and the market is moving with you, acquirers should ‘get’ it much more quickly, giving you more options and hence a better overall deal.
For its shareholders: personal reasons frequently play a major role, and these are often impossible to predict. Health issues and family matters affect everyone at some point and sometimes demand difficult decisions. Equally, some entrepreneurs find their thoughts turning to the next venture once their business reaches a certain scale; others find they can’t expand beyond a certain level and an exit is a way to hand the company on to someone else who can support and encourage its ongoing growth.
What about an unsolicited approach – when an acquirer reaches out to you and makes you an offer, whether or not you’re ready for it? Evan Williams, the Internet entrepreneur who co-founded Twitter, recently summarised his thoughts on whether such an offer should be seriously considered:
- If it captures the upside;
- If your business faces an imminent threat; or
- Personal matters dictate the timing (as above).
Overall, it’s very difficult to call the ‘right’ time; it will inevitably reflect a mix of factors and it’s unlikely that all the stars will align. Thinking about exit in advance is one way to make sure you keep track of the relevant factors and are ready to respond when the timing is opportune.
Many of our clients and contacts ask us to attend board meetings and strategy sessions, perhaps every six or twelve months, to help them keep track of these factors, provide an external perspective on the company’s growth and development, and provide an overall view on exit options, timing, and valuation.