Creating Your Exit Strategy: Finding Success Before, During, and After

I recently presented at the YPO: Tech Exist 2024 in New York City. This is an overview of what I presented for Tech exits--with a little bit of my favorite Motown songs thrown in.

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Exiting a business is a monumental event for any tech entrepreneur. Whether you're leading a high-growth startup or managing a well-established tech company, a successful exit requires meticulous planning, strategic foresight, and an understanding of the emotional challenges that come with transitioning. While many focus on a sale’s financial aspects, the combination of well-prepared operations, strong leadership, and long-term planning truly leads to success.

In this article, based on my recent presentation “Creating Your Exit Strategy: Finding Success Before, During, and After”, I’ll delve into the intricacies of planning a successful exit. I’ll explore the importance of aligning your strategy with long-term business goals, preparing for potential pitfalls, and ensuring a smooth transition that benefits you, your team, and your legacy.

Remember the days when you were starting your business doing two jobs: running the business and raising money? Well, welcome to two jobs again--running your business and existing your company.

The Importance of Exit Planning: Starting with the End in Mind

One of the most common mistakes business owners make is waiting too long to think about an exit strategy. As Dr. Stephen R. Covey once said, “Always begin with the end in mind.” Exit planning isn’t just about the sale itself—it’s about building a business that is attractive to potential buyers and valuable in its own right.

A comprehensive exit strategy considers various options, such as selling to a third party, selling to management through an MBO, or exploring employee stock ownership plans (ESOP). You must also prepare for the possibility of going public or even passing the company to family members. The decision you make will depend on your business's unique circumstances, market conditions, and your personal goals. According to data from Capeq and KMCO, the key to success is starting this process early and reassessing it periodically as your business grows and changes.

Deal Structures: Balancing Risk and Reward

Understanding how different deal structures impact your final payout is critical to making the right decision. Each structure has its benefits and risks, and selecting the appropriate one for your business depends on your risk tolerance, desired involvement post-sale, and long-term financial goals.

Cash is best when it comes to exits, and for good reason. Cash offers immediate liquidity and eliminates the risks associated with other forms of payment, such as earn-outs, equity rollovers, or seller-financed notes. While these alternatives can potentially offer a larger payout, they come with significant uncertainty—reliant on future performance, buyer solvency, or market conditions. By opting for an all-cash deal, sellers can secure their gains upfront, providing financial security and peace of mind. As the saying goes, “Cash is King”, because it minimizes risk, accelerates the payout, and allows you to move on to your next venture or chapter in life without lingering dependencies on the buyer's future success.

Earn-Outs are another structure, where a portion of the sale price is contingent on future performance metrics like revenue or EBITDA. While this can increase the total payout, it often leads to conflict over milestone definitions and expectations. Personally, I have seen most deals with Earn-Outs perform significantly less than what was intended, well-intentioned or not.

Similarly, Seller Notes—where the buyer finances part of the deal through a loan from the seller—may provide leverage, but they come with the risk of non-payment if the buyer underperforms. Equity Rollovers, where sellers retain a portion of equity in the business, allow founders to benefit from future growth. However, this prolongs involvement and increases liquidity risk.

There's lots more--this scratches the surface. However, deals can be structured in many ways to allow for compensation that is considered reasonable on both sides.

structure is about balancing risk and alignment, ensuring that both parties are incentivized to succeed after the sale. As Smokey Robinson once said, “The road to success is paved with failure. Don’t be afraid to fail,” but this doesn’t mean taking unnecessary risks during your exit.

Preparing Your Business for Scrutiny

When preparing for a sale, your business will face intense scrutiny from potential buyers, whether in the form of due diligence or audits. Ensuring you have accurate financials, updated contracts, and organized documentation is crucial to creating a smooth process. Potential red flags, such as inconsistent financials or legal issues, can scare off buyers or reduce your final valuation.

It’s essential to develop a checklist for this preparation:

• Clean Financials: Ensure that all financial records are accurate, up-to-date, and transparent. Buyers want to see clean books without discrepancies.
• Updated Contracts: Regularly review and update contracts with customers, vendors, and employees to reflect current terms and obligations.
• Organized Documentation: A well-organized repository of key documents (e.g., shareholder agreements, IP rights, compliance certifications) is critical.

