Most entrepreneurs wait too long to start thinking about their exit.

They usually sell their companies for much less than they could have. The valuation curve, and return to shareholders, usually ends up looking something like this.

That’s exactly what I did in my first company. (It was the first time I lost several million dollars, and the first of many similarly expensive - and valuable - lessons about exits.)

Most of the technology companies I’ve known well exited too late. Yes, most. "Riding it over the top" is by far the most common exit scenario.

The fundamental cause is simply our fundamental human natures.

The goal of this article is to help you time your exits better.

How Long Does It Take to Sell a Company?

Depending on who you ask, and whether they are trying to sell you something, you will get different answers on how long it takes to sell a company.

The time to exit depends a lot on the company - primarily on how long it will take to get the company into a saleable state, and then how much time the senior team has available to work with the M&A advisor.

A good rule of thumb is that it will take 6 to 18 months from making the decision to completing the sale. That means to execute the best exit, the decision to sell has to be made 6 to 18 months before the peak in the selling price.

Selling Price Depends on Internal and External Factors

Selling an entire company is similar to selling shares in the public markets - how much you can get depends on how the company is doing, but also on how the overall market is behaving. For many stocks, the overall market is a bigger factor than how the company is actually doing at any point in time.

This ‘external effect’ is even more pronounced when an entire company is being sold because the market for companies is much less ‘efficient.’ The term inefficient includes a lot of aspects, but the important effect here is price. This post describes market inefficiency and how you can use it to your advantage when selling a business.

At the end of 2008, near the bottom of the most recent debt bubble collapse, the overall stock market had dropped about 50%. If there was a similar index for the value of entire companies being sold, I am sure it would have gone down much farther than that, and stayed near the lows much longer. This is, in part, because the market for entire companies is much less ‘efficient’ and therefore more susceptible to changes in sentiment and liquidity.

The Macroscopic Economy Affects Every Exit

The overall economy is often the most significant timing factor in an exit. This means you’ll also need to consider what may be happening in the global economy 6 to 18 months into the future.

My first exit was sub-optimum because I hadn’t seen the previous debt bubble forming back in 1990. If I was paying attention, I might have noticed that most of my cable TV company customers were using a new financial instrument called ‘junk bonds’ and that S&L’s were financing too many real estate projects. Heck, I didn’t even know what an S&L was - let alone a junk bond.

We are all familiar with the effects of the macro economy. In the M&A business, the future condition of the 'micro' market is almost as important.

The Micro Market for Your Company

The state of the micro-market you will sell the company into is the second biggest factor in choosing the optimum time to exit. Markets for companies are notoriously inefficient, and the valuations for a given type of company can easily vary plus or minus fifty percent in a year depending on perception and supply and demand.

If a space becomes ‘hot’ valuations can be several times higher than just a year earlier. These micro market conditions can often affect price more than the fundamentals of the company.

The micro market is often easier to predict than the macro economy. For example, I recently met with two bright, local entrepreneurs who are building a company in an exciting niche market riding on a long term trend. These two young founders chose their space well and were already global leaders in their niche. They had prototypes in the market and a respectable global mind share.

Their niche was heating up quickly - unfortunately for them. In the previous six months, I’d read several articles in finance blogs or newsletters about yet another company that had just been financed in their specific vertical. Most of the financings I read about were for $5 to 20 million. This local company has been built on something around $1 million.

This is a scenario I’ve seen about a hundred times before: too much money flushing into a space the VCs think will be hot. Too many companies being founded with exactly the same business plan.

These entrepreneurs were too young to attract the amount of capital they’d need to compete in this new environment. They had only two strategic options - an early exit or hiring a ‘name CEO’ who just might be able to raise a big enough round in time. I recommended an exit because I knew the money flowing in to their space would also increase valuations - possibly by 2 to 5x over normal ranges.

You can probably guess the young entrepreneurs wanted to wait a ‘little longer.’

Most CEOs don’t have time to keep up with the macroscopic economy, or the micro markets for selling their type of companies. They need advisors who have the time to stay current on the big picture and help them incorporate these market effects into their exit strategy.

