A first-class exit
Overview
A first-class exit describes the sale of a company for a very high value, generally one that beats the expectations of the company's founders and investors and is well executed with a strategic approach.
It doesn’t necessarily mean selling at the maximum possible value, rather it is about the overall outcome for the company, shareholders and employees, including creating opportunities for growth, a smooth transaction and a successful transition process.
While an exit can also refer to an IPO or other liquidity event for shareholders without necessarily selling the company or giving up control, the focus of this post is in the context of a trade sale, as that is the most common form of exit where significant value is realised.
A first-class exit
A first class exit requires that the transaction completes with the best acquirer, at the ideal time, with peak negotiating leverage, where you receive full consideration when it is due and are able to look back and be grateful for what you have achieved.
Transaction completes
Completion of the transaction marks a significant milestone for the company, the founders, investors, management team and the acquirer. It means the company’s founders and investors can move on to the next chapter and for the acquirer, it means they have successfully acquired a company they believe can help them achieve their aspirations.
This means that all of the legal and financial details have been resolved, consideration has been paid and received and the transfer of ownership and assets has taken place. Additionally, in the context of a first-class exit, it refers to the successful conclusion of any executive service agreements, earn-outs or warranty periods.
Best acquirer
The best acquirer is ideally a premium buyer who can generate the most value from your business, has the capacity to take action and can complete the acquisition at the ideal time.
Preferably the buyer’s goals, values and culture align with your company’s goals. They share a similar long term vision for your company, will maintain your brand integrity and they have a track record of integrating and growing acquired companies. In a first-class exit, an acquisition is a positive for both your team and your customers.
A first-class exit can take time to consummate (often years) from your first meeting and so it is important to build quality relationships early with the right people. Knowing who your buyer might be (or who they won’t be) can be invaluable, particularly if they are operating in a synergistic manner to the company. This can help you make wise decisions as you set the strategic direction for your company and can serve to help the best acquirer choose to buy your company at the ideal time. There is also the added benefit of knowing each other over a longer time period which gives you the best opportunity for the relationship to withstand the intensity involved in an acquisition process.
Ideal time
The best time for an exit is usually when your company is approaching the maximum possible value, market conditions are favourable and shareholders want to exit.
Timing can have a huge impact on valuation and the likelihood to complete a transaction. It is hard to predict market timing precisely and there are many different ways the ideal time can come up.
If you sell as you approach maximum value (but still leave capacity for growth and future opportunities for the buyer) it can be very helpful to achieve the best possible overall outcome, rather than optimising purely for the headline price which can often have unintended negative consequences.
In some situations you can try and select your ideal time by pre-empting the market. For example:
You are set to become the market winner (and the acquirer won’t be able to afford you at scale) and your rate of growth is increasing;
An acquirer needs your business now (so they can win the category and/or achieve a step-change valuation); or
The market is set to mature and you can front-run consolidation
Other reasons for the ideal time could be the company is ready for the next stage of growth and someone else is better positioned for that stage or it can be more personal, for example something changes in the business or you and other shareholders have a preference for liquidity over other options.
It is almost impossible to predict the ideal time, which is why it serves most companies to have more than one option available and to be well prepared ahead of time. The benefit (and curse) of hindsight means you will almost always have a different perspective after the event.
Peak negotiating leverage
Leverage refers to the power or ability to achieve an impact or influence outcomes. In a negotiation, the one with more leverage is able to shape the outcome in their favour.
To work towards peak negotiating leverage it is helpful to have:
A competitive process with multiple interested buyers (ideally with more than one premium buyer)
A great relationship with the key person at your best acquirer cultivated over time with a high degree of trust, respect and transparency
A strong customer proposition and competitive position with attractive industry dynamics
A solid balance sheet and financial track record (so you can negotiate from a position of power and have influence on the ideal time to exit)
Your shareholders and team are aligned and prepared (which comes through to potential buyers and increases confidence, speed and likelihood of the transaction completing)
You understand what would be attractive to a buyer and are able to clearly articulate the key aspects of your business, your plans and your potential value and synergies to a strategic acquirer
For peak negotiating leverage:
Your best acquirer knows you exist, recognises they need to acquire you now to achieve their goals and know that it will likely be much more expensive or not possible to buy you later
They understand that they need to move quickly because it is a competitive process and this is their one shot to do a deal with you
They know that if they don’t complete the acquisition, if you continue to thrive independently (e.g. increase market share), raise a meaningful external investment round (privately or via IPO) or are acquired by another company, it will create a major problem for them
Receive full consideration (when it is due)
In a first-class exit, all (or close to all) of the consideration is paid upfront when the transfer of ownership and assets takes place. This would often be cash but in some cases may be partially or fully paid in shares. In many cases there may be a portion of the consideration deferred. Some common reasons are:
Warranties: there may be a period of time that certain warranties are required and in some cases a portion of consideration is held back to the completion of the warranty period
Executive service agreement: if leadership is staying on post-acquisition, there will usually be an employment or consulting agreement governing the relationship. In some cases there may be bonuses or other incentives tied to the executive(s) staying for an agreed period of time or achieving agreed KPIs
Earn out: buyers sometimes use earn outs (or similar structures) as a mechanism to bridge the gap in valuation expectations between the parties and to incentivise certain behaviour. Earn outs often have a portion of deferred consideration which is linked to the company’s performance or specific events post-completion
Grateful for what you’ve achieved
Achieving a first-class exit is often difficult and requires many different factors to come together, often over a very long period of time. It requires the support of the team and many significant others over the course of the founder’s and company’s journey (think team members, investors, customers, family members etc.). Many founders use the opportunity to reward those that supported the company.
At the end of the process, if you're proud of what you’ve built, what you’ve collectively achieved, and the legacy that’s been created, it justifies the effort and hard work over the years.
Final musings
Every successful exit has its own challenges. There is a lot to be said about not completing a transaction if it doesn’t meet the requirements of a first-class exit. We all try to make the best decisions with the information available at the time. However it is impossible to have contingencies for all of the unknowns that arise in an exit process.
This post isn’t meant to be a step-by-step guide. Rather it is an outline of what the best case could be so that there is something broadly to aim for. I’ve found it helpful to use a structured approach when working towards an exit and to have a solid understanding of market multiples and transactions over time to help make better decisions.
As a founder, achieving a significant exit can be a life-changing event. There are many positives but also challenges to consider: managing the financial windfall (not losing it); maintaining relationships with those you worked with and staying motivated by deciding what to do next. I’ll dive deeper on these topics in another post.
