Starting a Company? Plan for Exit

Some founders start lifestyle businesses and envision themselves working as the company’s CEO for the rest of their lives. Other founders launch their startups fantasizing about a big exit one year later. And then there is everyone in between.

 The reality is that most companies, if they are successful, pass out of the hands of those who founded them. Commonly, this passing of the baton is through an exit. Most often, successful companies are sold 5-7 years after they’re founded. And founders are happy with that – they get their cash, their reputation is buoyed and they can move on to build their next thing.

 Forced Exit

But that’s not the only path. It’s not uncommon for discord among co-founders to lead to a managed buy-out where one partner’s shares are bought out by the other partners, effectively kicking that partner out of the business. In many instances, investors will make moves to protect their investment which can include replacing you as the CEO. Another common situation is that you, the founder, will lose interest in the company that you created. Along the way, a bigger or more tantalizing problem will have captured your attention, or your personal situation will have changed in a way that forces you to step down.

For all scenarios, building your company for exit is an essential part of your growth strategy. Anything can happen. So, start with the end in mind.

How do you do that? You think about who would buy you. Who’s the big fish in your market? What if you pivoted direction so that you could grow into an adjacent industry, either as your main line of business or a side-line and possible spin-out? Next, begin thinking about who those big fish players are in those markets. Envision one of them buying you out down the road. To prepare for that possible exit, think about how you could form a strategic alliance with them now, so that they get to know you and know your business. What would that look like?

Are you a player?

I mean, are you a player

in your MARKET?

You’ll need to establish yourself as a player in your market. Strong messaging, consistency on your social posts and building a brand towards thought-leadership are all critical steps to do this. That doesn’t happen overnight. It happens over time. In fact, it typically happens over an extended period of time. So, start now. The sooner that you get on this path, the more likely that you’ll become an established player in the market. If you wait, someone may plant that flagpole before you do. 

The idea of financial and tax audits make the average person shudder. Nobody wants to be at the center of an investigation that digs into every dollar spent. It’s tedious, time-consuming, distracting and it could cost you your business. Don’t wait. Financial health begins Day 1. Establish your business on financial management software – there are plenty of choices including affordable and even free ones. Excel spreadsheets aren’t ideal, but they can get the job done. At least at first. Track your expenses, keep your receipts and stay one top of your spending.

Here’s a path to exit that often gets overlooked. Relocation. You may be thinking that moving is the last thing that you’ll ever consider. Perhaps your family is established where you are and the idea of leaving everything that you know behind is frightening. That may be so, but it’s worth considering. If you can co-locate with one of your targeted, future prospective buyers, it may give you the opportunity to solidify a relationship so that it becomes a no-brainer to do when the time comes. It can also lead to a more favorable exit with a higher buy-out and one that may even enable you to stay on with the company you founded. Shuttling to and from a second location can be challenging, but it can be done. Think about it.

Of all the things mentioned here, over-dilution should be the one that scares you the most. It’s the one that investors pay a lot of attention to. If you keep going back to the well to get more investments instead of offsetting your operational costs through revenue generation, you’re going to be the King or Queen of an increasingly smaller pie.

The Dreaded Sub-20% Mark

Once a founder dips below 20% ownership, that’s usually a sign that it’s time to exit the founder. Whether that exit is forced or agreed to all depends on how effectively you have managed your fundraising needs and spending. Companies looking to acquire your business will be especially concerned. It’s typical for them to think that you’re not going to be inspired enough to continue putting in the 101% it takes to grow the company because you’re no longer financially motivated when your share shrinks below that critical dilution point. At that time, you will be forcibly exited, like it or not 

So, back to the critical question, are you planning for an exit? If you are, start planning now. It’s never too early to begin.

If your fundraising game (which you need to grow then exit) could benefit from a little help from mentors who have been there done that, apply HERE to the Masterclass How to Get Funded.