Adrie's Blog

Exit Strategy

Part 1

Exit Strategy is a great subject to begin the New Year with. As you think about your plans for this year, one of the thoughts you may have about your business is thinking about how to make the next step, to raise funding or you may even be thinking specifically about how to create an exit.


This question of “an Exit” has only been part of business strategy for the past few decades. From the middle of the last century, to even early 1980’s – founders would not think beyond running their company to fulfil in their families’ daily needs. There was no question of “exits” – merely how to build a business that would last so they could hand it over to the next generation.


This ‘family-rules’ strategy had a number of obvious downsides:

·       there was no way of adding liquidity to the business other then by earning it yourself;

·       founders were dependent on the willingness and more importantly the ability of the next generation to take on the company when they wished to retire;

·       expansion could be hard to achieve as you would need (bank) lines of credit for that, for which founders would be liable personally.

·       Retention of talented individuals in the company was hard, when those individual would soon enough realise that the next generation of family members would always be their next generation of bosses, instead of the individual having a career path to the top open to them.

I myself worked for such a family concern in the early 70’s. However well I was regarded in the company, it was only a matter of time until the third generation would be appointed to be my management. And I could easily see that the person that would take over then was not as qualified, or able as his predecessor, nor (to be blunt) as capable as I was, besides being a good deal younger. I decided there and then never to work for a family-run company again.

These days, many companies look towards an exit as a way of progressing their company’s lifecycle. When considering an exit, there are a number of things to bear in mind and prepare:

·       You need to communicate the expectations well with your stakeholders. You need to set expectations and reach agreement on things such as price, process, timelines as well as responsibilities during and post exit.

·       You need to make 100% sure that your admin is in order. Your articles of incorporation, accounts etc. all need to be formally dealt with and in tip top shape, since you absolutely know for sure that the potential investor/buyers will do their due diligence. The more gaps you leave for them to find, the bigger the guarantees will be asked which may even prevent you actually getting the money you were looking for.

·       Be prepared for a lengthy period of negotiations. You will have to rely on others to run the company almost during this time as it will require a lot of your attention if the exit is to be successful. And you cannot afford your company to falter whilst your mind is on trying to close a deal. Typically expect a minimum of 3 month although I have had deals that took a mere week to one that took almost 9 months (which was a purchase to British Telecom, big company = long time)

When considering your exit strategy – it is vitally important to choose the right advisors and partners in the process.

One of your advisors could be a Mergers & Acquisitions (“M&A”) firm which might help you narrow down to a selection of potential candidates. You should consider which M&A firms are the best in your industry, as each may have its own reach for instance such as in Technology or Hospitality. Using a recommended firm is important as you don’t want news of a potential sale to be on the streets too early, so your name has to be safeguarded.

Then there is the negotiating party – often it is better to have a neutral party negotiate on your behalf with a potential buyer. As a founder you may well be too emotionally involved, and a buyer is bound to come up with statements about your company you might not like.

Next - your accountant, an important party that should be trustworthy as everything will stand or fall with the quality and correctness of your numbers.

A legal advisor is indispensable – although you want to make sure that you are very much in control of how you want things done. Identify which structure you want, and what are potential deal breakers for you in the negotiation processes or you may be wasting a lot of time and money on something that is never going to happen.

Costs associated with an exit

First rule – make sure you agree as soon as reasonably possible that each party will bear the cost of their own advisors.

And don’t skimp on these costs, a sloppy M&A man can ruin your exit, whereas one that is professional and sharp can be worth his weight in gold. Ofcourse, it doesn’t always go that an expensive advisor equal quality and expertise, but don’t just look at the money part – this is your future you are talking about and if the advisor comes highly recommended, but is expensive, then probably it is simply because he or she is GOOD.

An M&A advisor will typically ask a fee somewhere between 3 - 6% of the sale, usually built up in such a way that the % gets to be lower as the amount of the sale increases.

I have always thought this a little odd – I like incentivizing people to go that extra mile, so I am typically very willing to pay a higher % as the advisor gets a higher sum for the company. In my last deal, I agreed to pay a fixed % up to the amount all shareholders had expressed that they would be happy with, with an increasing scale of % commission for every million the advisor would be able to gain in addition of that sum.

Negotiation Strategy


I have had several negotiation rounds where it made sense to continue the negotiation non-stop until we reached agreement. It took in some cases more then 36 hours, but the advantage of simply putting ourselves in a room and thrashing it out, is that all parties, including lawyers, eventually stop fighting over the minutest detail in the end as everyone has a inherent interest in getting things finalised.

When negotiating, remember that it’s not just about getting the absolute best deal you possibly can (expressed in $$$). You should never underestimate the importance of timing. Of course you won’t know if you sold at the best time or not – or at least not till later. Be content though if you get what you were looking for – don’t go scraping the bottom of the barrel just because you feel you can. I have seen more deals gone sour due to greediness backfiring then due to any other reason.

An interesting example about managing stakeholders in the process of an Exit plan, is a company where I was a reasonably large stakeholder during the internet bubble. Via an insurance company where I happened to know the right people, the company got an offer for Euro 15 million CASH but a number of the managers/shareholders did not want to be involved with the buyer and kept telling me that the company was worth a lot more. These shareholders/managers finally came up with another buyer – who offered Euro 40 million in a share swap. The buyer was a privately held company in the UK. My cash buyer could not win against this potentially much larger deal that all the shareholders seemed to want and backed down. 3 months later, the internet bubble burst, the UK company went bankrupt before completing the proposed deal and the rest, as they say, is history….

Part 2 will be posted Tuesday by Marion

Marion Freijsen

Adrie Reinders