How to Prepare Your Company for a $100 Million Exit
How do you prepare your company for a $100 million exit? I didn’t have to look far to find the right resource to answer this question. Craig Slayter draws on more than 30 years of experience as a Silicon Valley start-up entrepreneur, CEO, founder, general manager, and MNA executive. He has personally raised over $50 million in venture capital funding.
The first company he founded at the age of 31 was SoftStyle, an embedded software company, which he sold 5 years later to Phoenix Technologies, where he participated in taking that company public.
He has assessed hundreds of companies for potential acquisition, and participated in acquisitions ranging from $5 million to over $100 million. He’s the co-founder and first CEO of oDesk, which is now Upwork, the world’s largest freelance marketplace. He’s also my father.
Why $100 Million?
“I think it’s a big target and I think most of us would be happy if we had our own company and got $200 million for it, but it’s a realistic goal,” answers Craig Slayter in regard to the $100 million number. “Ninety-five percent of the transactions in the world exist in a range of $5 million to $100 million. The vast majority of transactions done in what we call the middle market are within that range, so I think it’s a reasonable goal.” Having that goal and an exit in mind is important and often overlooked. “In my very first company, I didn’t really think about my exit plan and that was one of my biggest strategic mistakes,” warns Slayter Sr. “When it came time to exit, my company wasn’t really prepared for it, and I had to do a lot of homework, and a lot of soul-searching before we actually pulled off the transaction. So, if there is one lesson I’d have for small businesses, it is to begin with the exit in mind.”
The Biggest Mistake
When entrepreneurs start companies, they tend to focus on growth, never stepping back to consider what would entice buyers. “Now in Silicon Valley it’s an art,” says Slayter Sr. “At the beginning of the business we set up cap structures and intellectual property models that allow companies to be sold in the future. But I think that is the exception rather than the rule.” Even in Silicon Valley, the planning can’t begin soon enough, and entrepreneurs get caught up in dreaming about single-handedly creating the biggest company in the world. “It doesn’t really happen that way, so my number one advice is to ask yourself the question, ‘Why would somebody want to buy my company?’” The question can be answered when you approach selling your company in the same manner you approach selling a product. Stepping back to answer the question reveals both existing value and areas in need of strengthening.
“For example,” says Slayter Sr., “an investment banker once told me that his biggest problem was not finding businesses to sell, but it is finding businesses which are saleable...You have to construct a company that is imminently saleable, and that includes a number of factors.” Messy or incorrect capital structure is a common downfall and can be an instant turn off to otherwise interested buyers. “For example, with my very first company, because I didn’t plan my exit properly, I ended up using a lot of bank financing, in addition to private investments. Well the bank is not a very good partner when it comes to selling a company, and that actually reduced my valuation when I sold. My lesson would be to look at your capital structure and if you’re going to take bank loans, make sure the covenants on those loans allow you to have control of the transactions instead of the bank.”
Strengthening Your Business
Whether or not you intend to sell, one of the best ways to strengthen your business is by knowing why acquisitions fail. “For example, one of the biggest reasons acquisitions fail is that market’s growth is slower than expected. Now if you can assure a buyer that your market is growing, and it’s going to grow at X% a year, that’s a real nice place to be.” Conversely, even if you don’t sell your business, position yourself in a market that’s growing.
Acquisitions also fail due to less than expected industry margins. “If you’re in, for example, a low margin business, you might want to position yourself so that your margins are the highest in that market space, or potentially realistically set your expectations at what your pricing might be so that you don’t ask for too much money since your margins are less than typical.” By examining the reasons acquisitions fail and learning what risks the buyer of your company is trying to avoid, you can minimize those risks and strengthen your company. “By addressing those,” advises Craig Slayter, “you’ll be sold for a much higher amount of money.”
When Your Company Is Being Shopped
I asked my father what is the most important thing for a founder to do while being shopped. He was quick with his answer. “There’s an inclination to focus all effort on what’s called due diligence. But it turns out that the top ten reasons that acquisitions fail is not because accounting or legal due diligence is a problem.The real issue becomes if two partners come into the room to meet the CEO of the acquiring company, it doesn’t take long to see when they are not aligned. This happened to me. I actually thought I was aligned, but we got into a meeting and it became real apparent that we were not. It will be quickly detected by the buying party. It’s really important that you reach a consensus internally that number one, you are interested in being sold, and even if you’re just testing the water, that the founders and partners are all aligned on this.”
You still need a strategy, because buyers won’t proceed unless they understand where the company is headed. “Unless it’s headed for a crash,” Slayter Sr. notes, “and they’re picking up something cheap. I’m assuming you are selling from a position of strength.” Being aligned on all key aspects of the business, including your management team, growth strategies, three-year plan, and sales plan is key. When team members give conflicting stories, buyers walk.
But This Company Is My Baby
Sometimes a founder merges his identity with his business, to such a degree that selling “his baby” is a scary prospect. Craig Slayter is familiar with this from dealing with peers in a CEO group in Silicon Valley. “I got to hear the concerns of CEOs about selling their company, and quite often the purpose of the group was to bring reality to them, and say, ‘I know this is your baby, but look, they’re paying you a lot of money, maybe you can concede on a couple of points here, and make this transaction more attractive to the potential buyer.’ Sometimes what it takes to address that kind of concern is a group or a mentor, someone you can speak with to get that under control.”
Parting Words of Wisdom
“The thing I learned is that it’s a lonely road out there, and in particular, a CEO doesn’t have many places to talk.” Slayter Sr. advises developing a network of peers to share information with and learn from. These are “good for your sanity and for making the right decisions along the way. Peers and mentors can help.”