A well-prepared business instills confidence in buyers and demonstrates that you’re ready for a seamless transition. As Midstreet’s research highlights, businesses that take the time to prepare often secure better deal terms and experience smoother transactions.

Put a data room together now. Get your information --and act--together. Go through a practice round and stress test it. It will all pay off.

Common Myths About Exits

There are many misconceptions about the exit process that can mislead founders and lead to disappointment. Let’s dispel a few of the most common myths:

• Myth 1: Exits Happen Quickly Reality: Exits often take longer than anticipated—sometimes as long as 5 to 10 years. Patience is key. Many business owners mistakenly think they can exit on their desired timeline, but market conditions, buyer negotiations, and unforeseen issues can delay the process significantly.
• Myth 2: Founders Always Get Rich Reality: Not all founders walk away with a fortune. Payouts vary greatly depending on the deal structure, equity stake, and financial performance at the time of sale. Some founders walk away with modest sums, and others end up reinvesting in future ventures.
• Myth 3: Exits Solve All Problems Reality: Selling your business doesn’t mean the problems disappear. Founders must still navigate the challenges of wealth management, transitioning roles, or maintaining culture within the company.
• Myth 4: Exits Are Predictable Reality: Exits are highly unpredictable. Market forces, competitive shifts, or even personal health issues can derail even the best-laid plans. It’s essential to be adaptable.

Characteristics of a High-Value Business

So, what are buyers really looking for when assessing a company for acquisition? The presentation outlined several key metrics that define a high-value business:

• Annual Recurring Revenue (ARR) Growth: Ideally, buyers are looking for 30%+ YoY growth in ARR, which signals a strong revenue base.
• Gross Margins: For SaaS businesses, gross margins of 75%+ demonstrate operational efficiency and strong pricing power.
• Low Churn Rates: A low customer churn rate (below 5%) shows that your customers are satisfied and likely to stick with your product.
• High Customer Lifetime Value (LTV): Buyers want to see a high LTV to Customer Acquisition Cost (CAC) ratio, ideally 3x or higher, indicating that the business can monetize customers effectively.

Boosting Value Before the Sale

Before selling, it’s essential to take steps to maximize your company’s value. Some strategies include:

• Improving Customer Retention: Focus on enhancing your customer success efforts to ensure customers stay with you for the long haul. Upselling and cross-selling existing customers can also boost your ARR and customer lifetime value.
• Optimizing Profitability: Aim for a strong EBITDA margin and control costs. This not only improves your bottom line but also makes your company more attractive to buyers looking for operational efficiency.

As Marvin Gaye sang in “Got to Give It Up”, “Keep on dancin’, got to give it up,”—don’t stop focusing on your business's core operations and growth, even as you prepare for an exit.

Managing the Emotional Challenges of Exiting

Exiting a business can be an emotional rollercoaster. Many founders face feelings of loss or uncertainty as they transition away from the company they’ve built. As Diana Ross once said, “I knew it was time to reinvent myself, to focus on the new chapter.” Proper preparation, both mentally and emotionally, can help you navigate this transition with resilience and grace.

Key strategies to manage the emotional side of exits include:

• Relying on Your Exit Team: Leverage the expertise of your advisors, such as your M&A advisor, legal counsel, and wealth manager. Their guidance will help alleviate some of the pressure you may feel during negotiations.
• Prioritizing Self-Care: Taking time for exercise, relaxation, and hobbies during this period can help you stay grounded and reduce stress.
• Staying Focused on the Big Picture: Don’t let short-term emotional reactions influence long-term strategic decisions. Keep your eye on the prize, whether that’s maximizing value, securing your legacy, or ensuring a smooth transition for your team.

Conclusion: The Art of Exiting Gracefully

As with any major life event, how you conclude your business journey can shape the perception of your career. A strong, well-planned exit not only ensures financial success but also leaves a lasting impression on your employees, customers, and partners. As the Four Tops sang in “Reach Out, I’ll Be There”, your leadership during this critical time will set the tone for the future—whether that’s your next entrepreneurial venture or a well-earned break.

A successful exit is about much more than money. It’s about leaving behind a legacy, maintaining relationships, and knowing that you navigated the process with integrity and foresight.

Sources: Capeq, KMCO, Midstreet, and insights from Greg Coticchia’s exit planning presentation.