It’s important that every key stakeholder, including the founder and CFO, knows what they are building and has a vision for what it will become. Entrepreneurs have varying levels of experience and may be solely focused on launching the business without thinking about an exit strategy. However, in many cases it's good to start thinking of your exit early.
To find long-term success, founders should envision their business at its beginning and end. That means connecting the dots between the startup, business development and the more mature firm to come. This helps create a complete vision for the company.
The strategies below walk you through how to prepare for a successful exit, be it an IPO or acquisition.
Consider an IPO from systems, processes and people perspectives
Many founders envision a point at which they may be prepared to leave the company or take it public. If you haven't considered an IPO, it may be a good idea to do so. To prepare for an IPO, a CFO must work closely with the founder to understand how their vision for the company impacts an exit strategy. This understanding should start early, sometimes two years or so in advance of the proposed departure. The process often starts and continues through many conversations with the founder during funding stages.
According to Iain Hassall, VP of Finance at billing and payments company Zuora, there are three main aspects to consider for an IPO: systems, processes and people.
"When we thought about the systems side, we wanted to make sure that we'd make investments early on that would allow us to really invest into a broad systems infrastructure that would actually deliver that final goal. And to really think about those systems — would they be public-company-ready? Would they actually meet the compliance standpoints?”
Make your processes predictable
From a processes perspective, Iain emphasizes the importance of maintaining quality control. On top of that, he shares how predictability took on great importance at Zuora and even became mandatory. “We were operating for a long period of time on this quarterly cadence, basically making sure that we were setting up those benchmarks and then hitting them, and I was framing what I could explain to the street.”
However, the key is to map out those processes from a cost standpoint and then adopt them based on cost to apply. For example, don't start quarterly reviews with your auditors until you are almost ready to file. Otherwise, you could end up performing expensive quarterly reviews for a long period if the markets aren't ready for you to file. Developing a process like internal forecasting with public-company street metrics, however, has a minimal cost to apply.
Pointers for investing in the right team
Another consideration is the people perspective — how to invest in the right team. According to the 2019 Guidant Financial Small Business Survey, business owners report a 15% increase in challenges with recruiting and retaining employees. For companies with a smaller number of employees, underperformance can be harmful to the bottom line. That underscores how important it is to find and keep top talent.
Iain cautions that you should avoid investing in too many new team members too early on. “We really wanted to think about it from a standpoint of having a lot of people that you do good for along the way. However, you don't want to invest in all of those people too early on because they'd be sitting around with nothing to do and it would be very expensive.”
To address this, many folks at Zuora wore two hats at a time. One team member might be an “SEC reporting person,” but was also the firm's “equity person” or “revenue person.” Each person on the CFO’s team had one or more roles that helped lead the company toward the IPO goal.
"So we sort of doubled up those roles until we were ready to split them out, keeping in mind that we would split them out as we got there."
Getting to know investors is like a dating game
Another important part of the CFO journey toward the IPO goal is establishing and building relationships with investors. Paul Yee started as CFO at Stitch Fix just one day after the company filed its confidential S-1 with the SEC. As the company hadn’t had the need to raise a lot of capital, Paul recounts that the investment community didn’t know Stitch Fix very well.
“In hindsight, I would have encouraged us to spend even more time talking to the investment community,” Paul says. “There's a format called ‘test the waters’ where you can, with a confidential S-1, talk to investors with some constraints around what can be said. We participated in this dialogue but probably could have done more. It's a helpful part of the process to get to know investors, as well as for them to get to know you. This was particularly important given the unique and disruptive business model of Stitch Fix. It's like a dating game; ultimately you build trust in the team and understanding of the approach over time.”
Ryan McDonough, Co-Founder and former CFO of database firm Accompany, says when it comes to investors (some of whom become board members), everything is relationship-driven.
"We worked hard to keep our board tight. We called every single CEO of our lead investor’s portfolio companies before he came in, failures and not, because we wanted to know what the guy was like over time, so that there wasn’t any question. And I think the underlying thing is that it's all about relationships. Think of this more as a marriage than an investment. You will likely be spending a decade or more together. Your board meetings are not the only time you're meeting with your board members; you're meeting with them all the time outside. And, drumming up demand for your company is all about relationships."
How to know if an acquisition is right for your company
Another exit strategy is acquisition, which also has many aspects to consider in ensuring a successful transition. As Ryan notes, it’s not a matter of deciding to sell and then just handing the keys over. He and the founding team built an impressive infrastructure but knew continuing to grow the enterprise business would take scaling an entire sales team, something the team had not done before.
“Three of us founded the company,” he says. “We had the CEO, CTO and CFO — and early on we realized our management style and what we wanted to do was not lined up with a quarter cadence. We started thinking about the acquisition process a couple of years before undertaking it. And also, keep in mind you can't un-ring the bell when you start shopping yourself. Once it's out there, it's out there.”
Ryan acknowledges that the team consciously began laying the groundwork for a potential acquisition. The CEO began to do more presentations and raised her visibility, while the other executives focused on more internal aspects. To prepare for the eventual acquisition by Cisco, they kept a lean team of less than 40 people and put the right systems in place behind the scenes.
“I had the right legal people, the right tax and accounting people, all those systems in place,” he says. “I was all about being acquisition-ready. That means our file structure, how we stored things, it was basically just going forward like the deal was happening then.”
Early preparation helps you in several ways. First, you can build stronger relationships with potential acquirers. Second, you get the time to pivot if needed. You’re also able to nurture internal relationships to prepare the organization for the acquisition. You want your team to stay motivated and to ensure that a potential acquirer holds true to your company vision. Focus on the strategic initiatives that raise brand awareness, interest, revenue and profitability, and therefore positively impact your valuation.
An exit is integral to your overall strategy
Whether you’re considering an IPO or an acquisition, preparation is everything. In order to be successful, give yourself as much time as you can and define the strategy in terms of financial and performance expectations. Lay out these milestones as realistically as you can upfront and continue to adjust them as you build your business and seek funding. Communicate this overall vision in a thoughtful way with internal and external audiences throughout your journey toward whatever exit you take.
The views, opinions and recommendations in this article are those of the author and do not necessarily represent the views, opinions and recommendations of First Republic Bank.