Making a grand exit

19:43, Jun 10 2013

Entrepreneurs start companies for different reasons.  

Rod Drury’s first two startups were sold within a few years. When he started Xero, however, he aimed to build a listed company from New Zealand, with global ambitions.  

What his ventures demonstrate is the importance of setting a goal and a strategic path for your company.

If you’re expecting to build a company for sale (like Drury did early on), then there are some important rules to follow from the start.  

Work out who might buy your business. If you haven’t considered that, you don’t know what you are building. 

You need to understand from the first day of your startup’s life who your strategic acquirers are, why they will buy your company and what it is that they value.  

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This is fundamental to your likely success in reaching that goal. 

Do your homework. Once you have basic proof of concept, you can analyse your exit and get to know the key players.  

Potential acquirers could be those who will suffer most if your business executes successfully, those who might gain from your success, or those who would be locked out of the market and need to buy their way back in. 

Find out who could make more from selling your product or service than you can, and those who need the technology and your customer base.  

This will leave you with a target acquirers list - one of the most important pieces of paper for any startup.

You need to know what the target acquirer is seeking. Look at all the public information available on the businesses they have acquired, what the strategic fit was and what they paid.  

Because markets move quickly, you need to revisit this each quarter.  

In my experience, if you are not discussing your exit plans with your board once a quarter, then you are not investing sufficient time in this key aspect of your business.

Engage early with your target acquirers and find out what they really value.

An acquirer may value sales reference sites, but ascribe no value to the creation of your own distribution network because they ultimately would prefer to use their own distribution channels.

The rule here is to value your business from the target acquirer’s perspective, that way you might build only what the acquirer, and your customers, value - and you don't waste precious funds and resources.

You need to build a platform that is immediately scalable in your purchaser’s hands. I've observed from recent US conferences that acquirers are buying less developed businesses earlier, for more modest, but still very respectable, exit values of around US$50 million.

An acquisition opportunity can arise at any time, so make sure you're executing well and maintaining a due diligence folder of all the key information an acquirer will want to review.

Maintenance of this information doubles as an investor portal for fundraising throughout the life of your business.  

It will contain key commercial and staff contracts, IP details, board documentation, business plans, go-to-market plans, capitalisation tables and market size analysis.   

Finally, make sure you align your entire team’s incentives to focus on a successful exit. Prepare for that by running a mock exit process, and get top professional advisors and an industry-experienced negotiator on board to assist.

Constant focus on your exit will assist to ensure your expectations are realised and hard yards rewarded.  

Having learned those lessons, your next startup might be a keeper. Whatever the end goal is, it has to be central to your business strategy.

Andrew Duff is the chairman and co-founder of Sparkbox Venture Group. www.sparkboxventures.com

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