Life & Money

How Entrepreneurs Cash In. Debunking 3 Common Myths Around Business Exits

March 8, 2017


How Entrepreneurs Cash In. Debunking 3 Common Myths Around Business Exits

Life & Money

How would a $400 million payday sound to you? (It sounds pretty darn good to us.) Maybe you caught the news last month about the Hyatt brothers’ sale of BlueCat Networks for that very amount. That successful business exit was actually a follow-up to a 2011 buyout from another Hyatt brothers venture, for $100 million. Nicely done!

These kinds of big deals help showcase Canada’s emerging startup sector. As a growing startup, we’re proud to be part of that dynamic tech community. Increasingly, this community is building innovation that big players in the US and elsewhere are happy to buy up (at a premium).

Many of our online wealth management clients are in business as founder-entrepreneurs. Others investor-clients are key members of startups or rapidly scaling up companies that could go on to big things.

We help our clients plan and manage wealth to give the best possible outcome for their financial futures through investing – basically, an exit plan for everyone. We wanted to give back this week to our community of entrepreneurs (both current and prospective) in particular, with some insights to help them ‘maximize the return’ on their business.

3 myths about business exits that every entrepreneur should know

To that end, we chatted with one of CI Direct Investing’s advisors, Bernd Petak, about this very topic. Bernd provides strategy and operations advice to many technology companies. He has mentored for several Vancouver-based accelerators and advised many startups. Basically, Bernd is the go-to guy for sage advice when it comes to how a business should plan for their exit. For all of our entrepreneur and startup community friends, enjoy.

“My interest in exits is to make sure there is one,” Petak said. “You don’t get those other first world problems that a corporate lawyer or tax lawyer would deal with until you solve that first problem.”

“Let’s start with the fact that 25 percent of companies that even want to exit actually do so, according to M&A Advisor Basil Peters,” Petak said. “The other 75 percent hover over the airport and never hit the ground. There are many misconceptions even among entrepreneurs.” Let’s go over a few of those myths.

Myth #1. Business exits start with a random inbound call from an interested buyer

Business exits often happen when you get a wonderful random email or phone call from someone who wants your product, technology, team or customers, etc… right?

“It’s not random at all,” Petak said. “This requires effort over a long period of time, years before you’re ready for an exit or even want an exit. The call comes at the end of all the hard work.”

Making that effort is critical even for people who intend to build a ‘lifestyle business,’ where you might build up to a certain size and revenue stream – and then just stay in that comfort zone for the long term. “If you want to at least leave the option open to do something different later on, you need to be ahead of this. That’s true even for people whose exits might be 5 years off.”

How can companies get ready so that they don’t have to rely on that random, fortuitous call from a Fortune 500 firm with a dedicated war chest for acquisitions? “You have to spend time building relationships in your community of possible acquirers. Build those relationship and maintain them over the life of your company.”

In the end, those inbound calls happen because someone knows what’s going on with your business. They know the value of your business and have an established relationship. Maybe they’re someone who thinks that running your flag up your flagpole will be a shrewd move and get them in good with their boss.

A bit counter-intuitively for some who think of business as a zero-sum game (because it isn’t), it’s critical to build respectful relationships with competitors. Potentially, they are the pool for your best possible acquirers.

“Why do people buy companies? Because they need something from you. An aqui-hire for instance comes in when a competitor is having trouble building their team… By the same token, who puts the most value on your customers? Your competitors. If you’re offering serious competition, can they get rid of it by buying you?”

With all that in mind, you’ve got to put in some effort into business exits. “You go to the same conferences, so say hello.  Make sure you’re in competition, but make sure there’s respect there.”

Building relationships takes work and can’t be relegated to an ‘if we have time’ kind of activity. “As a company matures and the team grows, a CEO needs to pull out of day-to-day operations to handle things like this,” Petak said. “This new task of engineering your exit begins. It’s no different from building a piece of software.”

Myth #2. Want a business exit? Just call up a famous, big-time banker in San Francisco

The banker will do all the work and you’ll be retired on an island paradise inside of three months. Right? Well…

An investment banker is not a magic bullet for a founder who wants to pull the trigger on a business exit.

“The first thing to understand: there’s a spectrum of service providers available,” Petak said. “There are those who only succeed a small percentage of the time when they take on a client. There are the ones who succeed at a much higher percentage. Generally, as you’d expect, there’s a direct relationship to fees, from lower to higher.”

No matter who you run out to hire, if you haven’t done the prep work ahead of time, that investment banker will have to do the work you should have been doing for years. That will add time and expense to an already complex process.

“It’s unfair to think that just because that investment banker is an expert, they can make that serendipity happen before you go into bankruptcy (or whatever else is driving you to go into an exit),” Petak said. “Either you do the work over a period of time, or you get someone to do the work in a compressed span of time.”

The best time to go to an investment banker is when you’ve already got an opportunity on the table. “You might get a provider if you think you need the help and if you want more than one company interested.” That way, you’re making their job as a service provider possible.

Myth #3. Business exits are easy and pass through stages in a linear, organized fashion

“Nothing could be further from the truth,” Petak said with a hangdog expression that alludes to the disturbing popularity of this impression.  “Time is the enemy of all deals. The longer any deal takes to conclude, the bigger chance it will have one or more near-death experiences in that time. With exit deals, you’re looking at multiple months of work even in the most ideal situations.”

Let’s not get too pessimistic. Exit deals are hard to do, but even when it looks like a lost cause, founders can still find hope. “There will be in nearly all cases points in time where it looks like the deal is going to fall apart. You’ve got people who packed up their bags and flew home, but a deal still came out in the end. These things needed to be brought back creatively. That requires really good board members and corporate directors who know how to maneuver through the near death experiences, even when the deal looks like its ‘pushing-up-the-daisies’ dead.”

In the vast majority of cases, someone has to get on a phone (or a plane) to get the deal done. “It’s common to think of being an entrepreneur as something akin to riding a roller coaster, but the exit process increases that,” Petak said. “It’s an every-5-minutes up and down, where it’s more essential than before to have someone who is a stabilizing influence, with a thick skin… Some founders seem to be amplifiers of those ups and downs and it comes apart when it comes to an exit negotiation. Sometimes, they’re the calming influence.”

In these kinds of situations, big egos and greed are not necessarily bad things in a founder. “I know enormously greedy and ego-filled founders who are fantastic in situations like this. They’re focused on maximizing value to the point of ruthlessness. They can manipulate a fast-moving situation where you need to keep your head down while the bullets are flying, but still somehow see where you’re going. Other founders who are calm at other times can actually flip out in these kinds of situations.”

Whether investing in a business or other kinds of investments, the stress can get to some. But for many, the fun part of the process is the chess-like game aspect, Petak said. “When you’re done, you might say you won’t do it again… But in reality, you can hardly wait for your next opportunity.”

Are you an entrepreneur, or working in a company that one day might try for a successful business exit? What about your own, personal exit plan? Are you optimizing your investments to make the best possible financial future? We can help with that. Sign up to CI Direct Investing today and invest your first $1,000 for free.

A few minutes today could save you thousands tomorrow.
Start investing in under 5 minutes. No hold music. No paperwork.