For many tech startup and scaleup founders, the ultimate goal is to exit – selling their company for vast sums of money. This article, co-authored by Simon Pearson and Anna Faelten from EY’s TMT Corporate Finance team, explores how you can figure out if you are prepared for exit.
In our recent launch of the EY Fast Growth Tracker, a survey of entrepreneurs at the helm of fast growing UK businesses, we found the statistics to be clear – UK entrepreneurs have exit clearly in their vision. The survey found 30% of entrepreneurs will look for an exit within three years from today, with another 35% looking at a slightly longer three-to-five-year horizon. But are they ready? Arguably, if the exit is more than three years away, it is probably wise to focus solely on Business As Usual [BAU], which for some entrepreneurs is of course not very usual.
Growing a business at a fast pace, in terms of products, customers and organisation, is no easy task to start with. Add to this the preparation for a successful exit, and you have a pretty full agenda. But for those entrepreneurs with an exit planned for a bit closer in the future – we guide to 18 to 24 months to intended transaction date – this is a necessary exercise.
Preparing for your exit means exactly that, preparing. Preparation should be done thoroughly and well in advance of starting your process. But most importantly, as an entrepreneur you need to be prepared to sell your business. What do we mean by this? Well, you will need to have a clear idea of what transaction you are after. The answer will differ case-per-case, of course, but these are a few good questions to start thinking about:
- Is your story an exciting growth story which is well articulated and believable, ie backed by appropriate Key Performance Indicators [KPIs]?
- Are your shareholders aligned to the exit outcome?
- What are your own and key management plans post exit? This will indicate the preferred buyer route.
The preparation will also include structural issues, for example aligning the corporate structure for a sale and being aware of any tax implications, as well as financial and legal preparation to make the business fit for diligence. You – as a busy entrepreneur – might also ask yourself: “Why bother? We can surely sort out these issues when we need to at a later date.”
Below is a selection of questions you should be asked at an early stage and will help drive valuation and mitigate deal risk:
- Does your CRM system retain data in a way which proves historical sales conversion?
- Do you have enough data to evidence return on your accelerating overseas activities?
- Do you have share options promised to key staff but not documented or agreed?
- Are your brand or IP rights unclear – software code using open source or other unlicensed modules?
These questions are all likely to take time and cost money to solve at a later date and could result in a valuation reduction or prevent a premium being paid for your business. Systematically mitigating over a 12-month period before a transaction starts allows you and your team to focus on the good news and market opportunity, and not get delayed.
We often help entrepreneurs get started in time by running focused workshops. These sessions, held with management and key stakeholders, are intended to assess how ready the business is for an exit process.
As a final thought on this topic, corporate financiers will testify to the notion that there is no such thing as an easy deal. An exit process is time consuming and, by definition, uncertain until the last minute, as there is no transaction until the dotted line is signed. Make sure you and your team are prepared for minimum six months of BAU and running a parallel process.
The EY Fast Growth Tracker is a survey of executives of fast growing companies in the UK, tracking business sentiment and views about growth. Email EYFastGrowthTracker@uk.ey.com to learn more. If you want to talk to us about your exit, email spearson@uk.ey.com or afaelten@uk.ey.com