How to Exit (if you are not the CEO)
It was, IMHO, time to sell.
The only problem was that I wasn’t the CEO. I had a fair share of the company, but not nearly enough to force an exit. Sound familiar?
For the most part, this didn’t matter. Like most good founding teams, we had complimentary skill sets and mutual respect so most decisions were by consensus. The decision to sell was not one of these. That decision was (and rightfully should be) up to the CEO and the Board of the company.
For context, the company effectively started in early 2000. We were hit hard by the dot com crash and one of the lesser casualties of September 11 was our term sheet. We stopped taking even meager salaries and bootstrapped to profitability in 2002.
The next few years, we had ridiculously high growth, ever increasing revenue per customer, failing competitors. It was the best of times.
Six years later, I wanted to sell. Our growth rate, while still high, had started to come down and the vibe at trade shows was that we were past the early adopters; there were still plenty of prospects but they were slower to sign and more price sensitive. At the same time, our competition was trying to lure our best customers away by undercutting us. We were doing the same, of course, but once a steal becomes an attractive trade off relative to greenfield prospects, something fundamental has changed.
On the flip side, our growth was still really, really good and the market was hot. Based solely on the numbers, we could have got 6–8x times earnings and we had a good chance of attracting a strategic (read: not price sensitive) buyer.
The CEO wasn’t interested. He believed that our new products would fix growth so we could get the same multiples on a higher base in another year or two. Knowing what we knew then, he might have been right.
But he wasn’t. Next year growth was a bit lower. Still really high but with two years declining growth, even he agreed we should at least shop the company to see what we could get. Unfortunately, the banker we brought in now thought we could get 4–6x earnings from a financial buyer but there were still strategics….
After leaving no stone unturned, the best offer we got was… 5.5x. No strategics. Between the market cooling, taking time to digest their previous acquisitions, and our growth slipping, they didn’t bite. This wasn’t the payoff the CEO had in mind. He did not want to sell.
But I still wanted out. I figured it would be years before he shopped the company again and, even when he did, the odds of getting a better offer hinged on an increasingly unlikely turnaround. So I told the CEO that, if the prior offer was too low, he should be thrilled to buy me out at that price. I also told him that I was ready to move on even regardless. Ultimately, he agreed to buy me out in exchange for my finding and training up my replacement.
Soon after that, the economy exploded and we entered the worst recession in living history. Fast forward seven years, still no sale.
Before I hurt myself reaching over my shoulder to pat myself on the back, I should acknowledge a few factors that made this possible. The first is cash; wouldn’t cash in the bank from a profitable business, this would not have been possible. The second was my role; if I hadn’t been a core team member, I’d have had zero leverage. The third, ironically, was the number of shares; there would not have been enough cash to buy out a larger stake.
- For your first startup, a solid double or triple in a few years often beats holding out for the home run that may never happen. Life is a lot easier with a win under your belt.
- Use inside information. If you’re seeing the road getting bumpy, act on it.
Don’t fill an inside straight. The irrational optimism that got you this far has no place here.
- Respect the market. It may be hot now but it can change at any time. You wait on it; it does not wait on you.
- Respect the market. (Yeah, I know…) Barring #2 above and filtering any of that through #3, if you ran a good process, the price you get is likely fair.
- Governance matters. Understand who can stop or force a sale under various scenarios. You may not be able to change this, but you don’t want to be surprised.
- Be creative. Not all exit doors are clearly marked.
- Recognize your leverage — in some cases, weakness can be strength — and be willing to use it.