Reflecting Before an Exit

This piece, written by Carter, was originally published by the Wall Street Journal in a section called “The Accelerators.”

The strong pace of initial public offerings in 2014 and the first half of 2015 has many entrepreneurs contemplating if, when and how to look for an exit. Even though the IPO window may be closing for the moment, delicious deals like Shake Shake or Fitbit may encourage exit-minded founders to prepare for an IPO.

Entrepreneurs have to consider a myriad of challenges that come with preparing for a liquidity event. Before even contemplating prospectuses, entrepreneurs should step back and reflect on the emotional and psychological aspects of selling — whether through an IPO, to a private equity firm or to other third parties. Relinquishing control of “their baby” may be harder than entrepreneurs realize, and selling to a buyer who has a far different vision for the company may lead to regret. It pays to keep a few things in mind:

Are you truly ready to give up control? It may seem obvious, but in the intoxicating rush to an exit it can be easy to overlook the fact that selling the company means giving up control. The emotional and psychological impact of selling the company may be underestimated by the entrepreneur, even when gaining access to more capital resources appears to make sense, at least on paper. Though selling may be the right thing for the business, entrepreneurs shouldn’t jump to make a deal without first determining their own readiness. Entrepreneurs need to ask themselves: Am I prepared to hand over the reins or, at the very least, share control of what I’ve built?

To thine own self be true. It takes a tremendous amount of self-awareness for entrepreneurs to admit, even to themselves, that their company needs a different leadership profile, a broader managerial skill set or a more experienced management team to take it to the next phase. It’s rare for a founder to conceive of and start a company, find that elusive “product/market fit,” take it through the early hyper-growth phase and lead it into a sustained-growth scaling phase. In other words, launching a company and willing it to $20 million in revenues takes one (extraordinary) skill set; scaling it into a $150 million entity takes another. Entrepreneurs must consider whether their expertise lies in early-stage product and business development, or if they have the requisite skills to scale a business by doing such things as expanding into new markets, creating scalable processes and broadening their marketing and selling efforts, while also dealing with an ever-growing group of stakeholders.

“Prince Charming” doesn’t exist. Sometimes what looks like the “perfect” deal comes along — for example, the seemingly ideal match of Trunk Club, the online men’s clothing service, with Nordstrom in a $350 million acquisition in 2014. But for most companies looking to sell, holding out for perfection raises unrealistic expectations that are almost guaranteed to result in disappointment. Or, hoping to sell at the peak can leave a company stranded when an unfortunate turn in the market comes along. Being patient in order to find the right strategic and cultural match is one thing; attempting to ride a crest wave or waiting for Prince Charming to come riding in, offering a mind-blowing multiple on forward-year revenue projections is entirely another. So understand your priorities and be prepared to pull the trigger if and when they’re met.

Are you aligned with the prospective buyer? As entrepreneurs look for an exit, especially through a merger or acquisition, they need to understand the vision and values of the buyer. Is there a meeting of the minds, a shared vision on the future direction of the company? Does the potential buyer want to accelerate growth and expand into new markets or does the buyer really want to take the core assets and shutter the rest of the company? Will the legacy of what the entrepreneur created live on, or will it be “assimilated into the Borg?”

Who’s looking out for the team? An exit is not just about the entrepreneur. Successful startups grow because of a team’s efforts, and that team has a tremendous amount of product, customer and institutional knowledge to offer. Before sealing the deal, entrepreneurs need to make sure valued team members have the right incentives and protection to stay with the company to continue its growth strategy, or conversely that they are rewarded with severance packages that take into account their contribution.

As these points illustrate, looking for an exit takes more than analyzing ratios and multiples or cashing out in the most lucrative deal. Entrepreneurs who take the time to consider the emotional, psychological and strategic aspects first will be better positioned to make a successful transition to what comes next.

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