Tech entrepreneurs know that an exit is often part of the game plan. From the earliest days of an enterprise, the prospect of “cashing out” when the time is right can galvanize efforts and define strategy.
These days, some founders start their business with an eye to a buyout by a specific company. We have seen companies build many applications on specific platforms in hopes of broad acceptance resulting in a capital raise or a sale of the business.
One thing to keep in mind is that not all exits are created equal. Founders will sometimes look for a partial exit — perhaps via Series A or Series B financing — where they dilute their equity to 15 or 20 percent ownership. They will retain a robust equity stake, but they now may have venture capitalists as partners who contribute both capital and strategic acumen.
How to maximize value
Whatever form the exit takes, founders increasingly must consider a basic question: How do I maximize value in advance of an exit?
The answer is best viewed through two classic lenses of business success — increasing growth and minimizing risk. To kick-start the process, we present 7 strategies to maximize exit value:
- Diversify — Investors want to see that a business carries as few risks as possible. If your company is dependent on a few key customers, focus on lowering risk by adding customers or diversifying your revenue streams.
- Focus on contracts — If your business relationships are defined by evergreen contracts with no formal contract, try to change your contracts’ terms. The longer the contract, the lower the risk for investors.
- Plan the succession — Many early-stage businesses avoid the headache of succession planning. However, founders know that their “secret sauce” can comprise intellectual property that sits with them. If you want to sell the business, this knowledge needs to be transferable. Patents are often a key plank of this strategy. You can also institutionalize the technical knowledge in the business.
- Streamline processes — Prospective investors want to know that their investment can grow. To this end, make operations as scalable as possible by automating as many of your operations as possible.
- What has your business done lately? — Tech startups can often burn through capital at astonishing rates to fund growth. While a long list of Silicon Valley successes demonstrate this strategy’s effectiveness, investors need to know that your business has staying power. They will look at your cash burn and your last 12 months of revenue growth. If your company’s long-term investments compromise its ability to generate traction with the “perfect” product, you may need to reconsider your strategy.
- Get your house in order. Selling your business can sometimes seem like staging a home for sale. Professionals can help you spruce up your financials to prepare for VC scrutiny — from ensuring your tax strategy or working capital is optimal to implementing internal planning or administrative changes, such as improving budgeting, forecasting or financial reporting. It is also recommended to perform a due diligence check on your business — even for smaller items such as staying current on your tax returns or optimizing days in accounts receivable or inventory turnover ratios. As founders transition from the bootstrapping life, points overlooked during 18-hour workdays can hurt your valuation when your business becomes an investment target, since some of these improvements take time to implement and demonstrate to investors that they are sustainable.
- Go beyond the standard balance sheet — Investors will concentrate on key performance indicators that exceed the reach of a typical balance sheet. From the sales pipeline and customer acquisition costs to monthly recurring revenue to customer churn, you need to understand these indicators and ensure they are in top shape.
While maximizing an organization’s value hinges on the nitty-gritty of the business, tech entrepreneurs cannot lose sight of the wider investment arena. Market variables have a way of changing the calculus of your exit strategy.
Canadian startups in particular face a separate set of valuation challenges. While the market continues to grow and offer opportunities, it remains a smaller market compared to the U.S. As a result, Canadian companies should consider the U.S. market to complement their client base north of the border – and should pursue investors and partners if it makes sense.
While looking outward, entrepreneurs may notice market shifts that frustrate their best efforts to control the success of their business. But new developments also offer opportunity for tech leaders with a well-honed sense of timing.
Take artificial intelligence and Blockchain. Once afterthoughts in the investment universe, these technologies now command the attention of investors. For tech founders in those spaces, the timing may be right to sell. Startups in other spaces can heed the lesson: By tracking market trends and the success of complementary technologies, you can see what potential acquirers of your business are themselves seeing.
Entrepreneurs will always work to control their business environment through strategy and grit. To tackle the unpredictability of the market, though, you may require a dose of luck. It is far less strategic — but it too can add value if the timing is right.
This article was co-authored by Brion Hendry and Paul Gill. Hendry is the GTA Technology and Life Sciences Leader for BDO Canada and Gill is the National Valuations Leader for BDO Canada.