How to think about exit strategy – Mark MacLeod

April 22, 2021 - Mark MacLeod

How to think about exit strategy

In my discussions with CEOs we often talk about exit strategy. Either because the company has current inbound interest or just thinking about the future. There is no one ‘right’ answer for when to sell your business. I often bring up the story of Facebook as an example.

Very early in its history Yahoo! offered to buy them for $1B. This would have been a huge win for everyone. No one would have faulted Mark for taking that deal. But he didn’t. Today, his company is worth 840 times that!

So how do you think about this all important topic? Here are some suggestions:

Vision

Why did you start this company? What opportunity did you see? Is it still valid? Do you still believe in the vision for this company?

Turning vision into reality

How repeatable is your business? Do you have proven, repeatable channels for customer acquisition? Do you have room to keep growing in these channels without killing your unit economics?

Have you boiled your business down into a number of repeatable machines or recipes? Do you know where to go to get your best fit customers? Do you know how long they stick around? Do you know exactly how and why they buy? Do you know the levers for retaining and expanding them?

Do you have the leaders in place to keep executing these recipes over and over again and have them taste the same each time?

Landscape

Who are the most natural buyers for your business? What are their typical deal sizes? Let’s say your most natural buyer typically buys companies for < $100M. That is an important data point when you’re thinking about raising later stage rounds. Will you price yourself out of the buyers’ sweet spot? (Note: this is a lagging indicator and buyer behaviour changes).

Existential threats

Revisiting your vision and looking at the repeatability of your business are all about establishing the confidence to keep going and not sell. If you believe in your vision but your business execution is not proven and repeatable, then you are hallucinating. You don’t have sufficient evidence to be confident until you are running a proven, repeatable machine.

Another important element in building that confidence is whether you face any external, existential threats. Let’s say you built your business on top of a platform such as Shopify. Should Shopify expand its core business to include what you do, then you could be in big trouble.

Energy, passion

Let’s face it, startups are hard. Most fail and the journey is never a straight line. Do you have the energy and passion to keep going? Are you having fun?

Note: You can decouple yourself from the company. If you’re done or beyond your ability to add value but the business is working you can replace yourself without selling the entire company.

Getting tomorrow’s value today

Finally, perhaps the most compelling reason to sell is when a buyer offers you a valuation that you believe you will only reach several years from now (and with lots of risk between now and then). If you are being offered such a valuation and you have any doubts about your vision, repeatability or external threats, then it may be very tempting to sell.

As mentioned, there is no one right way. And this is not something you can A/ B test. Hopefully these suggestions above help you think through your exit strategy.

Photo by Bernard Hermant on Unsplash

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