When is the Best Time to Pursue an Exit Strategy?

If you are considering taking your business through an IPO instead of a merge or acquisition process then you need to learn to identify the short windows of opportunity that open as a prime time to make an IPA. These windows of opportunity will ensure your company will receive a strong valuation on your business and maximize your return on investment. If, however, you are going to pursue an exit strategy through an M&A process then it is more about positioning your business for an acquisition rather than timing.

Pursuing M&A

Pursuing an M&A exit strategy is more about cash than it is about timing. You need to determine if you are on an upward trend or whether you are at the bottom of a trough or just coming off the top. If you are still climbing in revenue and your business is looking better and better each year then a buyer is going to see that as opportunity. If, instead, you are showing three years of growth then the most recent year is a decrease, an investor is going to start to wonder why you what to sell now. What do you know that is making you anxious to sell your business? If your business has been receiving decreasing amounts of cash each year for the last two to three years then it may appear that you are cutting your losses and are looking to escape while you can. Which situation of the three discussed would you be willing to pay the most for a business?

The infamous owner of the Dallas Mavericks, Mark Cuban, owned many businesses throughout his career. The business that made him the most wealthy, however, was Broadcast.com. Mark Cuban along with his colleagues were building the business and experiencing rapid growth all the way up till they found a motivated acquirer, Yahoo, who was looking to improve its technological capacity. Shortly after the sale of the business the company started to head down hill. The point is not to try to stiff arm the party that will make the acquisition, it is to sale the business at the time that you have just about done all that you can to with the business but you are still experiencing growth. Then you sell to another enterprise that can continue growth in a manner that you are not capable of. In this case Yahoo just missed the ball as they took their eye off search engines.

Four Main Roles in an Exit Strategy

There are essentially four main roles in an exit strategy: The investors, the board of directors, the CEO, and the investment bankers.

  1. The Investors: the role of the investors, as they are the main share holders, is to determine along side the board of directors which exit to pursue, whether that will be an IPO or an M&A strategy.
  2. The Board of Directors: It is the responsibility of the board of directors to consult with professionals on which strategy to take. Once they have consulted it is important for them to realize that there is a fiduciary responsibility to the investors to actively pursue the strategy that will increase the value to the shareholders.
  3. The CEO: The CEO is responsible for carrying out the demands of the board of directors and ensures the company continues to be profitable and increase in value. As the CEO may very well be one party who will remain with the company after the sell he or she needs to continue operations successfully and put out any rumors that the company may be going through an exit strategy. The reason it is so important that the employees do not know about the pursuit of an exit strategy is to ensure that key employees do not start to look for employment elsewhere. If key employees start leaving the company value may start to decline quickly.
  4. The Investment Bankers: The role of the investment bankers in an acquisition process is to facilitate the sale of the company and increase the value of their client in any legal and ethical way possible. If personal expenses are being ran through the company it is their responsibility to identify those expenses and add them back in to the figures determining the value. It is also important for the investment bankers ensure the owners maintain reasonable expectations with valuation and deal terms as they enter the process.

Each of these key roles need to be performed exceptionally well as each role will play a critical point at some time during the process.

Troy Jenkins
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