To help Founders faced with the challenges of preparing for an exit, Eveline Baumeister shares her experience from over two decades helping Technology companies of different shapes and sizes to grow while at Siemens, Cisco and mostly recently through the lens of Private Equity. She is a Consultant with The Deal Team.
The Technology sector is continuing to innovate at a rapid pace across all sorts of industries, sometimes even accelerated by the pandemic, and a greater number of young European start-ups are increasingly developing into more Technology Growth companies. Company founders and investors are having to prepare rapidly for exits. As you hit your growth phase, your corporate planning should therefore include what is needed to execute on your exit strategies whether a trade sale, IPO, or private equity buyout.
Why is it worth you investing scarce time and resource before you reach this point? Because exit timing in the Technology sector can be crucial, taking market inflection points into consideration and thereby monetising on a specific solution or technology. Since the Coronavirus pandemic has boosted many if not most tech company valuations as so many other industries accelerate their move to digital, your exit preparation needs to be swift and accurate.
1. Should I prepare proactively for more than one possible exit route?
The highest multiples are often paid by strategic buyers. You are encouraged to build relevant relationships with mutual beneficial partners and potential buyers from early on, and ideally, to develop them as B-2-B customers or ecosystem partners based on selected joint use cases to nurture both joint revenue growth and your potential strategic exit routes.
Further, financial sponsors (e.g. Private Equity firms) are increasingly emerging as additional exit options, also for Technology Growth companies. Understanding the universe of potentially suitable financial sponsors and developing the relevant relationships with these firms is equally critical.
Long-term and diversified relationships present an opportunity to better understand a potential strategic, technology and cultural fit ahead of the actual exit process phase. Why is this important? During the pandemic, tech company exit processes have often not been lengthy auctions, instead they have been accelerating into a targeted and swift negotiation with a few already-interested buyers. Investing in your relationships and then proving your delivery underpins this swift process. Preparation of the company as well as the actual exit processes will be essential to meet the demanded quality and short timelines.
2. What Corporate Infrastructure and KPIs do I need?
Technology Growth companies specifically are characterised by high, double digit growth. Building out your effective scaling engine is one of the main levers for achieving high enterprise values.
So high-growth companies preparing for an exit must not only emphasise the business model and scaling mechanisms, but also build out an appropriate company backbone to sustain and support the projected operational growth. The rapid growth often seen in the technology sector, means companies usually operate with lean setups which require a good deal of upgrade ahead of a planned exit – which risks distracting the founders from the core business.
Your IT function should provide a solid infrastructure and applications based on your business plan that will enable the workforce to continue driving sales growth, delivery, and relevant corporate functions in an efficient manner. Zoom famously saw its daily users jump from 10 million to 200 million in three months. Plan how you would scale operations if that happened to you, because demonstrating rapid delivery on such a scale may itself trigger buyer interest.
Remember that your IT core systems are also critical to management oversight and financial reporting, so may require enhancing to help getting your monthly management reporting and quarterly financial reporting down to a reasonable period which many buyers will expect to see.
Human Resources will have to cater for increasing hiring and employee relations needs, and to assess the attractiveness of introducing employee shares programmes.
Relevant company achievements across all functions should be underpinned by a meaningful KPI trajectory which will also form part of your company steering, management reporting and, during the exit phase, relevant investor documents. In addition to general financial KPIs, you will have introduced KPIs over the growth phase of your company that can provide you as well as your investors and potential buyers with operational and forward looking KPIs that are tailored to your business model and type of operations. As an example, if you were a Software-as-a-Service company you may have considered metrics such as e.g. Monthly Recurring Revenues, Annual Contract Value per Customer or Lifetime Value of a Customer.
3. Why should I incentivise both senior management and employees?
It goes without saying that you as the Founder/CEO, your existing shareholders, and potential bidders, will all assess the strength of key management. You will want to ensure an ‘A-Team’ is in place sufficiently ahead of any exit preparations, with established credentials, that are not just great operators for your business but can also credibly represent the company during management presentations or investor meetings.
Well before an exit approaches, do consider what incentives you want to have, both for employees and for senior management. Avoiding a “Them vs. Us” situation will allow your carefully created corporate culture to survive and thrive through an exit process.
4. What additional functions do I need to strengthen for an IPO?
An IPO scenario will add an extra dimension of complexity to the execution process. Your company will have to build multiple robust processes and functions to serve the rules and regulatory requirements of the listing stock exchange(s).
The Investor Relations, Corporate Governance and Compliance functions often must be set up from scratch. These include for instance setting up an Investor Relations website and Annual Report as well as Annual General Meeting, following a Quiet Period policy, scheduling Directors’ responsibilities briefings, establishing a Company Secretary function, defining a formal corporate governance calendar, briefings on Insiders procedures and post-IPO regulatory announcements. Attention needs to be paid to the regulatory requirements on internal controls and corporate governance – which may impact on your management structure, responsibilities, even your office layout and your culture of openness. Your legal advisors will assist with the clarifying the detailed regulatory requirements of an IPO and necessary documentation.
The finance function may require even more strengthening ahead of an IPO to cater for the qualitative requirements and defined timelines for release of quarterly and annual results. In addition, many companies decide to use external consultants such as an audit firm or specialist consultancy to conduct an IPO readiness check of the business operations, and to provide a framework for necessary operational exit preparations.
It is further recommended to prepare a list of potential Supervisory Board (or Board of Directors, depending on the jurisdiction) Candidates early. Potential candidates should bring strong and relevant expertise and high visibility. They should be capable of establishing capital markets’ as well as customers’ and partners’ trust in the company. Ultimately, they should be able to help expand the company.
5. What does an internal exit planning team do?
By now, you may have already identified several internal projects that are needed to prepare for the exit, as well as to run the process itself day to day. As the Founder/CEO, you can’t afford to be distracted long term from running the business. So, it is in your interests to establish a dedicated exit project team that can orchestrate the various workstreams and milestones in both the company preparation and transaction execution, manage the internal/external interactions and overall processes effectively and efficiently, and help you and your senior team focus on achieving the targeted business performance.
Achieving or even overachieving the desired performance targets will be critical in attracting desirable strategic or institutional investors and is a key lever in exiting successfully.
Eveline Baumeister is a Consultant with The Deal Team. The opinions in this article are the author’s own.
The Deal Team is passionate about transaction execution – because management should be running their business, not the deal. We are the first professional transaction manager for M&A and capital markets. We deliver speed, agility, and transparency of execution processes to maximise your competitive tension, your control over transaction variables, and your management teams’ capacity to focus on business performance. We do this by providing a dedicated Deal Captain to work shoulder-to-shoulder with management teams, delivering execution excellence onsite throughout a transaction.
To meet the rest of our Team and watch our one minute video explore the rest of our website here >