Founders should have frank, regular conversations with key stakeholders about your exit strategy throughout the life of your startup
When it comes time to sell your startup, you will need key stakeholders to agree to the sale: your board, your investors, and, of course, the core team of employees who have helped get you where you are today. After all, potential acquirers may hit pause if they sense confusion and discord.
“No buyer wants to inherit a crisis,” write Mert Iseri and Mark Achler in their new book, Exit Right: How to Sell Your Startup, Maximize Your Return, and Build Your Legacy. Achler is an adjuct lecturer of marketing at Kellogg, managing director of Math Venture Partners, and a serial entrepreneur; Iseri is the founder of healthtech company SwipeSense.
So it can be wise to ensure that all of your ducks are in a row before an offer ever arises. Which is why Iseri and Achler advise doing something most founders don’t do: have frank, regular conversations with key stakeholders about your exit strategy throughout the life of your startup.
And yes, there is a way to do this without scaring anyone off. In this excerpt from their new book, the pair explain how.
The foundation of all trust is open communication. We all know this instinctively, but we tend to forget it when we get busy. We prioritize other issues and forget to stay in regular communication with the important stakeholders in our organization. But you need to talk about selling your company with your stakeholders often and consistently. Getting acquired is not a bad thing, after all—a successful exit is the desired outcome for most startups. What hurts is when the acquisition is a surprise—a distraction from the shared commitment everyone is there for.
Start a conversation about selling too early, and the shareholders will doubt the long-term commitment of the leadership. Too resistant to a sale, and the shareholders will grow frustrated with their expectations for a positive return. This is a tough balancing act, but it should not prevent you from discussing an exit at all.
Unfortunately, the conventional wisdom is for founders to virtually never discuss exits with shareholders. It is frowned upon to talk about the sale—investors expect the founders to constantly be focused on building an even bigger company until they are ready to cash out. The challenge is that if the founders are bringing up the sale conversation, it looks like they are interested in selling the company before the maximum value can be achieved. In other words, the board will question the long-term commitment of the CEO if the conversation comes up prematurely.Also read: India's seeing a flurry of new unicorn startups. What's going on, and what's next?
Founders need to establish the expectation with their boards that once a year, the group will add an agenda item to the meeting related to the sale. It is simply a temperature check on long-term strategy, potential strategic buyers, and time horizons. This will allow you to build rapport, continue the process of alignment, and establish the trust you need to have a FAIR deal [a transaction that’s the right fit, achieves alignment among stakeholders, integrates plans post-acquisition, and has rationale in terms of value creation]. The exit is one of the most important moments in the life of a startup for the founders and investors alike. A conversation filled with anxiety, doubt, and mistrust serves no one. Carving out intentional space to have these conversations in an open and honest fashion on a periodic basis will improve outcomes for all parties.
The secret to board (and shareholder) buy-in is consistent communication on expectations and strategy to achieve objectives. This is where the CEO can withdraw from the trust bank that they have been putting the savings in over the years with their consistent communication.
The goal of these conversations is not to kick off a sale but to ensure there is alignment around key questions:
- What is our threshold walk-away price?
- What is the fund timeline to return proceeds for limited partners?
- What objectives need to be accomplished for existing investors to further capitalize the company?
- Who are the key buyers, old and new? With whom should the CEO be building relationships in those companies?
- What is the key performance metric those buyers care about? What is the strategy to optimize that further?
We call this the Exit Talk: a key ingredient for a successful exit and effective governance. It is also an opportunity for a CEO to educate their shareholders and board on what matters. These are the moments to build shareholder confidence, define what the possible exit may look like, and execute on that premise.
It is true that if a founder never mentions a sale for eight years and suddenly starts bringing up the topic to a board, it signals a lack of energy to win even bigger. The reverse is also true: VCs are managing a fund with return expectations. A founder unaware of the dynamics of the investors and their timeline doesn’t help the anxiety surrounding the sale.
Instead of fueling the awkwardness of the exit topic by staying silent, we are putting forward a new norm that we believe the entire industry should adopt: the Exit Talk.Also read: The relationships that create successful acquisitions
The moment the founder shakes hands with the investor who will join the board, they should agree to bring up this question once a year: Are we ready to sell our company? In most cases, the answer will be a simple no—but the space itself will take out the anxiety that a founder will feel when they bring up this question. This is one of the many norms we hope to shift in the world of startups today in order to take the stigma out of this important conversation.
In addition to the board, regular check-ins (about once a year is the right cadence) with the core leadership team to update them on the current thinking surrounding an exit are similarly beneficial. Take the temperature of your team, and fill them in on where your head is. Is everybody still in the game? Are there things you should be worried about? Is this the right time to sell? Use correct judgment, and limit the discussion to your top leadership, but be honest and transparent with the folks who will take the company to its ultimate destination. If the ultimate goal is to go public, you need to have extreme dedication from your key leadership to stick it out long term, not just from the founders.
[This article has been republished, with permission, from Kellogg Insight, the faculty research & ideas magazine of Kellogg School of Management at Northwestern University]