Your company has finally achieved success.
You’re finally looking to cash out on the effort you invested.
Deservingly so, but you’re not done yet. The most critical stage is near—the exit.
Founders can’t simply hand over the reins in exchange for a handsome payday. It’s more complicated, as exiting is a strategic decision—one that founders must be aware of early on.
We have invested in over one hundred successful startups, and founded our own açai-infused vodka company, VEEV. We learned lessons the hard way, and we want to make it easier for you.
Here’s a fact that most founders overlook. You need a reason for potential buyers to actually want to buy your company.
What about taking your company public via an initial public offering (IPO)? The reality is that IPOs comprise a small percentage of total exits, so we’ll focus on more common acquisitions.
Consider how your company will be positioned for an attractive acquisition. There are many areas of your business to focus on to ensure a successful exit. Mastering any three of the following areas will greatly work in your favor:
Your distribution model
Your access to a particular demographic
Your brand’s strength
What about revenue?
Revenue is important, but potential acquirers rarely buy a company for the added revenue. Odds are that the incremental revenue barely moves the needle for your acquirer.
While revenue—especially revenue growth rate—is important, the three aforementioned areas carry more weight. Let’s discuss them in further detail.
Create a nimble distribution model that an acquirer couldn’t replicate.
PetSmart’s acquisition of Chewy for $3.5B in the spring of 2017 is a great example of a purchase based on a distribution model. PetSmart, the brick and mortar retailer of pet supplies, needed Chewy, an e-commerce provider of pet supplies, for its direct-to-consumer channel.
In the end, PetSmart gains critical online access while Chewy receives the expertise and resources necessary to refine and expand its business.
A win for both parties.
Additionally, corporations realize the need to gain access to new demographics— especially Millennials.
Consider RXBAR, the maker of simple ingredient, protein bars. Founded in 2014, the company has experienced meteoric growth, due in no small part to its support from Millennials who are attracted to RXBAR for its simplicity in both labeling and ingredients. Food manufacturer Kellogg’s—eager to enter the space—announced in October 2017 its intention of acquiring RXBAR.
RXBAR plans to remain an independent company within Kellogg’s all the while expanding its product, and Kellogg’s can effectively leverage the access to RXBAR’s target demographics.
Again, a win for both parties.
Finally, it’s impossible to overstate the importance of your brand image. Corporations are seeking ways to capitalize on emotion-based purchasing.
We’ve previously mentioned the increasing role that emotion is having on consumer purchasing behavior and significance of brand image here. However, it is worth reiterating the point again.
Because corporations—not just consumers—are looking for products with a strong brand that evokes a particular emotion. Oftentimes, this is not their area of expertise. Corporate competitive advantages traditionally lie in the form of a cost advantage.
Now, they’re looking to acquire companies with an emotional advantage.
PepsiCo’s acquisition of the sparkling probiotic drink maker KeVita is a prime example. A slogan of KeVita’s, “Revitalize from the Inside,” represents the pathos that PepsiCo was looking to capture. In a time where consumers are turning away from traditional soft drinks, PepsiCo found a perfect opportunity in the health-conscious KeVita.
The acquisition places Kevita on a larger stage, giving it increased access to new distribution channels and resources. PepsiCo now has the means to leverage KeVita’s image to ideally position itself in a time of changing consumer behavior.
Yet again, a win for both parties.
Determine early on what makes your company a threat to potential acquirers. If they need you more than you need them, you’re in a good position.
You know what to focus on.
Now you need to balance the operations of your company with the intricacies of an exit.
Now let’s address the less concrete aspects of selling your business and how to best-position yourself. Two pieces of advice come to mind:
Base your exit on operational milestones, not a timeline
Keep potential acquirers in the loop
A fundamental misunderstanding that many founders have is basing exits off a timeline, and not an operational milestone.
This principle can be applied in a greater context, especially when it comes to fundraising. All too often, founders seek a certain amount of capital to grant them X months or years of runway. Rather, they should seek this capital to reach a particular milestone, such as achieving a particular customer acquisition cost or breaching a given revenue threshold.
The same issue occurs with exits.
Founders are too focused on exiting in Y years, and not based off a given milestone. A major reason we sold VEEV was because we realistically could not keep growing the business. We had reached an intermediate size, and realized that we didn’t have the distribution capacity or necessary connections to expand VEEV internationally and further grow.
This telltale milestone was far more helpful than any time-based method in determining the right time to sell. Additionally, milestone-based exits are also more flexible than their time-based counterparts. They account for unpredictable macroeconomic factors that can either expedite or slow your timeline.
With that said, build relationships with potential acquirers well-before you reach your desired exit milestones. You should keep them in the loop from an early date.
It’s known that you should contact investors well before your intent to raise the next round of fundraising. The same logic applies to exits.
There a few reasons for this.
The first is simply the importance of getting your foot in the door and establishing relationships with corporate partners early on. The second—and equally as important—reason is that they can help you reach or tailor your operational milestones.
Essentially, your potential acquirers can outline the kind of milestone that would spark their interest in a deal.
However, be straightforward if challenges arise that may hinder the completion of a milestone. Acquirers should be willing to work with you. They will not be willing if you paint a rosy picture, only to have them later discover issues in the due diligence process.
That should go without saying, but we have seen it adversely affect many deals.
A final note is to realize that this process takes time. We may have mentioned the importance of stressing milestones over time, but it’s important to realize that a corporation moves slower than a startup. You should be in discussion with companies at least a year before any intention to sell, and know that exit deals usually take at least six months.
In the end, it’s no secret. Exiting is difficult.
Applying this advice will differentiate yourself from the competition and increase the odds of gaining the attention of an acquirer.
The earlier you start the process, the better your odds of success.
From experience, we realize that the timing is never perfect and an ideal match is rare. With that said, it’s important to always keep the exit in the back of your mind, and explore the many ways that you can capture the value of the business you created.
Now, get to work!
And if you need help to guide you along the way, find resources from people who have been there and done that.