This is a guest post by Jock Purtle, the Founder and CEO of online brokerage service Digital Exits. His firsthand experience with online startups, combined with his work buying and selling online companies, makes him an expert in high-growth internet companies. When he’s not working with investors and business owners, he’s contributing to the growing community of entrepreneurs and CEOs who have been such a useful resource throughout his career.
While exiting your startup might not seem like the goal in the beginning, it soon will be. Growing businesses with a premium product and a tested business model are always on the radar of both investors and large companies looking to diversify their investments and expand their reach. And while you might think you want to run your business forever, the reality is that the time to move on will eventually present itself.
So the issue at hand should not be deciding whether or not to sell, but rather deciding what you can do now to make sure your business is acquired for as much money as possible. And while large companies and investors won’t overpay for something, they will hand over big sums of money for something they consider valuable.
For you, this means that securing the best exit for your startup starts with thinking about your business in the same way those considering buying it will be. In other words, you need to think like a CEO. Obviously you need to make sure your numbers are strong and that you have a long-term strategy in place, but there other factors that lots of business owners overlook.
Here are four of the most important points to remember as you start planning to exit your business.
1) Systems and Processes Matter
One of the most common misconceptions when talking about startups and their value is that ideas are worth something. Sure, you can’t start a successful business without a good idea, but to think this is all you need is simply incorrect. How you actually turn this idea into a business will determine first how successful you are and then how much you’ll be able to sell the company for when the timing is right.
As a result, it’s imperative you begin looking at how your business runs, working to optimize everything you do in support of business growth. Investors and CEOs will be interested in more than just the growth numbers. They will dig deep so that they see how every aspect of the company works.
Doing this will require a number of different things. For one, you may need to establish a more clear management structure. Startups tend to shy away from the idea of installing a bureaucracy into their business, but it’s a necessary component of building a business that runs effectively and profitably. One of the first things any investor will look for is who makes up your team and how they are organized.
2) Outsourcing and Automating
On top of your management structure, you will also want to make sure your systems and processes facilitate productivity, meaning they do not take away from people’s abilities to do their jobs. Solutions to this include automation and outsourcing. All sorts of processes can be automated, from marketing to payroll to production, and implementing this strategy will thin down your business and make it look more efficient to any potential investors.
Outsourcing is also important. Think about it: if your business gets acquired by a large corporation, there will be lots of redundancies. They likely have their own IT, accounting and HR departments, meaning yours will no longer be needed after the acquisition.
As such, consider taking steps now to optimize these functions, such as employing the help of firms that specialize in them. For example, you could outsource parts of your HR duties to a professional employer organization (PEO), freeing your current staff and giving them more time to work on higher-value aspects of HR, such as your employer brand, candidate experience and onboarding process. These types of decisions will not only make your company more efficient and profitable, but they will also help make your business a far more attractive investment option.
3) Data, Data, Data
When handing over a large sum of money to acquire a business, CEOs and other investors want to be as sure as they can of a return. And while neither you nor them can predict the future, you can come pretty close these days with properly-used data.
Because of this, to set your company up for a successful exit, make sure you’re doing everything you can to collect any and all relevant data. This includes analytics numbers about internal performance, as well as market data and risks. Make sure to fully automate things such as your CRM system and website/social analytics, as this will be information investors and CEOs will want to see when they begin examining your business for a potential acquisition.
Most business owners tend to go after only the data they consider to be relevant at the time. But this causes them to overlook lots of valuable information. Install robust data collection systems into every function of your business so that you can be in the best position to grow now and sell later.
4) An IPO Isn’t Likely
The first thing every startup owner needs to get out of their head is that their business is likely headed for an IPO. The news headlines surrounding IPOs are tempting, as are the individual pay days that they produce, but expecting this to happen is simply not realistic.
To give you an idea, consider the study of tech startups in America conducted by TechCrunch.com. By looking at a random sample of 1,000 tech startups, they concluded that only one out of six will end up making it to the acquisition stage. And the startups that make it to this point are 16 times more likely to sell out via a merger or direct acquisition than an IPO.
So even if you’ve made it past the stage where your startup is no longer in danger of going belly-up, the chances of you exiting the business via an IPO are still slim to none. As such, it’s important to simply push this idea from your mind and instead focus on other ways of getting out of the company in an effective and profitable way.
Your Competitors Are Your Friends
Once you recognize that an IPO is not the way to go and that an acquisition or merger is therefore more likely, it’s time to start thinking about who you might want to sell to. And in this case, your competitors will start to feel a lot less like adversaries and instead more like collaborators.
This occurs for three reasons:
– First, your competitors are in the same market/niche. Acquiring you may help them expand their reach;
– Second, acquiring you means they no longer have to compete with you, which fortifies their position and gives them the chance to carve out even larger chunks of the market; and
– Third, an acquisition means an expansion of their team, giving them access to new talents and new people that can help drive success.
Keep Your Friends Close
However, while it’s important to maintain a relationship with all your competitors, there are three things to remember when looking for a potential buyer for your business:
– Go after those who are best able to acquire you, not those you like the most. Target competitors with deep pockets and solid management structures, as these are the people who will realistically be able to acquire you for a price that reflects your business’ value.
– Expand your reach beyond just your competitors. There may be only one or two other companies in your niche, which means there won’t be much of a market for your business if you only target them, resulting in lowball offers or wavering interest. As a result, make sure to expand your scope to other markets and industries with the goal of identifying firms who would benefit by gaining access to your market and client base.
– Get to know people at these companies. It’s not enough to just know about the companies who could acquire you. Instead, you need to actually have relationships with these people you can later leverage into genuine acquisition offers.
Planning Starts Today
Whether you’re looking to make an immediate exit or are still working through your long-term strategy, it doesn’t really matter. The time to begin planning your exit is now. Try as best you can to get into the heads of the CEOs and other investors who will be looking at your business, and then take steps to make your business more attractive in their eyes. Doing so will make exiting your business far easier and profitable when the day finally comes.