4 Ways to Develop a Better Exit Strategy Build a great business first. The rest will follow.
By Joel Trammell Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
In the early days of founding a company entrepreneurs must be laser focused on creating a great product or service and generating revenue. However, once they reach the stage where they want to be acquired, many don't get their house in order. They continue to focus on only one area and believe the rest will take care of itself.
Companies that are world-class in one area but neglect the others are not good acquisition targets. Acquirers care about everything -- from contracts to HR to the sales pipeline. Here are four ways to be a better acquisition target.
1. Avoid the "Super VP" trap.
Many CEOs come from a functional area of the business such as marketing, sales or engineering. Once in the CEO role, the temptation is to continue to focus on what they know and do best. A CEO from sales will often jump in to close a big deal, for instance. While this can be useful at times, spending too much time in one area -- being a "Super VP" -- is a quick way to failure.
Related: Exit Strategies for Your Business
The risk, besides undermining their executives, is failing to do the real job of the CEO. Acquirers are looking to minimize risk. When one area of the business is poorly run, it increases the risk for the acquirer. I have seen simple things such as failure to properly pay sales tax torpedo a deal.
Jim Schleckser, CEO and Managing Partner of The CEO Project, says chief executives need to transition from individual contributor to leader. They must be professionals and bring in talent and systems to execute the same things that they would do as an individual contributor.
2. Build mature systems and processes.
Schleckser stresses that early in an organization's founding, entrepreneurs make up for the lack of processes and systems with talent. This is fine for a while but does not scale. Somewhere north of 25 to 50 employees, when the business is starting to take off, entrepreneurs need to put on the "engineer's hat" and invest in more sophisticated systems and processes that will help run the company more efficiently and gain a true competitive advantage.
I have been shocked at the inability of even large businesses to answer even basic questions about their business, because they don't have proper systems and processes. Sometimes CEOs think they can get by without them or just don't want to spend the money. Other times the business is growing so fast that the systems and procedures can't keep up. In any case, failure to do so will inhibit growth and the ability to attract potential acquirers.
3. Strive to be world-class in every department.
Simply buying some new software is not enough. CEOs need to make it a priority to ensure that every department functions at a world-class level. They need to work closely with the executive team to identify the key processes in each area of the business and then undertake a systematic approach to improving each one.
Some companies will have a COO who may take primary responsibility for this work. If not, the CEO should regularly review metrics and focus on the processes that make the biggest difference to the business. Leaving this role entirely up to the members of the executive team means the CEO often won't have the knowledge needed to make effective decisions when issues escalate. Of course, all of this starts with hiring the best people possible at every level in the organization.
Related: Five Smart Exit Strategies
4. Get the financial side of the house in order.
Every department is important, but prospective acquirers who cannot make sense of a company's finances will make a low ball offer or quickly walk away. In "5 Lessons Learned From Serial 7-Figure Sellers" Mark Daoust, founder of Quiet Light Brokerage, wrote: "One of the most common differences between a business worth $100,000 and $5,000,000 is the state of the financial records. It never ceases to amaze me how many entrepreneurs try to run their businesses with poor financial records."
CEO advisor Bob Barker of 20/20 Outlook recommends that start-ups have two years of audited numbers to help "potential acquirers get a rapid and reliable financial picture of the business, a key step in accelerating their interest. This immediate positive step doesn't require deep thought -- just do it."
Related: Why You Need an Exit Strategy for Your Business
Too often CEOs and leadership teams focus only on an exit. They don't strive to build the finest business they can, diminishing their chances of getting the best deal possible for themselves and their stakeholders.
