Exit Execution Workshop (Philadelphia) Part 4: Exit timeline
This is the fourth in a series of eight posts on Exits Execution – the Philadelphia Series. In this session, Basil describes the steps in the exits process.
The Exit Execution series follows the Exit Preparation presentation and Exit Strategies – The Waterloo Series available on the exits.partners blog.
The Exit Execution workshop was first presented at the Angel Capital Association Annual Summit in Philadelphia on May 9, 2016.
EXIT EXECUTION – THE PHILADELPHIA SERIES
PART 4 – EXIT TIMELINE
Executing an exit takes much longer that you might think. A well-planned and executed exit of a highly sought after company might take as little as six months. For less-prepared companies in more challenging markets, the process might take 18 months or longer.
There are four parts in the exit process.
Part 1 is the Preparation phase. This five-step phase is described in detail in Exits Preparation. The five steps include:
1) Building alignment around exit strategy.
2) Financial history and projections. (See accompanying post on building a financial model.)
3) Creating the sales collateral which explains the company to prospective buyers. Experienced and diligent investment bankers may spend months with the founders and management exploring and refining the company’s value proposition to potential buyers, then capturing the message in a formal Confidential Information Memorandum or Presentation and an Executive Summary.
4) Cleaning up the corporate structure to simplify the share capitalization table. This makes the diligence and drafting of the legal agreements much simpler.
5) Preparing the due diligence. This requires organizing all of the company documentation as described in the Exits Preparation presentation.
The Preparation phase can take many months. In particular, assembling all of the documents, cleaning up the Minute Book, developing the Financial Model, and the myriad of other tasks is time-consuming. Preparation should be done early and continuously so that the company is ready for the exit before the process starts.
Part 2 is marketing the company to prospective buyers. Based on the Value Proposition, diligent investment bankers may identify and contact 50 – 250 companies, respond to 10 – 50 interested prospects, and start due diligence with 5 – 8 to get to an ideal short list of 3. This requires intensive work over a period of several months. Occasionally, a prospect will be so interested in the acquisition that it will make a pre-emptive offer that is too good to refuse. This can shorten Part 2 considerably.
Part 3 is the Negotiation phase where the M&A Advisors leverage the interest of the few best prospects to develop the optimum exit transaction. This may take a few months.
Part 4 is the Closing phase. Once the bankers have negotiated the best transaction with the winning bidder, the lawyers and accountants prepare and negotiate the definitive agreements. There may be dozens of documents to negotiate. It is an exhaustive process which usually takes 2 – 4 months to complete and can lead to “deal fatigue”, especially for the founders who are running the company at the same time.
There are many steps in these 4 parts to execute an exit. There are always issues which arise which take time to resolve. Often the diligence exposes missing documentation which need to be clarified. Exits typically take much longer than six months to execute.