#1 Start earlier.
Whenever you think you want to start getting ready to exit, add six months…at least. Your primary job is running a company. And as a secondary job, it will take way more time to prepare for an exit than you think. You must hire outside help. Implement that help. Shop the company and then negotiate and paper the deal. There is an immense amount of work that goes into selling a company. Do not underestimate the time and effort. The earlier you can start the better.
But here is the counterpoint, the earlier you start, the more likely it is to leak to your team that you are shopping the company for an exit. So, it’s paramount in the early days of this preparation to keep the circle small. My rule of thumb has always been founders plus CFO (or accounting equivalent).
We suggest you begin the sale process at least three quarters (9mo) before your target exit date.
#2 Are your financials up to snuff.
The easiest way to turn off a prospective buyer is to look unorganized when delivering your financials. Never undermine the integrity of your financial figures. Never give the impression that you are not completely dialed into the numbers of your business.
We have seen the horrors of delivering monthly P&Ls that don’t align with the same quarterly or annual P&L. But don’t worry, if you are starting early, you have the time to internally clean up, or potentially bring in outside help to get your books in perfect order.
Having the financials prepared or reviewed by an outside firm often gives the buyer even more peace of mind if a third party has been involved in the preparation.
#3 Tune your dials.
Building a business for the long term and preparing your business for an exit requires a slight shift in mindset. You must begin to amplify your key selling proposition. What makes your business attractive to a strategic or financial buyer? If you are selling on incredible growth, push growth, even at the cost of profit. If you are selling on EBITDA and profitability, trim costs, even at the cost of outsized growth. If you are a Rule of 40 seller, balance growth and profitability as best you can. Lean into what makes you desirable and turn those dials.
Every business is different, but if you get into an exit mindset early, you have time to implement an exit-focused strategy and get the desired results well ahead of speaking to your target buyers.
#4 Do you have legal landmines?
Our firm is often engaged during or immediately after an LOI is executed. But, after an LOI is entered, the buyer is immediately expecting to jump into more advanced diligence. There is not really time to undergo proper clean up. At this stage, your legal team can merely support the deal process and attempt to mitigate any operational legal pitfalls.
However, with months of advanced notice, the team can be proactive, rather than reactive in uncovering and solving any legal landmines in your business. In our experience, the number one cause of post-LOI deals failing to close is the buyer uncovering a legal landmine that changes the risk profile of the acquisition.
These “legal landmines” can include things like:
Maximize your exit certainty by bringing in outside (M&A focused) legal help well ahead of launching an exit process.
#5 Know Your Cap Table; Know Your Board
If you don’t know the goals and wishes of your investors and board members, you are negotiating blind. You really need to understand your cap table before you can properly solicit buyers.
You need to maintain good communication with your board throughout an exit process and that often starts with an understanding of their expectations in any exit event.
#6 Don’t run out of cash or come to the negotiating table with a weak balance sheet.
One of the worst things that you can do is nail all the preparation, run a perfect process, and then limp to the finish line with a weak balance sheet and a really tight runway. Remember, buyers have access to your financials during a sale process. They can see that you are broke. How do you think that plays at the negotiating table?
This exact scenario played out in a past exit of mine. The company ran a really strong sale process with a number of prospective buyers. But as it got deep into the process, the company started to get really tight on cash. What did it do? One of the company’s incredible strategic investors funded a bridge round to bolster the balance sheet. In doing so, they helped the company retain leverage in the negotiation and ultimately maximize the exit return.
Not everyone has an investor that can step up like that. So, if you are a company with a net loss, either get to cash flow positive ahead of your process or make sure you start your process with plenty of capital runway left.
BONUS: Build a data room…yesterday. It’s never too early to build a data room. If you are unorganized, it can be truly painstaking to find all the requested documentation and put together a data room under the time pressure of a deal. Why wait? Why not get organized and put together the data room well before your planned exit. Want to look like a really buttoned up company. Deliver a fully baked data room shortly after receiving the diligence request list. You will look like an absolute rockstar and impress any buyer.
We are here to help. It is never too early to get our team involved. While our attorneys have supported billions in M&A transactions, I am also an exited founder myself. I have been through this entire process firsthand. In fact, I acted as banker, inside counsel and key operating exec in a large exit of my own. So, when I say that I have been in your shoes, I mean the exact shoes. I know the value of great preparation in an exit process. When you work with our team, our expert advice goes beyond the four corners of a legal document. When you hire us, you always have someone in your corner to think through the broader strategy rather than just clock punching and document turning.
