Preparing for exit can seem daunting at the best of times, but many tech entrepreneurs fail to develop an adequate strategy for their business early on, subsequently leading to costly mistakes once – and if – the opportunity to sell arises.
While it’s true that not every business is suited to exit, devising a plan should help ensure employees across the board adhere to long-term goals and objectives.
With this in mind, we got a panel of experts together in a bid to provide tech entrepreneurs with a realistic overview of what needs to happen when preparing to exit a business. Our panel event, hosted in collaboration with business advisory firm RSM, featured David Blacher, the company’s partner and head of TMT; and Kirsty Sandwell, an M&A partner at the firm. Blacher and Sandwell were joined by Robert Whitby-Smith from Albion Capital; Tom Bradley from Oxford Capital; and Jules Coleman, the co-founder of Resi, who exited Hassle for a reported £24m.
Building a successful business is paramount, the experts agreed.
“On day one, you need to be passionate about your business and it’s not really about the sale yet. The focus, when it comes to an early-stage companies, should be on making them a success. The exit, or the fundraise, will follow if you do the right things,” Blacher weighed in.
Panelists encouraged entrepreneurs to set clear business goals and to review them annually, keeping in mind their long-term vision for the company. But, they also urged entrepreneurs to have early conversations about a prospective exit.
Bradley, whose portfolio companies at Oxford Capital include Curve, Attest and Moneybox, warned that some of the relevant paperwork should be taken care from the onset to avoid incurring additional costs and unnecessary stress.
“There are a number of things that you will need to have buttoned down when it comes to exit – things like employment contracts and IP ownership. It is much easier to get this sorted at the beginning than it is to do so when you’re running around and preparing for an exit,” the investor said.
The need for companies to have watertight intellectual property (IP) was a recurring theme throughout the discussion. IP is important for any business, but acutely more so when it comes to companies building proprietary technology and seeking to stand out in competitive markets and secure regular revenue streams.
Anecdotally, Whitby-Smith spoke about Oracle’s acquisition of Grapeshot, commenting on how the tech giant had looked back at the company’s IP over the past three decades before signing off on the deal. “Grapeshot hadn’t even been around for that long,” he quipped.
IP also struck a chord with Sandwell, who said it wasn’t uncommon for buyers to look at every single line of a company’s code as part of the due diligence process. If the prospective buyer notices any issues they may be spooked and the whole process could fall apart, she warned.
Ongoing conversations about exits and ensuring that all the necessary paperwork is in order is crucial, but so is managing expectations and considering what a potential exit might look like and why.
“It’s important for entrepreneurs to think about potential buyers, but also realise that a sale will take time,” Whitby-Smith said.
The prospect of selling a business could be exciting, but Sandwell warned that deals often took longer than expected. ‘It can entail a long and arduous process, even after the buyer has signed on the dotted line. Entrepreneurs, she added, should consider their own aspirations, questioning whether they want to be part of the business once it’s sold.
“The idea of getting a cheque and running off to the hills is a rarity,” she added.
Time considerations aside, the prospect of selling can also prove challenging. The process, panelists said, will see founders seeking to overcome a series of challenges, in some instances, for the first time. Hiring a professional who can guide the process is paramount, Sandwell commented, while encouraging entrepreneurs to realise that they don’t have to accept the first offer they receive. “Negotiation is key,” she added.
Coleman was candid about her own experience, telling attendees that it was useful to consider outcomes and opportunities. But, what do these outcomes look like? According to Coleman they can be summarised into: failing, building a business to be handed down to generations, going public or getting acquired.
“When I wrote the first line of code, I never thought someone would buy us or that an exit was even going to be the right thing for us and the business,” Coleman said, adding that the acquisition had happened almost by pure chance.
“We had a credible offer to buy us, and we kept turning it down. We also had a £20m term sheet for a Series B on the table. We decided to raise a round concurrently to see which process would take off first.
“My co-founder was on maternity leave. We didn’t engage any professionals to help us with the deal, which in hindsight was a mistake.”
As Coleman and her co-founders went deeper into the selling process, they realised the change in dynamics; aware of the fact that they would change roles as a result of the transaction. “You go from being a co-founder to an entrepreneur in the new company, once the sale process is complete.”
“Being on the other side of the table with the buyer is weird, because when the ink dries, you’re suddenly colleagues. Looking back, we did every single possible aspect of it wrong, other than looking disinterested when the buyer first came to us.”
The serial entrepreneur was candid about the personal toll the transaction had on her.
Not being able to disclose the potential sale to employees was tough, she added.
“You’re keeping a secret and trying to explain to people why you are absent or looking like you’re about to lose your mind without disclosing what is going on isn’t easy.”
Sandwell reflected on her experience, and commented on how she, too, had seen entrepreneurs suffer throughout the sale process. “The process of selling is very distracting and founders are not in control of it. We [at RSM] see a lot of emotional burden, it’s incredibly stressful.”
In order to lessen the potential burden on founders, Bradley adviced entrepreneurs to make good use of their chair people and advisors. “It helps to have a wingman or woman in this situation.”
There are, he said, certain conversations that a chairperson can have which may prove difficult or uncomfortable for the founder or CEO. Blacher agreed that board members could prove invaluable during an exit process, but noted the need for flexibility. “Expect board members to change. Sometimes individuals must leave because they are not ready to take the business forward.”
Technology entrepreneurs should first and foremost focus on building successful long-term businesses, while proactively planning for the future, and devising a clear exit strategy. Ensuring the right documentation is in place, hiring external advisors who can aid the process, and keeping expectations in line with reality should typically ensure the process is as smooth sailing as possible.