An Opinionated Guide to Preparing for an Exit
This guide is a result of my experiences in selling my own companies as well as leading the Corp Dev function in the sale of company where I was not a founder. I have been an Interim CFO and financial consultant to brands, so I pull from those episodes. And I am also drawing on my investment banking and PE experiences, and years of conversations with bankers, brokers, founders, CEO’s and attorneys.
This guide is meant to help brand leaders prepare for the best possible exit. It’s ultimately a compilation of things I had wished I had known or done. What it’s not is a substitute for expert, in the market advice. Your company is what it is. So the quality of your deal team will be the single biggest factor in the size of your success or whether you can get a deal done at all. Do not skimp or cheap out! Assemble the best possible team for a deal that you can. More on this below.
3 types of deals
Deals fall into one of three buckets.
The forced exit. This is when the brand is failing or stagnant. Growth is a distant memory. The founders, team and investors are tired. Maybe you are a decade in and ready to move on. Maybe lenders or creditors are pounding you with emails. Whatever the reason, you are being pushed into selling your brand, the timing isn’t really your choice and the outcome is likely disappointing compared to what you had thought was possible when you started.
The unplanned inbound. Things are cooking, you are focused on growth and suddenly there is an email or an intro or a conversation where a person is talking about buying your company.
The planned process. This is what it sounds like. You are ready to sell, you have prepared and you and your team are going to launch a process.
The advice below holds regardless of which bucket you fall into. The point is that deals can happen in many different ways and even in a process, you can only control so much. What you can control is your preparation.
Time kills deals
Time is the enemy of all deals. Once you start a process, you need to keep up the momentum and sometimes this means manufacturing deadlines and urgency. For some reason, a ton of deals I worked on had closings right before holidays. We always seemed to be working on the Wednesday before Thanksgiving, New Years Eve, the Friday before Memorial Day. There was rarely any reason a deal had to close on November 25 as opposed to November 30. But a collective psychology among the buyer and seller deal teams had set in and everyone was pushing to get it done before taking off for a holiday or weekend. Find those moments to create that collective psychology to push the timing. Once a buyer enters exclusive due diligence with you, they will try to slow down the process. It’s in their interest to see another week or month or quarter of results. You are trying to run a business and close a deal and the longer this goes, the more reasons buyers can find to not proceed, the more alternatives come across their desk, the more emotional sellers tend to get. So keep the process moving!
1/ Understand your founder and key person risk
Is your brand really a one man circus? If you stepped away for a month or even two weeks, would everything fall apart? Additionally, do you lean on a single team member to get everything done correctly? If that person left, would things spin out of control?
Most buyers want to buy a machine that will keep running regardless of who is at the controls. If your machine can really only be operated by you or your key person, you will get discounted.
Fixing this can take a couple of years. But you can start by creating a drive where you document key processes, contacts and relationships. Do you run OKR’s or EOS? What is your cadence of meetings? Are internal communications in organized Slack threads with history or stored as thousands of text messages?
This is called the bus problem for buyers. If you or a key person were run over by a bus, what would happen to the company?
Exceptions to this are sales to large strategics. They have high quality teams and processes and are confident they can take over and run it better. And in some forced exits the buyers just want the brand IP and the inventory.
2/ Be prepared to speak to revenue and profitability durability
Buyers will assess how durable your revenue and profitability are. They want to make sure they can continue it and they are also seeking to understand how much they can push the levers to get more. Making big changes to these items can take months if not years. Three common areas of deep questioning and diligence are:
Ad spend reliance. If your brand lives and dies by today’s Meta CAC and/or your ad spend is north of 20% or 25% of net sales, you can expect a lot of scrutiny of your ad buying and user acquisition machine.
Channel diversification. Are you 100% Amazon? Or 100% DTC? How diversified are your channels? Buyers will look at this by sales and contribution margin. They may also dig into cash flow by channel and ROIC by channel. They will want to understand products by channel and how unit economics change by channel.
Concentration risk. Is your business 90% wholesale and 90% of that is Target? You have real concentration risk. Buyers are going to dig deeply into the quality of that relationship and efforts to expand. Do you have one big hero SKU that produces 80% of profit? Expect deep dives here.
3/ Professionalize accounting, financial modeling and data analytics
My argument to founders starting a new company is that their most important tool is a simple three statement model that projects forward cashflow. They can then design the right margin structure from the very beginning, adjust assumptions based on new hard data and understand how much cash they will need to make the company successful. Unfortunately too many start with mediocre margins and then spend years trying to fight an uphill battle.
You are long past that point, so the question is what do you do now?
Nothing destroys exit value faster than bad accounting and financial modeling. When a buyer asks for your financials, you are being tested. If you can’t produce them instantly, you have spoken volumes. The quality of the accounting and modeling tells the buyer more about the business and you as an operator than any deck or series of conversations. At best, you will be discounted heavily for sloppy, bad or incomplete books and models. At worst, the buyer will take advantage of your weakness and financial illiteracy. This is another area where getting good people pays off.
How do you know if your accounting and modeling are good? You can reach out to us for our opinion. You can share what you have with advisors as you build your deal team (more on this below). You can reach out to more expensive fractional CFO’s to price out taking over your work and get their opinions.
4/ Tie up loose ends in inventory and the balance sheet
When I scan a balance sheet, I look for line items that don’t change month to month. When these line items are in inventory, receivables or payables, I see red flags. This is especially true in inventory. It tells me the brand doesn’t have their inventory process and accounting locked down. Can I trust their inventory number? Do they really have that amount in the warehouse ready to sell? Why can’t they get this reconciled? What sloppiness in the process and ops is causing this? What other processes are this sloppy?
