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September 19, 2022

Selling a business is a difficult task that requires a lot of planning and preparation. However, most entrepreneurs refuse to entertain the idea of a sale until it is too late. The best time to plan an exit is when times are good, not in a desperate situation. The longer the prep time, the higher chances of success. This article talks about how to build an exit strategy featuring Touraj Parang, President & COO of Serve Robotics

"Companies don't do deals; people do. So it's good to get to know the people that do the deals." - Touraj Parang 

Why build an Exit Strategy

Most startups don't survive after five years. 70% of venture-backed startups don't return the money invested in them. With horrible statistics on success probability, Touraj believes that entrepreneurs start ventures because they have a mission. They have an idea of what the future will look like and want to be a part of it.The best chance to achieve said mission is to be acquired by a larger company, and this is why entrepreneurs should build a business with an exit in mind.

An exit strategy also helps create a more sustainable business. Even if the company doesn't get sold, it is more likely to succeed and grow. Valuation also goes up if more acquirers are lining up for the business. 

How to Build an Exit Strategy

Building an exit strategy starts with the right mindset. Accept that planning early is in the company's best interest and that M&A is almost inevitable. 

  1. Collaborate with key stakeholders -  Building an exit strategy is not possible without the help of investors and key stakeholders. Collaboration is necessary to build an exit strategy canvas. 
  1. Build an exit strategy canvas - It is similar to a business model canvas but geared towards the exit. An exit strategy canvas is a living document that needs to be revisited periodically to update hypotheses, assumptions, people involved, and risks.
  1. Enter the long game - Building relationships with potential acquirers is the best way to create an exit strategy. Create a wishlist of acquirers and find a way to initiate a relationship with them. More buyers mean more leverage during the sale process. Also, start building a deal team and let them mature over time. 
  1. Enter the short game - Once ready to sell, evaluate the pros and cons of starting a sell-side process. Understand the risks involved. 
  1. Getting term sheets - Get buyers at the table, cultivate their interest, and bring urgency to the deal.

The Deal Team

Selling a business is not a one-person task; having a team of experts will help ensure a successful exit with the right buyer. Here are the people needed for an exit strategy:

  1. Legal team - Lawyers are great at identifying risks and protecting clients from downsides. There are a lot of complex terminologies that could be very deceiving during term sheets. Do not attempt to sell a business without lawyers present. 
  1. Deal advisors - To maximize the upsides of the sale, having a business-minded deal advisor is critical for identifying opportunities and the best terms possible. They are great at running the process and will act as the middle person who does most of the negotiations. Be sure to engage with investment bankers whenever possible.
  2. Backup management team - Acquisitions tend to be highly time-consuming. Whoever is involved in the sale won't have enough time to run the business smoothly. However, the worst thing that could happen is for the company to go off the rails during negotiations. Have a backup management team that could run the business's day-to-day operations.
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