In order to capture and share the critical information regarding your exit plan in an organized and easy-to-reference format, I recommend an approach like the one used by the increasingly popular business model canvas (BMC).
The BMC is a lean startup template. It depicts in a simple, yet highly informative visual layout the nine essential building blocks of a business model: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships and cost structure. This brings us to what I call the exit strategy canvas (ESC) as a template for your exit plan.
The main goal of the ESC is to document the essential building blocks of your exit strategy and create a shared language for communicating and iterating on your exit plan. I recommend that you lay out the ESC on one page to focus on what is absolutely critical and essential.
I recommend that you include the following essential building blocks in your ESC.
6 Essential Building Blocks of an Exist Strategy
- Success definition: What would a successful exit look like?
- Core hypotheses: What do you have to believe to be true for a successful exit to happen?
- Strategic opportunities: What are key areas for value creation through partnerships?
- Key acquirers: Who are your potential acquirers, and what are your selection criteria?
- Risks and challenges: What can jeopardize a successful sale to an acquirer?
- Key mitigants: What can you do to improve your chances of a successful sale?
The entire exit strategy is worthless unless it is crystal clear to all involved what specific outcome an exit is intended to achieve. Once everyone understands the destination, then they can support the journey.
For many entrepreneurs, a successful exit is one that ensures the survival of their startup. And this survival is all about the continuation of what lies at the heart of a startup’s core values and what the founding team considers to be a part of their personal legacy. That may consist of taking its products from a regional offering to the national or global level, creating new distribution channels, or enabling new features that can make it appealing to wholly new customer segments.
As you consider breathing life into your dream scenario, make sure your definition of success answers the following:
- How would an exit best manifest the values of your startup?
- How could an exit best promote the mission of your startup?
- What would be the ideal time frame for an exit transaction?
The next task is to make explicit what you would have to believe to be true for that outcome to manifest. Explicitly stating your assumptions helps you and other team members to discuss and gain clarity about what are the necessary conditions for success, and use them to gauge your future progress.
For example, if a successful exit for you would entail providing growth opportunities for your employees, then at the time of the acquisition you have to believe that your employees have sufficient skills and expertise of value to an acquirer. Thus, stating the hypothesis allows you and your team to reflect on whether this holds true for the current state of affairs, and if not, what you can do to make that a reality going forward.
To adopt a more quantitative approach, especially if your definition of success has a valuation threshold, you need to investigate and make explicit what it would take to justify your valuation goal based on either other comparable transactions or public market valuation benchmarks. Your desired valuation will likely necessitate achieving a certain set of financial (e.g., revenues, margin, profitability profile, or unit economics) or user (e.g., customer size, growth rate) metrics. A specific valuation goal makes it much more efficient for you to screen and filter acquisition opportunities as they arise.
In its simplest form, strategic opportunities are the key areas for value creation with your acquirer. They are the areas of complementarity between your strengths and those of the acquirer.
As such, to identify areas of strategic opportunity you have to start with a good sense of the strengths and weaknesses of your startup. Then, you need to consider the strengths and weaknesses of potential acquirers and how your strengths can fill in the missing piece for their weaknesses and vice versa. This is what is referred to as “synergy.”
If you have a prohibitively high cost of customer acquisition that prevents you from profitably growing and acquiring new customers at scale, you would have a strategic opportunity to partner with a company that has already figured out a way to acquire those customers at scale profitably but is looking for additional products to sell to those customers.
Think of companies in your ecosystem for whom you could fill a strategic need, such as adding revenue, adding profits, staving off a competitive threat, accelerating time to market for a product or service, or improving their market share.
As you enter into discussions with potential strategic partners, you will want to validate and revise your assumptions around areas of synergy and strategic opportunities and be on the lookout to uncover new areas to add to your list.
This is your wish list of potential acquirers. It will also serve as the list of potential strategic partners whom you will be building a business relationship with over the course of the coming months and years. Be as aspirational as possible. You are not looking for who could be an acquirer of your startup today; instead, you are looking for whom you would be thrilled to join forces with long-term.
For most cases, you could simply state the category or type of company. For a startup serving small businesses, you could refer to “domain registrars,” “website creation platforms,” “e-commerce tool providers” as potential acquirers.
Keep in mind that at this stage your goal is to provide directional guidance as to what are critically important criteria for assessing strategic partners and what the universe of those potential partners looks like.
Risks and Challenges
When considering your exit path, there are in general three types of risks that most businesses have to contend with: execution risk, market risk, and competitive risk.
Execution risk is a reflection of your core competencies, external relationships, reputation, and capitalization structure, all of which can make or break a successful exit. Weakness in your core competencies (such as an inability to manage the mergers and acquisitions process effectively, leadership gaps or a lack of a scalable business model) can stop many acquirers in their tracks. That is why building a strong business is table stakes for a successful exit.
Another often-overlooked risk factor in selling one’s startup is its capitalization structure: you increase your exit risk as you raise more money at higher valuations as well as when you grant voting rights to financial and strategic investors, as it reduces the founding team’s control and increases the possibility for others to block a transaction. It’s important that you understand the implication of those increasingly lofty valuations which at some point may render you “too expensive” for many acquirers.
As those of us who have tried to sell a company during a market crash know, market risk is always around the corner, and changes in macroeconomic conditions can very much impact the appetite of potential acquirers without forewarning. Because market risk is always present, the more desperate you are to sell, the higher the impact of market risk will be on your startup, so it is ideal not to time a potential exit around a time when you think you will be running out of cash.
No matter how unique your startup’s offering is, there is always competition in the market. And thus there exists the competitive risk that your ideal potential acquirers snatch up your competitor instead. Be sure to identify and list your largest competitive threats as an important strategic reminder for your organization.
For each risk and challenge you identify, call out a clear and specific set of mitigants.
Mitigating execution risks and competitive risks will generally involve building the requisite capabilities and creating strong relationships with your potential acquirers. The best way to mitigate against market risks, in my opinion, is to increase your operating runway so that you can live through short-term market fluctuations.
Remember that the ESC is a tool intended to efficiently capture and communicate your exit plan. As you create your ESC, feel free to customize it to your own needs, modifying what is captured in each block or adding new blocks that you may find to be particularly well-suited for your startup’s unique set of values, challenges, and opportunities.
Excerpted from the book Exit Path: How to Win the Startup End Game by Touraj Parang, pages 44-53. Copyright © 2022 by Touraj Parang. Published by McGraw Hill, August 2022.