A second reason this is important is that the buyer is figuring out how much working capital the business will need once they buy it and you are telling them you aren’t sure what the number is today and you don’t really know what it will be in the future.
5/ Understand supply chain risk
You may feel great about your relationship with your supplier, but a buyer will see potential risk. Are you 100% reliant on one supplier? Are your hero products all from one supplier? The buyer is going to be wondering about tariff risks, delays and how important you are to that supplier. They are going to worry about the financial stability of that supplier. Will they suddenly go under leaving you without Q4 inventory and out millions of pre-paid deposits? If they come on tough times, will they suddenly change terms from net 60 to 100% deposit at PO completely upending the working capital assumptions?
Buyers will also test your relationships. Who has the relationships at the company? When was the last time you visited the supplier? When was the last time you bid out other suppliers? If you are in the process of changing or adding suppliers, where does that stand and how is it going?
6/ Get your story down
This is super important. Selling your company is obviously a sales effort. How you talk about your brand will directly influence your advisors and potential buyers. Some things to keep in mind:
Choose your story metrics carefully and be ready to repeat them consistently. What metrics you use in describing your brand will tell people what you are focused on. They will also remember the metrics and ask you how they have changed. So you want to make sure your story includes the metrics you actually focus on. Your choice of metrics you choose to talk about must be ones buyers are interested in. You might care about Instagram comments, but why should buyers? Make sure your story includes metrics that show you are focused on making money over time.
A good story includes what makes the brand special.
It’s OK to not be a billion dollar brand. The hard truth is that most brands have limited TAM’s. A brand that is $20 million that could maybe get to $40 million over the next 5 years but be hugely profitable and capital efficient with happy customers is a great story for certain buyers. So don’t try to be something you are not.
Your story must match your financials and data. If you tout your high customer loyalty but have mediocre repeat sales, you have created a problem. If your story is about all your great product innovations but the hero product that is 7 years old is 80% of sales, you have a problem. Your story must match the reality of what buyers will likely see, not the vision you once had 8 years ago.
7/ Build relationships with your potential deal team now
If you are forced into a sale process by circumstances or unplanned inbound, you need to move quickly. Depending on the transaction size, you will need at a minimum an attorney with experience in closing small business transactions (this is not a time to lean on your cousin the divorce attorney) and you may need tax advice as well as a broker or banker. Finding these people through recommendations or searches takes time. Interviewing them takes time. Getting retainers in place takes time.
Instead, be proactive now. Reach out to your networks and start asking around for recommendations on the various roles. All these people will be happy to have an initial conversation in the hopes of gaining a new client.
Explain to them that you are not in a process or planning a process in the near future, but you want to know who you will be going with in case a deal comes up. Your goal is to choose your team now and have them on standby.
This is a great way to get additional advice about preparation and a read on the market.
8/ Build relationships with potential buyers
This is tricky, so tread carefully here if you decide to do this. Deals are more likely when buyers know you and deals are more likely to close when the buyer has a relationship with you over time. Relationships obviously build over a deal process, but if there is already an established relationship and trust, it definitely helps.
Some things to be careful of:
Be selective. This isn’t going out and talking to everyone. This is choosing a handful of companies you think may be the best fits and establishing a relationship. If it’s a big strategic, this can take some work to find the right person who would lead or be influential in a process. Remember to have your story down and be consistent with your metrics. Your approach in these conversations has to make clear you are not looking to sell now, but trying to learn more about the space from one of the big players in it.
Be organic. You aren’t reaching out cold or by LinkedIn. You are trying to bump into people or get introduced. You want it to be clear that you are not in a process or even running a process, but just trying to learn more. Your goal is to pique their interest so they make a mental note to follow your progress.
Be extra careful with PE. PE funds are in the business of making acquisitions. So any intro or conversation is going to get you into their internal CRM and deal tracking. PE funds want to avoid auctions and managed processes because their win rate can be lower and the price they pay is higher. They love snagging companies not in a process. So no matter how many times you say you are not in a process to them, you are in their process. PE funds also love data. They will be happy to dig into everything you share, so you have to decide if you want to share anything.
9/ Know your walk away
Unless you are in an absolute jam and forced sale situation, your greatest leverage is walking away. Loss aversion is super powerful. The fear of losing something is far more powerful than the desire of gaining something. As soon as a deal becomes ‘real’ with a discussed price and terms, you are subject to loss aversion. It will be difficult to not spend that money in your head. You will immediately daydream about life after the close. Buyers know this and they use it to get better terms and pricing over time. The time to think through your walk aways is before a deal, not during it. Some things to think about:
Price. I wouldn’t be dogmatic about price. You can read the tweets, look at the data, hear what the bankers say. But until you get offers, you don’t really know the price. I think the way to think about price is to think through what you will make in salary and distributions over some number of future years (e.g. the next 5) and what the exit price may be in that time and then compare it to the prices you are being offered. This forces you to think of the time, effort and potential future reward versus what you can get today.
Retention. Are you willing to stay on? How long?
Earn outs. Buyers love earn outs. The structure of these is critical. You can’t really decide on this in advance and they depend on the specifics. But earn outs depend on your ability to achieve them. The number may sound awesome, but can you, with the new owners and capital structure, actually achieve them? Can you even guarantee you will be around to earn them? What happens if they fire you? A good attorney is critical here.
Form and timing of payment. These are highly subject to the situation and buyer. But how important is cash at closing? Be careful of clawbacks and how much of the consideration is held in escrow. Does your consideration roll into equity in the purchased entity? Again, a good attorney is critical.
Personal considerations. If you have personal guarantees or debt obligations, how these are resolved is critical. I helped a founder explore a sale and the biggest consideration turned out to be how the debt and personal guarantees would be discharged without creating a big tax issue. If clearing the debt is your biggest issue, make sure you weight that appropriately.
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