Under Appreciation of Exits as a Strategy

Selling the business is an under appreciated business, and life, strategy. CEOs make important strategic decisions every day - often subconsciously. Most CEOs have never executed one exit and only a very few have done two. This inherent lack of familiarity results in exits being a very underused strategic alternative.

Most CEOs miss their optimum exit window simply because they haven’t been thinking about their exit and haven’t built alignment on an exit strategy. (I wrote about exit strategies in the previous edition of the Acetech Newsletter.)

Selling the company is also a life strategy. During my two decades in YPO, I got to know many successful CEOs. I watched many of them sell their companies. The exits were always a milestone in their lives and in every case I’ve been close to, the exit was a very positive event. And it was not just the successful exits that were positive life events - even the exits that might not have been considered a success by some of the investors were always positive events for the founders and CEOs.

I have come to believe that founders, executives and investors would all make more money, and have more fun, if we understood exits better and utilized exits more often as a business strategy.

And Largely Human Nature

I don’t want to be too hard on the young entrepreneurs I wrote about earlier. They were mostly victims of human nature.

They just couldn’t think about selling because they were having too much fun. They were leaders in their market and big companies were enquiring about huge orders. They knew their revenues were getting ready to grow – and possibly explode.

Unfortunately, they couldn’t appreciate that it was also the absolute best time to sell their company. In fact, they should have started the exit process 6 to 12 months earlier.

Human nature also affects the buyers. They will always pay the most when everything is going perfectly and the future looks even brighter. The buyers’’ human nature also means that a skilled M&A advisor can usually sell for a lot more based on the ‘promise’ rather than the ‘reality.’

Human nature also works against the entrepreneurs on the downside. The reason human nature ends up costing most entrepreneurs, and their investors, a lot of money is because most of the time CEOs and boards wait until it’s pretty clear that the company’s value has peaked before starting the exit process. By the time the buyers get to the serious price negotiations, it’s also clear to them that the company’s best days are behind it. And another 6 to 18 months has passed, which has usually allowed the trend to extend even further. The result usually ends up looking something like the graphic above.

When you do an Internal Rate of Return (IRR) calculation for an investor, the difference can be dramatic. Using the hypothetical example from the graphic above, an exit in 3 years at a 5x return works out to an IRR of 124%. If the company waits until the peak, then starts the process, and ends up selling for 2x at year 6, the IRR is only 15%.

With exits, like many things in business and life, timing can be (almost) everything.

Video of "How Not to Sell a Business - Don't Blow the Biggest Deal of Your Life"

If you’d like to hear more about everything I did wrong during my first exit, and avoid some of my expensive lessons, this is a video of a talk I gave the to the Vancouver Entrepreneurs Organization titled: "Don’t Blow the Biggest Deal of Your Life".

This is part 1-2 of the video series from my Early Exits workshop at Angel Capital Association National Summit, San Francisco May 5, 2010.

It was sponsored by the Angel Capital Education Foundation and the Angel Capital Association.

Highlights of Angel Investing in the 21st Century - Part 1-2:

• What happens to angels and entrepreneurs when traditional VCs invest in our companies?
• When VCs invest, on average it adds about a decade to the exit timeline - the math explains why
• The best strategy is to have angel investors or traditional VCs - but not both - university research shows
• When do traditional Venture Capital investors make sense for technology companies? A simple test for each company.

Part 1-2 of Early Exits Workshop - Angel Investing in the 21st Century is online here.

This is part 1-1 of a video series from a workshop I presented at Angel Capital Association National Summit, San Francisco May 5, 2010.

It was sponsored by the Angel Capital Education Foundation and the Angel Capital Association.

Part 1 of the Early Exits Workshop is titled - Angel Investing in the 21st Century.

These are a few of the highlights of Part 1-1:

• Outline of the Early Exits Workshop and how I got started on Early Exits
• Successful investing requires two things - investing right and exiting well
• Angels and entrepreneurs would have more fun, and make more money, if we focused more on our exits
• Angel investing is still new - about where traditional Venture Capital investing was in the mid-1980s
• The economy has changed and traditional Venture Capital isn't working for today's tech companies

Part 1-1 of Early Exits Workshop - Angel Investing in the 21st Century is online here.

This video series is a practical guide on selling a business, the exit process, the exit team and how to sell for 50% more.

