Think it’s too early to start planning for your business’ exit? Think again! Corporate partner Sarah Chambless recently joined the Potential to Powerhouse with Tracy Holland to discuss the often-overlooked world of business exits—unpacking M&A strategies, private equity, why preparation is key for entrepreneurs, and what fires her up about being a “ride-or-die" adviser to female founders.
Every business has an exit. It’s the startup lifecycle. The sooner you start planning, the better. For some startups, that could be an IPO or a sale, but for others, it may mean a wind-down or implementing a succession plan. Whatever path you take, an uncoordinated process will result in lost value, and that’s why you need to be looking a half-dozen moves or more down the chess board.
Plan way, way ahead. No matter which exit you’re eyeing, give yourself three to five years of runway to get there. Engage legal counsel and financial experts who can get to know your company, the quirks of your cap table, the personalities on your board, and can help you strategically prepare. Run a diagnostics on your company two to three years from your planned exit—you'll need to be able to show prospective buyers several years of clean financials.
Know the buyer playbook. Buyers have a playbook, and (unsurprisingly) it’s about maximizing their returns. But knowing their tactics can help you form a solid broader strategy. For example, it’s typical for a potential buyer to strike a rosy posture early, meanwhile tallying up reasons to push a retrade at the 11th hour—once you’ve come to financially rely on the deal going through. Surround yourself with advisers who can see around corners by approaching things with a buyer’s mentality.
Make sure the letter of intent is airtight. The letter of intent is a window into the buyer’s mentality and their approach to the deal. You need counsel that not only vets it to answer your questions but knows the questions you should be asking.
Adjust your expectations. It’s important not to get ahead of yourself, and tempering your expectations can prevent future headaches and heartache. When a letter of intent contains a range that the buyer might pay for your company, look at the low end and ask yourself what’s the least you’re willing to take for your company. If you’re discussing earnouts—where the buyer pays you a portion after closing, based on company performance—know that it’s unlikely you’ll see much of that.
Learn more about Fenwick’s startup capabilities and check out the full podcast episode.