Many companies fail to prepare adequately and early enough for an exit, and that can have consequences on the company value they’ve worked so hard to create.

Exiting a business can be a humbling experience. Most people have a preconceived notion of what their business is worth, but the sales and due diligence process is designed to put that notion to the test and reveal anything and everything that could influence the company’s value.

It’s like selling a house: great curb appeal will bring buyers to your door, but if the foundation isn’t rock-solid, you’re in trouble. Just as a home inspection can dramatically impact the value of a home, the exit process can impact the value of your company by uncovering operational, technological and legal cracks in your company’s foundation.

The pre-marketing phase of the exit planning process is an opportunity for CFOs to mend those cracks and reinforce the company’s underlying structure. Unfortunately, most don’t start early enough. Waiting until an exit is on the horizon won’t give you enough runway, because this type of preparation work can take years—and an inbound offer to purchase your business can surface at any time.

Ideally, the pre-marketing phase begins the moment the company comes under the umbrella of an institutional investor, with these five areas taking priority:

 

Operations

Having gone through exit planning with five companies to date, I have yet to walk into an organization that had all the underpinnings of operational excellence required for a smooth exit. This happens all the time but it is seen as a big liability by buyers, regardless of the overall appeal of your business.

If you can’t demonstrate a strong knowledge of the business and financial acumen, that will come out during the process and ultimately detract from values.

By putting standard metrics in place and creating a cadence of analysis and reporting, you can monitor the health of the underlying business and satisfy buyers who need to see proof of your company’s stability, efficiency and predictability. While every company’s KPIs are uniquely aligned to its industry and operating style, the metrics and processes that buyers most want to see include standard KPIs and financial reporting for the last 2 to 3 years, pipeline metrics and analytics, forecasting cadence and accuracy, and a long-range financial plan.

If you can’t demonstrate a strong knowledge of the business and financial acumen, that will come out during the process and ultimately detract from values.

Technology

Software companies need to be able to prove technological as well as operational stability. No one wants to buy a software company and then be faced with the arduous task of refactoring the code because of vulnerabilities, flaws or open licensing violations.

If you’re a software company going to market, you should expect the buyer to perform the following: an open-source review, penetration tests, vulnerability scans and an examination of the quality of your code.

To withstand the scrutiny, you need processes in place that meet rigorous quality and stability criteria. Do you routinely subject your code to penetration and vulnerability scans prior to release? Do you have a process in place for dealing with critical and high-risk issues? If you don’t, it will surface during the due diligence process. In these cases, the buyer will either require you to fix the issues (which can be costly and disruptive when addressed long after the fact) or detract from the value of your company and lower the offering price.

Do you routinely subject your code to penetration and vulnerability scans? Do you have a process for dealing with critical and high-risk issues?

Contractual Obligations

Customer and vendor contracts are subject to intense scrutiny during the exit process, and in my experience, there are certain provisions that may create diligence risk and impact valuation, including most favored nation clauses, termination rights upon COC, unlimited liability provisions and assignability issues.

That doesn’t mean you can’t make use of them, but it does mean that you need to go into it with your eyes wide open, as buyers often look for these types of provisions and make a risk determination as to the quality of your revenue. If they’ve been operating on the assumption that your contracts are inviolable, the discovery that they are not will be used against you in negotiations.

Your vendor contracts can also have an impact. Buyers inevitably look for ways to eliminate the duplication of spend post-acquisition, and if your company holds unfavorable contracts or rigid, long-term leases that lock the buyer into payment on unnecessary expenditures, that will reduce your company’s value.

As you move towards an exit, flexibility gives buyers the synergy they want; the more flexibility you can build into your vendor contracts, the more convenience and value they deliver to your buyers.

If buyers assume your contracts are inviolable, the discovery that they are not will be used against you in negotiations.

 

Data Room

While a data room won’t enhance the value of your company, it will help you support it. The information that buyers require is fulsome, and collecting and organizing it can take weeks, months or even years for more complex business entities. The best practice is to create your data room during the pre-marketing phase. While you can’t anticipate 100% of the documentation buyers will request, the majority is fairly standard and can be collected long before a specific buyer is identified.

By building your document-management system as early as possible, you’ll ensure that you’re adequately prepared and significantly minimize the pain involved in pulling it all together in the throes of high-intensity exit activity.

Legal Counsel

Lawyers are among the most valuable third parties that you will leverage during the exit process. Ideally, that legal team will bring both an understanding of your business and prior experience with the exit process.

That’s why I recommend that you hire corporate counsel that is also capable of representing you during the sale of the business. It will make life significantly easier on the CFO if they are able to get through the exit process without having to explain your business model, pricing and contractual nuances, capital structure and other aspects of your business to the attorneys at the same time they are talking to prospective buyers. Being able to rely on legal counsel that has been involved with your company from the beginning and is already up to speed is invaluable.

Lawyers are among the most valuable third parties that you will leverage during the exit process.

 

Here’s the bottom line.

There will be many surprises during the exit process, but one thing is certain: there will be an exit.

Yet many companies fail to prepare adequately and early enough for that basic reality, and that has consequences for the company value that you’ve worked so hard to create. By getting started sooner and focusing on the key capabilities and resources that support the exit process, companies can build and demonstrate a solid foundation that ensures a smooth exit on the most favorable terms possible.