As your company grows, it may be time to plan a possible exit strategy, such as a merger, acquisition or IPO. This article looks at financial and other considerations that companies should understand to prepare their organizations. These comments were from our recent LaunchTalks founder roundtable. Check out these other posts on why to consider an exit, timing and risks around an exit and what founders should think about before considering an exit.
HOW TO PREPARE FOR AN EXIT?
- Set-up the right legal and compliance foundation. Lee Schneider, counsel at Debevoise & Plimpton LLP, identified 3 key questions to address around your corporate structure: 1) Know your initial investor base and what that might look like to prepare corporate documents. Is it just you and family or will you bring on new investors as you grow? 2) Think about employee compensation, since most initial employees are likely to receive some equity-based incentive compensation in addition to cash, which has tax and HR implications. 3) Recognize that initial structures can be changed. May be expensive to change, but don’t feel like you’re going to make a mistake.
- Governance, ownership and control matters. If you are a minority investor, put in place protections to ensure you get fair value or if you have control, ensure that you have control and ownership. This becomes more critical as you sell pieces of the company to ensure its growth. Initial investments that seem equitable can evolve over time into minority stakes and this can be problematic when founder interests diverge.
- Protect yourself. Have planning around founder interactions and employment agreements – consider employee contracts and compensation. Intellectual property (IP) is not just technology, can include other forms of trade secrets, including your customer list and how you go about protecting your assets and your business idea. Make sure you have confidentiality restrictions to protect your business. Also put in place co-founder agreements. Founders should avoid entering into shotgun weddings, when they haven’t even dated to avoid ending a business relationship with a nasty divorce.
Set-up Your Infrastructure
“Something I wish that all my clients do upon startup, is setup data collection to understand the evolution of the business, which gets built into the sales narrative. Companies that haven’t built data collection and MIS infrastructure are playing from behind when managing the marketing side of a business.” Infrastructure, data collection, thinking about where you need to be in 5 years – absolutely crucial. Easy to get focused on running a business, but think about what you need in an end stage.” Peter Davis, Managing Director of Financial Technology Banking at Macquarie Capital
- Management Information Systems: Create an organization that can react to information requests. Know what information you are going to need and what is an outsider going to need as they look at your business from day one. clients, revenue and operating metrics for a period of 3, 5, 10 years as they think about the value of the business and investing in it. Put in place the proper recordkeeping from the start because it can be difficult to recreate data from several years ago. It will be frustrating to investors when they ask about how many clients you have and the information isn’t available for 3 weeks.
“Depending on size of business and complexity, put things in place 6 months to a year in advance. Make investment in your infrastructure.” Jeff Glick, founder and president of StartUUp, an outsourced CFO firm.
- How to make sure you are bankable? Make sure that your numbers are transparent and that you understand them. Have the infrastructure in place to report financials, for example 30 to 60 days after month-end, or the ability to produce flash reports depending on the risk. Other financing alternatives, like non-bank debt go through an online portal and purchase order (PO) financing, based on eventual receivables have similar requirements. Bankers are looking for something they can trust and may require founders to pledge personal assets or provide personal guarantees.
- Get legal counsel any time you sign a contract for capital. While it may be expensive in the short term, it will ultimately cheaper than getting into a bad agreement because large transactions can have broad implications.
- Understand bank requirements: People giving you money may require assurances and can tie you up unintentionally in the future. Banks may want to have pledges of assets and restrictive covenants around loan agreements concerning the types of activities you can engage in and other types of future financings. Equity is not the only way to raise capital – can also get line of credit or alternative financing, such as debt financing. It’s not uncommon for due diligence to uncover things, like undisclosed loans, which can derail deals. The perception that the company wasn’t “open kimono” made investors question what else might be hiding. It’s helpful to make sure everyone is on the same page.
- Get your financial house in order if you are looking to sell. Spend as much as you can in preparing good financial statements that are accurate and timely. Quality of earnings and assets check. Have an audit done by a reputable firm. Make sure taxes are up-to-date. Make sure any grey areas are vetted and understood. Some acquirers nervous about consultant vs. employee litigation.
“Fair and full disclosure is paramount – if you don’t have trust on the other side of the table then you will never get anything done.” Peter Davis, Macquarie Capital
- Find the right financial advisors. Make sure smaller investment advisors are bankers and providers are licensed broker-dealer – you can check them out on the FINRA website.
- Prepare for public company expenses. Anticipated costs range anywhere from $500 thousand per year to $2 to $3 million a year. Having Investor Relations (IR) in place is important. Think ahead 2-3 years, anticipate problems.
Are you considering an exit? Contact us to learn more about how Launch Warrior can support your leadership team in raising brand awareness and preparing your marketing and stakeholder communications strategy.
Thanks to our hosts, Debevoise & Plimpton and to our co-sponsors, Innovative Markets Fintech Power Circle, a group of financial technology professionals driving engagement in relevant fintech issues.