Position Your Company for a Sale – From the Beginning

Confused business man seeks a solution to the labyrinthEven before you launch your venture, put together a plan that highlights the venture’s exit options. Such a plan should highlight the strategic and financial options available to your venture, should you be able to launch. Having exit options will comfort your investors and stakeholders with the idea that the managers are first and foremost interested in creating value, value that at some point will be monetized.

Launch your venture with the assumption that you have three to four solid exit options. Its important to go so far as to detail those exit plans in materials for investors. Highlight who might be involved in certain exit events (who would be a likely buyer, for example), why they might be interested, and how an exit event would occur.

Its also important to brief employees and other stakeholders on possible exit options. Briefing employees on this information lets them know that management has a plan to create value. The best managers will motivate employees and align the goals of the individual employees with the venture’s strategic goals regarding exit options, making an exit event more likely.

Strategic options include, but are not limited to the following:

1. Potential partnerships with other players in the industry,

2. Joint ventures with industry participants,

3. A sale or merger of the venture.

Partnerships are often an informal way to test out potential mutually beneficial relationships with other players in the market. For example, a partnership may mean that you work together with an existing player in a capacity where you hold a strategic advantage, yet the other partner has the ability to offer some trait or skill that your venture might lack. Partnerships often involve little to no change of control. They are simply a way for two ventures to work together to leverage each other’s individual strengths and create a more powerful combined partnership.

Joint ventures are a step further along the spectrum in terms of a formal relationship with another industry participant. A joint venture could mean that the new enterprise has some degree of combined ownership or control. Similar to a partnership, joint ventures usually arise when two players come together with mutually exclusive skill sets. Unlike a partnership, a joint venture is often a more formalized, legal structure that can often be a separate corporate entity.

In a strategic context, a sale or merger would occur as a direct change of control (and ownership) to another industry participant. A sale would result in an immediate monetization of value. While that monetization may occur in stock (as opposed to cash), it is still a value creation event and an event whereby the investors can reap a return on their investment.

Focusing on financial options offer a slightly different set of opportunities for your venture.

Generally, the three options under a financial buyer are:

1.  An outright sale,

2. Partnering with a financial sponsor (private equity firm) to conduct a roll-up,

3. An equity offering such as an IPO.

An outright sale under a financial option is, of course, similar to a sale or merger under a strategic context. The major difference is that a financial buyer is likely to purchase your venture from an investment perspective. In other words, its not an industry participant acquiring your firm, it’s a group of investors or investment fund. There are many ways the differences between a strategic buyer and a financial buyer can manifest itself. Most likely a financial buyer will purchase a venture and keep the venture intact. A strategic buyer, on the other hand, likely has a great degree of overlap in terms of resources and skill sets, thus its unlikely they will keep the venture intact after the change of control as there are likely to be areas that will be cut do to redundancy. Similar to the strategic context, the sale would involve a change of control and likely immediate monetization.

A roll-up is a financial maneuver made popular during the leveraged buyout days of the 1980s. Under such a situation, a financial sponsor, usually a bank working with a private equity firm, supplies the capital to combine a number of ventures together with the intended result of creating a single, larger entity. This type of maneuver is popular in industries with a high degree of fragmentation, characterized by many smaller companies operating in the market, as opposed to a few dominant players. The thought is to put together many smaller players who are successful in their own niches to create a larger venture that can use its scale more effectively in the marketplace.

While many entrepreneurs are raised with the idea that an Initial Public Offering (IPO) is the pot of gold at the end of the rainbow, in reality it’s a highly unlikely event. Only a handful of companies reach the stage where they are able to raise funds through an IPO. An IPO simply means that you are selling share to the public via a public market such as the NASDAQ, NYSE, or similar exchange. Once a company achieves public status and is trading shares on a listed exchange, the regulatory requirements become quite onerous and there is an entirely different set of rules governing publicly listed companies.

Thumbs UpTry This: Enter into any venture with an exit plan. Show all stakeholders how you intend to create value for their investment.




Thumbs DownAvoid This: Manage the venture for the present, not the future. In the chaotic world of start-ups, its important to keep an eye on the future, but placing too much focus on the future can distract from more immediate problems.

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