Do you have an exit strategy?

One of the investment banking and M&A terms that gets thrown around frequently is “exit strategy.”  Does your company have one?  Does it need one?  And, maybe more importantly, how can you possibly predict several years into the future who will buy your company and when it might occur? 

Companies that have raised capital in the past are well aware that one of the questions investors like to ask concerns exit strategy.  For investors this is an important concept for two reasons: 1) it lets the investor know that the company has given more than passing thought to its future, and 2) it gives the investor comfort that there are multiple options and a large enough market for them to realize their investment at some point in the not too distant future.

But if you are not in the process of raising capital you should still have an exit strategy.  It is very true that you may have no idea how or when you will exit your company.  The point of having an exit strategy is not to try to guess the ultimate outcome correctly.  The point is to start thinking about the different possible scenarios now so that you are prepared when the time comes.

You might think that your existing management team will buy your company when you are ready to leave. You may have even had this discussion with them and all sides think it is the likely path.  But what if, when the time comes, the team can’t get the financing to go through with the purchase?  Do you have a backup option?  Your management team knows the company inside and out and won’t need to go through a lot of due diligence.  Not true of an outside buyer.  If you have not thought through all of the potential scenarios you might find that the company is not in a position to be sold to anyone other than management due to the lack of proper financial protocols that an outside buyer would need.

In addition to the “who”, an exit strategy calls for a “when.”  Companies that have the best likelihood of being sold and realizing their highest valuation are those that operate very professionally: outside audits or reviews of financial statements, board of directors, easy access to all corporate documents and contracts, etc.  You may not need to devote the extra time and expense early in the company’s life but having an idea when you might sell will allow you to begin adding these components before it becomes too late.

And knowing who the potential strategic buyers in your industry (or a complementary industry) are and how active they are is always helpful.  Unsolicited offers may come your way from a company that is aggressively growing through acquisition and you want to be prepared if/when they do.  If you know that your industry is ripe for acquisition, it may be time to ramp up financial and operational controls so that you don’t miss out on a potentially lucrative offer.

An exit plan should not be thought of as a very specific solution regarding exactly when or to whom your company will be sold.  Rather, it should be viewed as an exercise in looking at all of the potential options.  Going through this exercise will allow you to make sure you are planning for all scenarios and not just the one you think most likely.  A good exit strategy has more to do with making sure that your company is prepared when the time comes regardless of the timing or type of buyer.

Categories: Finance