How to plan for an exit while building a business

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It’s worth stating at the outset that although there’s nothing intrinsically wrong with building a business with the sole intention of a successful exit, it’s by no means a dead cert. First, your business idea and execution have to be successful (most aren’t).

Second, even if your idea is successful, depending on your sector, you’ll have to convince a buyer of its value and growth potential in a fairly crowded marketplace.

Third, you’ll need to find a way to enjoy the process, even while focused on the ultimate prize. Whether you’re in the tech space, fintech, insurtech or any other sector, you’ll probably feel safer planning for an exit even if you have no intention of selling.

The exit

As I mentioned above, to build a business that leads to an exit is not in itself a red flag. But what of the long-time successful entrepreneurs who say that the exit will take care of itself, so long as founders focus exclusively on building a successful business? And are the veteran entrepreneurs who say entrepreneurship probably isn’t for you if you’re seeking a fast exit in four years, all wrong?

According to some, many business founders have to be dragged kicking and screaming to the mergers and acquisitions table, and few go willingly, eagerly holding their hands out for the cash. For many who’ve been around the startup scene for a long time, it’s a bit like marrying off your first daughter; you’re happy for her, but a part of you would rather it wasn’t happening.

Founders’ ambitions versus investors’ ambitions

Entrepreneurs need to get their heads around the tension between the differing agendas of founders and investors. Investors will be looking for an exit as soon as possible, without much regard for your plans for the future.

The truth is that investors don’t generally share the same agenda or objectives as most founders, and some, it could be argued, don’t necessarily prioritise a startup’s needs above their own. Investors’ agenda is focused on exit, which isn’t always helpful when an entrepreneur is trying to build a business.

With such a laser focus on exit, investors can act as a major brake or distraction from the serious, important and engrossing work of building and developing your business.

However, because only around 1 per cent of startups have any chance of attracting venture capital – something that may persuade initial investors to leave their cash in for a little longer – why do entrepreneurs waste time jumping the gun to consider an exit? Because it’s become de rigeur to get used to including an exit slide in every startup pitch to investors. After all, the exit is uppermost in investors’ minds. Sure, they almost certainly rate the product or service, or they wouldn’t have parted with their cash in the first place. They might even rate you as a competent or gifted entrepreneur, but their eye is on the exit. And entrepreneurs have become used to this. So much so that it’s become customary to include in an exit slide, if you choose to go down the acquisition route, examples of specific organisations that are likely to acquire your business, including details on the value of any recent acquisitions made by those potential buyers.

Some argue that it’s important to consider your exit strategy early because whatever strategy you choose – whether it’s an initial public offering (IPO), management buyout or acquisition – it will affect business development choices.

There’s certainly some truth in that because well-planned exits established at an early date can positively affect strategic choices as your business grows and develops over its first four or five years.

Even if you have no current plans to sell your company, the other crucial reason to consider an exit plan is to cover and mitigate those terrifying unknowns. Events out of your control tend to come flying your way out of the blue. Health issues or personal crises can get in the way of running a business with 100 per cent focus, especially if you have no succession plan, while economic curve-balls like exchange-rate spikes, and inflationary geopolitical events – think crisis in Ukraine or uncertainty in the Straits of Hormuz – can have any number of negative impacts on plans for the future of your business.

And sometimes, an offer out of the blue to buy your company can leave you unprepared to take full advantage if it’s too good to resist.

Digitalisation makes your startup more attractive

If your business is not operating in the tech space, where digital platforms and quality data will already be the norm, it’s crucial to think about digitalising your business before a sale. Why? Many founders think they’re doing a great job servicing their most valuable customers and clients, but digitalisation lets business owners scrutinise and analyse data that can often reveal certain customers could be generating more revenue. And digital transformations don’t have to be expensive, now that many platforms like Microsoft Azure operate in the cloud on a subscription service.

Digitalisation offers business owners an extra dimension to data that can translate directly into revenue growth and a higher value for your business. Pinch points can be identified more readily, and workflows can be improved, leading to higher net margins and a more robust business valuation. In short, don’t allow a potential buyer to spot the hidden value in your company before you do. Without it, there’s a chance they’ll be acquiring your business at a considerable discount. Remember: ultimately, the value of your business is your core key performance indicator.

Building and selling: what to steer clear of

Selling a business requires no small degree of perseverance, and that inevitably means time, too.

Depending on the industry or sector, due diligence as well as the increasingly common forensic tech diligence may lead to price chipping and, in the worst cases, potential buyers could just be tempted to walk away. No buyer likes risk, especially if it’s hidden or wrapped up in historic agreements, actions or events that keep those risks secret or opaque.

To prepare for a successful sale, it’s important to mitigate or remove all risks, and crucially, to evidence the removal or mitigation of that risk through tech and data. That way, the process will be more transparent, leading to a much quicker sale agreement.

Don’t skimp on legal costs; the right legal help to steer you through a potential sale – or a series of potential sales – means you’re less likely to get caught up in the hidden risk typically buried in tortuous legal contracts.

The reality is that potential buyers are keen to have full sight of risk factors in your business, but they’re unlikely to offer you the same luxury on a plate.

Read: Abu Dhabi is MENA region’s fastest-growing emerging startup hub, reveals study

The writer is the CEO of Creative Zone.