Achieving a sale or flotations is a key long term goal for many fast growth companies and their investors backing them. However, it can be difficult to devote sufficient time and attention to exit planning while grappling with the day-to-day challenges of running a high growth business. The chances of an exit falling through can be greatly decreased, and valuations maximised, by proper exit planning. This article sets out four "top tips" for high growth companies to consider as they look ahead to a potential exit.
Prepare for due diligence
Acquirers will typically want to conduct a detailed due diligence exercise before committing to an acquisition. Due diligence conducted ahead of an exit can be significantly more thorough than due diligence conducted for earlier investment rounds. Due diligence is a time consuming process for management teams which can interfere with "business as usual" operations, so being prepared for it is important to minimise "deal fatigue" as the exit process moves forward.
Ensuring that company documents such as corporate governance documents, licences, contracts, tax filings, employment contracts and so on are all stored in an organised manner in one central database will assist greatly when the time comes to populate a comprehensive data room. Similarly companies should ensure that effective record keeping practices are operated – basic steps such as ensuring that a complete, fully signed and dated copy of all contracts is filed will help to avoid issues arising during due diligence.
Take legal advice on core business issues as the company scales
For most companies, it is simply not practical to take external legal advice on every legal issue and every contract that might arise. However, it is important to ensure that proper advice is taken on areas which are crucial to the business. For example, in the context of a company which provides software, ensuring that signed contracts are in place with software developers and that those contracts properly vest intellectual property rights in the company is of critical importance – this is an area that frequently causes real problems for exit processes involving technology companies. Similarly, if the business relies on processing data, it is critical to ensure that the business has appropriate rights to use that data and is able to demonstrate compliance with the relevant legislation.
Involve investors and build a deal team early
Before engaging too far in the exit process, it is worth engaging with the board and with external investors to ensure that all parties are aligned in terms of the objectives and likely outcome. For companies with complex cap tables, it is worth reviewing the "drag along" threshold in the company's articles of association to understand the minimum approval thresholds required to implement a transaction (though in practice a purchaser would typically want all shareholders to sign the share purchase agreement and approve the sale).
Obtaining advice from external legal and financial at an early stage is critical. We often see situations where management teams agree to problematic terms in term sheets without fully understanding the implications. Obtaining high level advice at term sheet stage does not need to be a long or expensive process but can avoid significant problems arising later.
Plan for the future
Many acquirers will look for the existing management team to stay in place post-exit, whether that be on a permanent basis or just for a transitional period, while others may want to bring in their own management team. Retention of key management, and in some cases over-reliance on the founder, is a significant concern for many prospective acquirers. Have conversations with potential acquirers and with the management team at an early stage to understand whether their objectives are aligned. Similarly, discuss with potential acquirers at an early stage what incentive schemes or other arrangements might be put in place to incentivise the management team to continue delivering on their business plan.