Exit in an orderly fashion

How to exit a business isn’t top-of-mind for most early-stage founders, typically more concerned with staying afloat or progressing their R&D, but putting some thought into the future can help you better manage the present.

Founder, mentor and investor Jenny Rudd says for most founders, the need for an exit strategy crops up as soon as a business is in the market for investors, though how in-depth it needs to be will vary based on the life stage of the business.

“At the very early stage, you just need to give it a bit of thought and awareness.”

She cites her experiences with her own legal tech startup, Dispute Buddy, a platform that creates communications timelines to streamline dispute resolution, as an example.

“I’m looking further down the line at some of the dispute resolution platforms that might want to acquire it.”

Though Dispute Buddy is early-stage, a capital raise means potential exit strategies need to be included in pitch documents, Rudd says.

It is quite different from her previous experience as co-owner, with her husband, Mat Tomlinson, of UNO Magazine.

“We bought the magazine in 2015 and we just didn’t even think about succession planning or exit strategies. We were putting all the effort into actually making the business really successful and profitable; building other revenue streams and having a great time,” she says.

“A lot of people did ask us in the beginning, ‘what’s your plan for UNO?’ I just didn’t even think about it. I just wanted to do the best job possible with what we had at that time.”

Then about four years into running the business Rudd realised her focus had shifted. She was spending more time in the tech startup space, making small angel investments and advising female founders.

“Once we started to think that we needed to move out of the business, then we started to think about a succession plan.”

‍

Succession or exit?

There is a difference between a succession plan and an exit strategy Rudd says. The first is really for those who own the whole business, or the majority of it, so are able to be fully in control of how you leave, who succeeds you, and how you reduce or sell your shares. 

That could be through management buy-outs, selling to competitors or suppliers, or putting the business on the market through a broker.

When it came time to sell UNO, Rudd and Tomlinson worked out that there were two ways that people bought businesses. 

“Usually it was people who either thought they could add value to the existing business, or people that thought that it was underpriced,” Rudd says.

“We thought about the people we knew who could add real value to the magazine, if they bought it and could deliver real value to customers. 

We drew up pitch documents outlining exactly how we thought they could add value and gave it to them. And that’s actually how we sold it.”

Though the first prospect they pitched to didn’t want to proceed, they introduced Rudd and Tomlinson to others who did. “We sold it within three months.”

On the other hand, an exit strategy is usually for founders who have several investors on the cap table, as is the case for Dispute Buddy, and you are having to think and act on behalf of all of you together, Rudd says.

“You often have investors from an early stage, and you might have done another capital raising round, so you have to think of those investors as well. And you have to remember that all investors come on your cap table because they want to achieve capital gains further down the line.

“With Dispute Buddy, we’re on the cusp of revenue. I have a couple of pre-sales, and I’m in the middle of a capital raise, so I have to think about the exit immediately. Investors are going to want to know what the potential exit strategy is.”

‍

What to consider and who to consult

For small business founders and owners, one of the things to consider in any exit is how you’d be happy to structure the deal, Rudd says.

That means considering if you need to have all the cash immediately, or can you work with staggered installments by the new owners once they hit revenue milestones, she says.

“Often, businesses can be seasonal, or they get big surges of revenue, and it’s much easier for them to pay you. That’s what we did when we bought UNO, and that’s what we did when we sold it as well. It enables you to get a really good price for it.”

She also recommends adding a clause that allows you to use the business product in the future. “Mat and I secured three years of page space in the magazine so we could use it to advertise different products and promote new business interests.”

As with many aspects of business ownership, one of the best sources of advice for creating an exit strategy is to talk to those who’ve done it before, Rudd says, recommending US-based website theygotacquired.com, which includes a library of founder exit stories.

“Talk to those whose vested interests are similar to yours. Be very aware of the lens through which people are looking when they’re giving you advice. 

“The investors on your cap table can give you good advice on getting the business ready for sale, and can be well-connected, they might be well connected to other startups who are potentially in a position to acquire you but some of their motivating factors might be different to yours.”

The key point to remember in any exit plan, Rudd says, is to ensure it delivers for investors.

“You are in a contract with your investors to return as much capital as possible to them.”