Start-ups: How to get your exit strategy right

Not every founder starts a business intending to hand it over someday. But for many ambitious entrepreneurs, exit is often the end-game.

by MT Staff
Last Updated: 31 Jan 2018
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For many start-ups the most obvious exit is in the form of an acquisition. Being acquired can have a number of advantages for entrepreneurs, according to John Cordrey, Private Equity Investment Manager at Foresight Group.

‘It can be good for businesses that are capital constrained, or where the founders want to de-risk and take some money off the table,’ he says. ‘It can also help reinvigorate growth, as well as providing the funding you need to invest in growth.’

You’ll want to consider how much equity to retain, Cordrey advises. ‘The acquirer is ultimately there to help you increase the overall equity value in the business. So it can be a great way to increase your personal equity value.’

However, there’s no golden rule for deciding when to put your business up for sale. It’s very much sector-dependent.

A young tech company, for example, may have an innovation that’s in hot demand, and find itself being snapped up at the pre-revenue stage. By contrast, a traditional engineering business would probably need at least £1m EBITDA to appeal to a buyer, ideally £2m plus.

‘You’ll need to be clear on your exit strategy,’ says Cordrey. ‘That means being upfront about whether you intend to stay on and help take the business to the next level. And whether you want to take all of your cash off the table, or defer some of the payout.’

Other questions to consider include:

  • How much equity can you expect to retain if you stay on?
  • Will you be offered options?
  • How much cash will you receive on day one if exiting?
  • Will there be an element of deferral – and for how long?
  • How will your performance be measured when determining your payout?

With all this in mind, you need to do your research, Cordrey advises. ‘Then approach a select number of potential buyers, making sure you understand each one’s potential motives to acquire your business.

‘This creates competition, pushing up the price and giving you leverage when negotiating the equity and payoff terms.’

One company that got their exit strategy right was translation firm and Mayor’s International Business Programme cohort member, translate plus. They were acquired by cross-media marketing production company Prodigious – part of communications giant Publicis Groupe – in 2017.

‘We didn’t go down the classic start-up route, taking on debt and developing the business to profitability over several years,’ says Co-Managing Director Robert Timms. ‘We made sure the firm was making money at the outset.’

Re-investing profits kept the founders in complete control of the company for the first seven years. It wasn’t until 2015 that they decided to seek funding – and look for a buyer.

‘The business reached a point where it was time for a transformative leap,’ Robert explains. ‘While for us as founders, it was time to de-risk, and gain some reward for our hard work.’

‘Being acquired by Prodigious was the ideal solution,’ Timms explains. ‘It had the ready-made global scale that could transform translate plus. Strategically, there was no overlap of services. And it offered the right level of de-risking, as an established and financially secure global business.’

The process was straightforward, but that doesn’t mean it was easy. ‘It was nine months of incredibly hard work,’ Timms cautions. ‘Huge amounts of prep were required, and we still had to keep the business running.

‘You must understand what’s involved before going into an acquisition. Then ask yourself: are you ready for it?’

Looking back on the experience, Timms has two valuable pieces of advice for start-up founders considering selling their business.

‘Sell when you want to, not when you have to,’ he says. ‘And know what you want from the acquisition.

‘For example, is your aim to exit the business, or stay involved in growing it? The two scenarios will make for very different deals – and very different buyers.’

For more information on the Mayor’s International Business Programme please see gotogrow.london.

Their new report on Routes to Finance features high growth London scale-ups who have successfully secured funding to expand their businesses. To access the report, please see business.london.

Image credit: Peter Gudella/Shutterstock

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