Waiting for Godot: How to Plan for an Exit and Understand the Timeline

Note: This article is the fourth in an ongoing series on Exits. To learn more about how to plan for exits and maximize returns, download our free eBook today Angel Exits: Perspectives and Techniques for Maximizing Investment Returns​ or purchase our books at Amazon.com.

Angel Investing Exit Timelines
Image by Barry Solow

Almost every day we read about some large tech company acquiring a small startup. This steady drumbeat of exits starts to lull angel investors into a false sense of security. Since exits happen on a regular basis, we can just sit back and wait for someone to come along and offer to buy our company, right? Well, unfortunately, that’s not the way it works in 9 out of 10 cases.

Planning for an exit is not something you do after you get an acquisition offer. Planning needs to start early in the life of a company. Company management and the board should engage in these discussions on a regular basis even if the company is years away from becoming a viable acquisition target.

There are multiple ways for investors to achieve liquidity on their investment, such as an IPO, an acquisition, or a royalty stream. With this article, we focus on an acquisition as the approach to an exit.

Q: Christopher, when should the company start planning the exit process?

The vast majority of exits are through M&A rather than IPO, which means they require the cooperation of some future third party in order to happen. Third parties of the corporate variety don’t cooperate unless it is in their interest to do so. So, as I pointed out previously, a founding team should be thinking right from the earliest inception of the company about:

  • Who might buy the company,

  • Why they might buy the company,

  • What they might value the company for, and

  • What milestones will have to be reached before they will be interested.

This will determine critical things like the capital plan, the go-to-market strategy, the marketing messages, the types of investors and even the way the company scales its team. It will be an issue in investor due diligence, and it should be a recurring issue at the board level throughout the company’s growth.

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Q: What are the first steps in the exit process?

The three most important early steps a company can take to maximize the likelihood of exit success are to:

  1. Build CEO and senior executive relationships with key industry players and likely buyers by networking, making time to take meetings at conferences and events, and asking for introductions;

  2. Look for opportunities to build industry thought leadership - speaking, writing, finding ways to be quoted by journalists, and even using social media to interact with key industry leaders - PR can be very powerful and very cost effective marketing;

  3. Keep your corporate records scrupulously organized and up-to-date, preferably in a cloud-based archive so that you are prepared to react to exit opportunities the minute they arise.  Try to look at your corporate data store through the eyes of a potential buyer doing due diligence: what are they likely to ask for, and do you have that information handy and up-to-date?  Nothing takes the momentum out of a prospective deal like having to respond to a request for “more detail on your projections” with a plea for several weeks to pull the information together.

If you run your company like you might be approached by a buyer tomorrow, you know you will maximize your chances of being ready when the opportunity arises.

Q: What preparation should the management team take on to make sure that an acquisition will run smoothly?

There are actions the team should take at both the senior level and with the broader employee base. At the senior level, having good advisors either on the board, in the investor base, or from an outside banker is very helpful. These deals take practice to do well and the typical CEO will have done none or few, so you want to work with folks who do them all the time. Having clear delegations of responsibility for different aspects of the process is critical. You cannot communicate forcefully or negotiate effectively if you are speaking with multiple voices. Training your managers about staying on script is key - what the key messages are, to whom they may talk, and in what context. Buyers have legitimate reasons to want to get to know the entire senior team, but they also use that pretext to obtain an awful lot of back channel diligence and valuation signals that can have a huge effect on the outcome of a deal.  

In terms of the broader employee base, it is very helpful to have a pre-established employee protocol that reminds employees  “we are regularly approached by companies and will routinely talk to interested buyers, so do not be disturbed if management is meeting with strangers. We are not interested in entering into a deal that is not good for our employees and other stakeholders.” It is also important to make sure everyone in the company from the senior team down to the most junior team members have and respect very clear guidelines about confidentiality - with M&A, loose lips sink ships.  

Q: What does the timeline look like for the full acquisition process?

There are exceptions to prove every rule, and in some ways every M&A deal is a snowflake, but the short answer is that most deals take at least 6-9 months from initial contact to final close. And depending on a variety of factors, it is not uncommon to see deals take 12 to 18 months from the time you engage an M&A Advisor, until the cash is in the bank.

Longer time lines are associated with:

  • Lack of seller readiness for the process

  • Lack of buyer conviction or competition between multiple buyers

  • Complex deal structuring issues like tax issues, strategic shareholder approval issues, key regulatory approvals, etc.

It is important to be realistic about this and it is not a bad idea to be very wary of M&A firms that promise something faster. These deals have distinct phases and they cannot be rushed: the pre-deal reputation building phase, the courtship phase, the due diligence phase, the negotiation phase, the shareholder and board approval phase, the documentation drafting phase, and the final closing and regulatory approval phase.  This is all work and it all takes meaningful time to get done, especially when key players on both the buyer and the seller side have day jobs to attend to!

Q: What are some of the areas of concern you watch out for once a company starts this process?

This is such a stressful and dangerous time for a company; there are a million ways these deals can go wrong.  Some of the big fiascos include:

  • Being approached by a competitor who claims to be serious about buying the company, but is really just on a fishing expedition to use the diligence process to gather sensitive competitive intelligence;

  • Having one or more reputable buyers take a good close look and then decide to walk away. Industry players will conclude you were not worth the price you demanded, or there is something wrong with your business under the surface (in these situations, you are said to look “over-shopped”);

  • Leaks getting out about the possible deal, leading to competitor responses such as doing their own deals with each other to become more bulked up and formidable, offering themselves up for acquisition instead of you (on more attractive terms), taking advantage of instability by recruiting your top employees away, or telling your customers that your product cannot be trusted because you are “in play”;

  • Becoming so distracted that you take your eye off the revenue ball and your growth slows, or even reverses, leaving you very damaged and vulnerable if the deal fails;

  • Telling the full team too early (or having the serious nature of the talks leak) and then having employee retention issues - your top performing sales reps are always the first to go because they have the best career options;

  • CEO or senior team deal fatigue leading to rash or impulsive decisions or harsh destructive comments to the buyer.

Want to learn more about how to plan for exits and maximize returns? Download our free eBook today Angel Exits: Perspectives and Techniques for Maximizing Investment Returns​ or purchase our books at Amazon.com.