Exits/Exit Strategy

Understand Your Exit Options Early: Despite What They Tell You

Founders are often reminded, “great companies are bought, not sold” – emphasizing the importance of focusing on the business rather than the exit plan.  True enough, but founders can help themselves through an early understanding of the levers for buyers in their industry.  Knowing that can help entrepreneurs position their companies for a successful sale – and it may also cause them to focus their startup in a different way.

I was reminded of this when I participated in an M&A panel at LeadsCon, a trade show focused on companies in and around the lead generation business.  The LeadsCon event, hosted by founder Jay Weintraub, has thousands of participants and encompasses a broad range of companies, from call center based companies to companies with proprietary technology enabling greater success, and lower cost, in sales lead acquisition, and companies from education to insurance to senior care and more.

The panel, which included seasoned investment bankers and a private equity professional, focused on merger and acquisition and financing opportunities for lead generation companies.  Tellingly, the panelists did not focus on the acquisition process, but rather much earlier:  whether the company had positioned itself out of the gate for outside investment or acquisition.  My fellow panelists emphasized the desire for acquirers and investors to partner with companies in which proprietary IP and technology give some distinguishing characteristic and advantage – a barrier to entry – over its competitors.

This may be particularly true in the lead generation industry, since a company can succeed initially without a substantial proprietary advantage.  An enterprising leadgen founder can build a company that generates positive cash flows quickly by arbitraging leads – that is, purchasing leads for one price and selling them for more.  This approach works fairly well in the short term but then tend to plateau in the face of increasing competition, making the company a less desirable investment and acquisition target.

The same principle applies in other industries as well.  The path that builds early revenues may not lead to a successful exit.  For example, a software company that develops software for third parties, without retaining any corresponding intellectual property rights, will generate more revenue out of the gate than the company that builds its own proprietary IP programs to license out.  The software company can generate a substantially higher long term valuation, however.  This sounds self-evident and may not be a bad thing – a  development company is a viable business after all – the founders should simply understand the impact of this approach when it comes time to sell.

My takeaway:  an early understanding of the M & A opportunities in your industry represents an important first step for a founder who hopes for a successful sale.  Founders that do so are more likely to sell their Company for the desired return.

Dealing with “Dead Equity”

“Dead equity” refers to company stock owned by individuals and entities no longer contributing to the company. In general, there are two types of dead equity seen on emerging company cap tables: Departed founders/employees. A co-founder or early employee leaves a company or no longer significantly contributes […]