Your company has reached the stage in its growth when you are considering possible exit strategies for your business evolution. This article looks at the timing and risks you should understand to prepare your organization for a merger, acquisition or capital raising. These comments were from our recent LaunchTalks founder roundtable. Check out these other event posts to learn more about why an exit would make sense, what founders should be thinking about and how to prepare your company for an exit.
WHEN CAN A COMPANY EXIT?
Start with the ends in mind.
- Timing is everything: It is never too early to think about your exit, particularly if you are going to take venture capital funding. While private equity uses financial instruments for leverage to increase their positions and they benefit from fees, VCs only benefit when they sell a company. A VC will be thinking about an exit the day any agreement is signed. Tracy Chadwell, partner of 1843 Capital, said that her VC thinks about leveraged buy-out funds from day one and private equity funds are also becoming a viable exit strategy for VCs.
- Valuation sizes and fit: Acquiring companies are most often interested in businesses and technology. Since it would cost $5 million to process a deal for a large strategic corporate – any transaction needs to be large enough to move the needle for that company or will focus on the intellectual property (IP) or technology (un which case a company could be pre-revenue). Any deal really depends on its value to competitors, which are exceptions to the materiality rule (typically high growth with potential to hit $100 million in revenues within 5 years). Understand how you fit into an acquirer’s organization beyond simple economics. Most bank advisors have fostered a community of investors, so find the right advisor who focuses on companies of your size and who knows potential logical investors in your business.
WHAT ARE TRANSACTION RISKS?
- Lack of disclosure: Potential acquirers become concerned when there are questions about financial reporting or assets – this may impact valuation and EBITDA. Take steps to be transparent, which will mitigate operational risk.
- Reputational damage: While companies often focus on the financials, they may underestimate the other information requirements around any exit – the need to update investors and provide disclosures. What if the deal falls through? Is the executive leadership team prepared to respond if something gets leaked to the media? Founders should be thinking, how do I protect may business and my brand? What do my different stakeholders need to know and what information do we want to make sure people don’t know, so that we can minimize information leakage.
- Confidentiality: How to find the right balance between engaging potential investors vs. protecting business information? Most VCs won’t sign a non-disclosure agreement (NDA) because it creates a lot of bureaucracy. NDAs provide limited protection in reality. Ideally reputable VCs will protect your confidentiality, however bargaining power is always an issue. Get advice from your lawyer, but also consider staging that delivers information that’s benign, not highly sensitive, at the appropriate point in time. Know what is most relevant that you can talk about and share. Protect your intellectual property with trademarks and patents, but assume there is no unique technology and that anything can be shared.
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 co-sponsors, Innovative Markets Fintech Power Circle, a group of financial technology professionals driving engagement around fintech industry issues.