Funding & Exits: Best Practices for High-Growth Companies
Funding and exit strategies are critical to high-growth companies planning to sell (or potentially sell), even if a sale is still years down the road. It allows stakeholders to exit on their own terms, for top value.
But readying a company for funding and exit is sometimes seen as an expensive burden. As such, businesses go about it as if it’s a separate exercise, apart from day-to-day business – and/or wait too long to go about it at all.
Exit planning should not be an isolated effort because what makes a company attractive to others can also make it thrive until the exit. There’s value to weaving an exit planning mindset throughout a company’s entire lifecycle.
Why do some exits fail?
When funding and exits don’t go as planned, it’s often due to one or more of the following missteps:
- Information is missing
- A company can’t articulate its own value
- There is a lack of communication across the organization
All of the above show a company not ready for a sale. How does this happen? Companies like talking about the idea of funding and exit. Why don’t they invest time and resources to make it happen?
The answer boils down to disconnect.
Think of businesses as four-story buildings:
- Day-to-day operations are on the ground floor.
- One level up is management, handling the flow of goods and services.
- The second floor is home to directors.
- Third floor is c-suite executives.
- The fourth floor is the advisory board.
Like in real life, the higher you go in the building, the greater the external view. The advisory board on the top floor is handpicked for its relevant, high-level expertise and experience, whereas employees on the ground floor are expected to focus more squarely on tasks at hand.
In our years of advising clients for exit, we’ve seen that exits fail because floors generally operate too independently of one another.
Consider a typical management report. Generally, 2NDand 3RDfloors will generate quarterly management dashboards that look like something on a due diligence checklist. Everyone on the 2ndand 3rdfloors is impressed…but if they were in touch with the 4thfloor, they’d see that it isn’t as unique as they thought The 4thfloor has already formatted this information in efforts to assess value and to run scenarios against an exit plan. Had the floors shared this info, the efforts would have been cohesive. There would be visibility and drill-down. Even more, necessary overlap remains in place while duplicate efforts would have been avoided.
Solution #1: Increase Communication Between Floors.
A 4-level building wouldn’t be a 4-level building without stairs and elevators. But you have to build them. At proper intervals (weekly, monthly, quarterly), ensure communication between levels, even if it’s as simple as a summary of what’s happening there. This keeps individual floors from doubling up on work or operating under differing assumptions.
Stronger communication channels also keep leadership from getting stuck at one level. Small companies and CEOs of larger companies sometimes spend too much time on what’s happening on the ground floor and never have the high-level discussions a company needs to build a growing, sustainable, attractive-to-buyers business.
Solution #2: Ensure every floor is doing what it’s supposed to be doing.
1st floor: Things happen here. Front load and standardize these processes. Don’t skip project management steps but don’t overdo it, either. Overdo it, and leadership ends up spending too much time here. Core data must flow upward, simply and with ease.
2nd and 3rd floors: These floors handle bylaws and vendor management. Know what’s working and what isn’t. Know what’s differentiating your products and services. Aggregating information and metrics that underpin value provides necessary visibility.
Top floor: Should be able to take info from the lower floors and filter it further to ascertain what’s valuable to the market and what’s not. Don’t just check boxes. Look at the summaries of pluses and deltas; that’s where the expertise of advisors can be leveraged for effective feedback. Are we focused on one area too strongly? Is positioning improving? Did the actions of the last two quarters shift the company from one scenario to another? You can target suitors/buyers with this information.
Solution #3: Continuously Prepare for Exit
As best you can, fold exit readiness into ongoing activities throughout each functional area of your business. It’s here that you ask yourself the hard questions. Are we delivering value to our customers? Will this value still be valuable in 1 year / 5 years? What do we need to change to get from where we are to where we need to be to achieve a successful exit? When you have answers to these questions, management and the board can focus on continuously building value.
Solution #4: Seek Outside Counsel
Very few companies successfully manage their exit alone. A good advisory board’s value can be immeasurable. An advisory board keeps the CEO focused on the right things. An advisory board keeps an eye on exit goals and how the company is approaching those goals. An advisory board keeps you honest – a group of objective professionals that have seen and heard it all will know when you’re on track and when you’re slacking. They’ll help you drive what matters and demonstrate where things fit proportionately in a valuation.
Conclusion/what’s at stake:
Many businesses don’t fold preparation-for-exit processes into everyday operations. Many of them cram them in leading up to an exit. It’s these businesses, more often than not, that either fail to exit or sell for much less than what they thought. Don’t be like these businesses. You don’t want to be running around at the last minute trying desperately to make your business more attractive to suitors. Your value should be readily apparent when you’re ready to sell. The great thing about positioning your business for exit is that you don’t just realize the value when you sell. Good communication up and down the organization, clear responsibilities across departments, a continual focus on value, and good outside counsel makes businesses more efficient, more profitable, and more valuable.