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Formulating Your Exit Strategy

Updated: Jan 30, 2023

In the 1989 classic film, “Field of Dreams,” the protagonist, Ray Kinsella undertakes a journey, guided by unknown forces, to build a baseball field on his family’s struggling Iowa farm.

The most famous line in the movie, manifesting from a voice in a cornfield in the opening minutes, informs Ray, “...if you build it, he will come.”

The ensuing 1 hour and 45 minute movie follows Ray’s quest to understand who will come, if he builds a baseball field. I wouldn’t dare force a spoiler on you – even for a 20 year old movie, so you’ll need to watch it to figure out “who” ends up coming to Ray’s Iowa baseball field.

Ray’s journey is not unlike that of a startup founder. Because the ultimate goal for most founders is not to sustain a long-term growth business, a startup should be asking, “if I build it, who will BUY my company?”

Instead of undertaking a costly journey without considering who may purchase your startup, BOSS asks founders to start with the end in mind, and identify their Ideal Acquirer Profile (IAP) during the first phase (Vision) of the BOSS Lifecycle.

An IAP consolidates the characteristics of common industry acquirers and acquisitions, and sets target timelines and profit targets. Identifying your IAP is the first step in formulating your full exit strategy.

Building IAP – The Abbreviated Version

The first step in constructing your IAP is to research historical acquisitions of companies similar to yours. Identifying key characteristics of previous acquisitions, like:

  • What industry was the acquirer in?

  • What was the acquirer’s annual revenue and cash reserves at the time of the purchase?

  • Did the acquirer make a financial or strategic acquisition? Was the objective to make or save money?

  • Was there customer alignment between the acquirer and the company they purchased

  • How did that acquisition compare to the industry average for similar acquisitions

  • Are there any acquirers that stand out as having made frequent acquisitions of companies similar to yours

Next, using your research, list key demographics and statistics about industry acquirers that may be fit for your IAP. This may take some more targeted internet research about these acquirers. Look for interviews with company leadership, tax filings, or vision statements about their future path which includes data points like cash balance, number of employees, annual revenue, number and types of customers, competitors, and financial needs.

Finally, combine the above data into a single concise Ideal Acquirer Profile Statement. Here’s an example:

“My Ideal Acquirer is a North-American chemical distribution company with more than 1000 employees, an annual revenue of $30-$100M, and more than $10M cash reserves. They seek to expand their line of products and to rapidly grow their market share.”

At this point, you may have a couple of potential acquirers in mind. That's great!

Using your IAP Statement, the companies you have in mind, and the questions you just answered, you’ll now build your Acquirer User Stories (just like User Stories).

You'll use your Acquirer Stories to narrow your list of potential acquirers, highlight the value you can deliver to your potential acquirers, and as a concise way to communicate with investors.

Putting in the work to identify your IAP early in your startup’s lifecycle helps you avoid a cinema-worthy drama of who may purchase your company.

You'll now plot your exit strategy by setting a desired exit price, establishing your target acquisition timeline, and laying a time-based framework of Key Performance Indicators (KPIs) from your future exit, back to where you currently are. These KPIs, designed to achieve your Ideal Acquirer's valuation drivers within your exit timeline, will form the basis of your company's daily operations.

Setting An Exit Price

To set your desired exit price, start with your previous research to identify an average acquisition price for companies similar to yours.

“I don’t have a price” or “I’ve never thought of this” are common answers when early-stage founders are asked about an eventual sale of their startup. But ask yourself, “would I sell for $5M? $100M?”. Most of us founders building startups have a goal.

You’ll need to make assumptions about what value your company or product will add to your potential acquirer based on their valuation drivers and their preferred exit types. Things are worth what someone is willing to pay for them.

If your Ideal Acquirer prefers Financial acquisitions, then you'll need to forecast annual revenue at the proposed exit time. If it's significantly higher than the average acquisition price you researched, then you can consider increasing your target exit price beyond the industry average.

If your Ideal Acquirer prefers Strategic acquisitions, then estimate the value you bring to that acquirer, besides revenue. Your product or process may save your acquirer significant time and money in operating costs.

Remember, your estimated exit price, calculated at this early stage, is not your company's current valuation. It's merely a rough estimate to guide your KPI development, timelines, and how you plan your fundraising rounds. You’ll frequently update this value throughout your company’s lifecycle as your valuation becomes clearer.

Exit Timeline

Next, estimate your desired exit timeline. For new startups, BOSS recommends an exit timeline of 3 to 5 years from the start of the Vision phase. For more mature companies, this timeline can be reduced to as few as 1 to 2 years.

Build Your Exit Statement

Put this timeline and exit price into a concise sentence that includes your IAP statement.

“In 3 years, I will exit for $20M to a North-American chemical distribution company with 1000-5000 employees, an annual revenue of $30-$100M, and more than $10M cash reserves, that seeks to expand their line of products so they can rapidly grow their market share.”

Mapping KPIs

With a very rough estimate of your exit price, and timeline, you’ll now map KPIs aligned with your potential acquirer’s valuation drivers - onto your timeline. This map moves back in time from exit, to profit, to product launch and your first sale, and finally to the present day. Let’s take a look.

We know we want to exit in 3 years for $20 million. Our Crunchbase research shows that our potential acquirer favored strategic exits based primarily on Market Share - the companies they bought had a high customer attachment rate, and ICP alignment. They also valued year over year customer growth percentages higher than 50%, and 12-month customer retention greater than 60%.

So, to meet our Ideal Acquirer's Valuation drivers, in 3 years we need to achieve the following Valuation driver KPIs:

  1. Customer attachment rate to our potential acquirer of at least 70%

  2. Year-over-year customer growth rate of at least 50%

  3. 12 month customer retention greater than 60%

If we develop an accurate ICP and Buyer Personas during our Vision Phase, aligned with our Ideal Acquirer, then as we grow our customer base, it should automatically have a high attachment rate to our Ideal Acquirer.

Let’s work back from our exit to the present day. Year 2 to 3 is our year to grow our customer base with a focus on Sales and Marketing, Service Delivery, and Customer Support functional areas. We can assign a Valuation driver KPI to our Sales & Marketing team of 50% customer growth with a minimum of 70% attachment to our IAP. We'll assign the 60% 12-month retention KPI to our Service Delivery & Customer Support.

Let's keep working backwards. Year 1-2 is our year for product development and go-to-market KPIs, focused on getting our first customers with attachment to our acquirer. So we’ll need KPIs for product design, testing, and marketing, all focused on a customer base aligned with our Ideal Acquirer.

Our entire company, from the start, is focused on achieving KPIs designed to increase the chances of a successful, timely, profitable exit.

You now have a roadmap, with measurable, time-based KPIs from Vision to Exit.

BOSS Academy Courses cover how these KPIs and your exit timeline map directly into structuring your functional areas, assigning missions, and measuring progress in your daily operations.

Without a methodical assessment of where you want to take your company, and how long you want to take to get there, most startups become reactive to problems, instead of operating proactively towards clear, time-based objectives with accountability and a shared vision.

If you want to learn more about creating your Exit Strategy, register here and use the code BCP123 for access to our course "Build your Exit Strategy & Exit Strategy Fundamentals". If you would like to watch our webinar about developing Exit Strategies click here.



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