Finding the right exit
Helpful tips to plan your high-growth exit strategy
With the value of mergers and acquisitions of UK companies exceeding £200 billion in 2016, here are some key factors to consider when planning your exit strategy.
The value of mergers and acquisitions of UK companies in 2016 was over £200 billion1 – and this is just part of the story when it comes to successful exit deals. So what are the key factors to consider when planning your exit strategy, so you realise the full value of all your hard work?
It’s important to keep your options open, given the sheer amount of investment capital available. Much of this comes from the US and Asia, looking to tap into the proven technical capabilities of UK companies. You could also reap rewards from the strong merger and acquisition activity at the entrepreneurial end of the market.
Whether you choose a trade sale, a public listing or venture capital deal, or a private equity investor looking to ‘flip’ the business, there are critical issues to consider. Building the right management team, finding the right partner and thinking hard about your ongoing involvement after exit are all steps you can take to prepare.
Don’t build a company just for exit – but be prepared for it
“You should never build a business purely for exit or acquisition”, according to William Tunstall-Pedoe, a leading tech entrepreneur and founder of the company behind Amazon’s Alexa technology, speaking at a recent Barclays High-Growth and Entrepreneurs event on exit planning. “Your focus should be on building a world-class business, with a clear vision, that’s sustainable in the long-term. This is the key to ultimately making yourself palatable to an acquirer.”
Stan Boland, another serial entrepreneur and now CEO of autonomous driving technology company FiveAI, points out that exit strategies depend on the circumstances of each business. “Can your business stand alone or does it need to be part of something else? If you’re producing just one component it might be absolutely right to sell your partly-baked cake to someone who can provide the rest of the ingredients.”
While you shouldn’t run your business solely for an exit, it’s important to be ready when the time is right. “If you prepare for the possibility of exit, you’re in a much better place to take advantage of it,” says Darren Bear, a corporate finance partner at Grant Thornton. This includes having your documentation and patent protection in order and available in easy-to-share digital formats.
One way to gauge if your business might attract suitors is to put yourself in the shoes of a potential buyer. Ask yourself the ‘buy versus build’ question: is your product too hard for a competitor to build itself, making the acquisition of your company a better option?
Hanadi Jabado, Executive Director, Entrepreneurship Centre and Director, Accelerate Cambridge says: “A lot of UK start-ups just want to get their product to market. Others find it hard to build the extra level of management often needed to take the business to the next level and, arguably, some sell too early.”
The importance of investing in your management team can’t be over-stated. After all, it’s your people as much as your product that your business is built on and this will be a critical consideration for a potential buyer or investor.
Finding a buyer or investor with the right cultural fit is obviously critical. It’s not just about the financial terms of the deal.
“The biggest challenge I see is whether an entrepreneur can work within the acquiring buyer. Entrepreneurs can find it hard to fit in with a large corporate,” says Darren Bear.
Acquirers are likely to want to lock in the owner and management team so they stay with the company for a number of years. Earn-outs can be very complex to work out. Business owners shouldn’t be scared off by these arrangements, but should treat them with a degree of scepticism. Many underestimate how frustrating it can be to be part of a larger business when they’ve been used to being masters of their own destiny and it’s not unknown for the original owner to walk away before the end of the earn-out period.
There’s also the longer-term impact on the business and its employees to consider. For example, will it invest in your employees in the UK – or is it going to cut jobs and move the operation to Silicon Valley?
Ask the experts
It’s important to have people around you that you can trust and bounce ideas off. “Finding the right exit strategy for your business can be hard and expert advisers can double the value of your business”, says Stan Boland. “Remember that you need advice for the business and for your own personal interests, which will not always be completely aligned”, adds Hanadi Jabado.
Getting help from good advisers, or employing an experienced CEO to manage the deal process, can help business owners avoid costly mistakes and allow them to focus on building a relationship with the other party. For example, your advisers can have the difficult conversations with your potential buyer so that you don’t damage your rapport with them.
Advice from an experienced business mentor or sharing challenges with other entrepreneurs will also be to your advantage in planning your exit strategy. Remember – not everyone is blessed with negotiating skills. Appoint advisers who know how the game works and can coach you through negotiations. Sealing a good deal can be a once-in-a-lifetime opportunity, so it’s critical to get it right.
Quick tips for exit planning
1. Focus on building a world-class business and buyers will come
2. Find the very best investors – they should be ambitious for your business and able to really add value
3. Be sold, don’t be bought – own the process by being prepared for it, but don’t run your business solely for an exit
4. Bring your top management team with you at all times – it’s a long journey and you shouldn’t do it on your own
5. Make the most of advice on exit strategies available through business mentoring networks, such as Barclays’ Scale Up UK programme, run in collaboration with the Cambridge Judge Business School