A first-class exit

At Clear Value, we often use the term 'a first-class exit' with the founders as we help set them up for success — but what does this mean and why does it matter?

A first-class exit is the sale of your company at a very high value, generally beating the expectations of the founders and investors.

It doesn't always mean selling at the maximum possible value, but rather takes into account the overall outcome for the company, shareholders and employees — including the creation of growth opportunities and a smooth and successful transition to the new owners.

A first-class exit requires that the transaction completes with the best acquirer, at the ideal time, with peak negotiating leverage, where you receive full consideration when it is due and are able to look back and be grateful for what you have achieved.

Transaction completes

The completion of a transaction is a significant milestone for the company, the founders, investors, management team and the acquirer.

The founders and investors can move on to the next chapter.

And the acquirers have successfully bought a company which they believe can help them achieve their goals and aspirations.

It means all legal and financial details have been worked out, consideration has been paid and received, and the transfer of ownership and assets has taken place. It also means the conclusion of any earn-outs, executive service agreements and warranty periods (I'll explain what these things mean further down).

Best acquirer

The best acquirer is ideally a premium buyer who can get the most value from your business, has the capacity and resources to take action, and can complete the acquisition at the ideal time.

The acquirer's goals, values and culture should align with yours, and they should share a similar long term vision while maintaining your brand integrity.

And most importantly, the acquisition is a positive for both your team and your customers.

Finding the best acquirer could often take years and so building quality relationships early with the right people is important.

Ideal time

The best time for an exit is usually when your company is approaching the maximum possible value, market conditions are favourable, and shareholders want to exit.

Market conditions are hard to predict precisely but timing has a huge impact on valuation.

So rather than purely optimising for the headline price, a better outcome is usually created as you're approaching maximum value — i.e., leaving the company with capacity for future growth to the buyer.

Sometimes, the company might be better placed for the next stage of growth under someone else (e.g. changes to founders' personal situations).

It's almost impossible to predict the ideal time, so it's always a good idea to have more than one exit timing option available and to be well prepared ahead of time.

Peak negotiating leverage

Leverage is the power you have to achieve an impact or influence outcomes. In negotiations, the one with more leverage is able to shape the outcome in their favour.

To work towards having negotiating leverage, it's helpful to have:

  • A competitive process with several interested buyers
  • A great relationship with the key person at your best acquirer
  • A strong customer proposition and competitive position with attractive industry dynamics
  • A solid balance sheet and financial track record
  • Your shareholders and team are aligned and prepared
  • You understand what would be attractive to a buyer and can articulate your business, its plans and potential value and synergies to the acquirer

And to achieve peak negotiating leverage:

  • Your best acquirer knows you exist, recognises they need to acquire you now to achieve their goals, and knows it will likely be much more expensive or not possible to buy your company later
  • They understand they need to move quickly as it's a competitive process
  • They know if they don't complete the acquisition, you'll continue to thrive independently, or are acquired by a competitor which could create headaches for them

Receive full consideration (when it's due)

In a first-class exit, all (or close to all) of the consideration is paid upfront. This is often cash, but could be partially or fully paid in shares.

In many cases, a portion of this consideration is deferred. Some common reasons are:

  • Warranties: There may be a period of time that certain warranties are required and a portion of the consideration is held back until the warranty period completes.
  • Executive service agreement: If leadership is staying on after the acquisition, there will usually be an employment or consulting agreement to govern the relationship. It could include bonuses or other incentives tied to KPIs for an agreed period of time.
  • Earn-out: Buyers sometimes use earn-outs (or similar) to bridge the gap in valuation expectations between the parties and to create incentives. Earn-outs defer consideration and are linked to the company's performance or specific events after the completion of the deal.

Grateful for what you've achieved

Achieving a first-class exit is often difficult and requires all the different pieces of the puzzle to come together over a long period of time.

And importantly, it requires the support of the team and other key people (e.g. team members, investors, customers, family etc.)

At the end of the process, you should be proud of what you've built and what you've achieved collectively, and the legacy that's been created.

And justifies the effort and hard work over the years.

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