It's my keynote speech at the National Angel Capital Organization Summit on October 15, 2009.

Some of the topics include:

• Successful investing requires two things - investing right and exiting well
• Exiting well means selling a business at the right price but also in a reasonable amount of time
• Why its important to engage professionals and why the CEO should not lead the exit
• The exit is just another business process and why every company needs an exit strategy
• Term sheets create exit alignment and vesting is the most important term
• Who are the buyers for tech companies today?
• Corporate buyers are often the fiercest competitors for traditional Venture Capital funds
• Today, companies are often acquired just two or three years from start-up
• The most important criteria for selecting the M&A Advisor and the M&A Advisors functions
• M&A Advisor fees and why the M&A Advisor should be local
• The benefits of doing a secondary sale before the exit
• Things to do before contacting the first buyers - clean up the structure, employment agreements
• Financial statements - review or audit, the financial model, tax considerations, the sales collateral
• The sales funnel and ways to maximize the final selling price of the business
• Structural value increase, illuminating strategic value, capitalizing on inefficient markets
• Why you always need multiple bidders and the selling skill of the M&A Advisor
• Reps and warranties, the closing process, it's recycling other resources on selling businesses

The video series on Selling a Business is online here.

This is the first in a series of articles on how to design and execute an optimum exit for your company. Future installments will discuss: how exit strategy drives financing strategy, corporate DNA, who the buyers are, secondary sales, building an exit plan, the exit timeline and ways to maximize your exit value.

This article was written for the Acetech newsletter: CEO Snapshots.

Every company needs an exit strategy.  Ideally, the exit strategy should be signed off by the founders before the first dollar of investment goes into the company.  This is especially true today when early exits are such an attractive option for many technology companies. 

These days, tech companies are often sold only two or three years after they’re founded.  Flickr was a year and half old when it sold for $30 million. Club Penguin sold for $350 million when it was just two years old. YouTube sold for $1.6 billion when it was two years old.

Of course, in many cases it will take longer than two or three years to optimally exit.  But this doesn’t reduce the need for an exit strategy and continuous work on the exit plan – right up until the day the company is sold.

It’s just another business process – the most lucrative one

Selling a company is just another business process. Designing and executing the exit well can easily make half again as much money as all the hard work that goes into every other business activity – so it is often the most lucrative of all business processes.

Every manager knows that large business goals need a strategy, plan and regular monitoring.  The exit is no exception.  

The entire purpose of the company

Looking at it in the simplest terms, or as an investor would, the company is simply a black box with the inputs being entrepreneurs’ effort and investors’ cash and the only output being the purchase price paid by the ultimate buyer.

Everything else that happens inside the black box is simply a component contributing to the single output – the successful exit.  While this is no doubt an enormous simplification, it is clearly the most purpose of most companies with external investors.

Build It and They Will Come – Not

The classic joke for managers involved in product development is ‘build it and they will come’.  In the 80s, there were several well-known management gurus who wrote books and made good livings on the lecture circuit advising entrepreneurs and managers to listen to their customers before starting to build new products or services.  Today, almost everyone agrees that a strategy of ‘building it and they will come’ is laughably ill-advised.

Even so, many entrepreneurs still go happily along building companies hoping that one-day a ‘buyer will come’.  It’s an equally bad idea.  To succeed in any business process you have to start at the end – clearly articulate the desired outcome and then plan the intermediate steps needed to achieve the goal. 

For most technology companies with external investors, the ultimate objective is to sell the company.  To achieve that goal, the exit strategy should become part of the corporate DNA. The exit strategy should be clearly articulated, signed off and reviewed regularly.  With a good exit strategy, and reasonable attention to the process, your company will exit earlier and for a better price.

The First Step – Your Exit Strategy Rev 1.0

An effective exit strategy can be pretty simple. Here’s a real life example from a company that I can talk about – Parasun Technologies which was in New Westminster. At the company’s second strategic planning retreat in September 2005, the board and management agreed that “Our Core Purpose” was to sell the company for more than $10 million by late 2006 or early 2007.

That’s all you really need: a target date and a price. Exit strategies can be more complicated, and might include statements on maximizing strategic value, target customers and even sales tactics. But the two essential elements are when and how much.

Parasun’s simple exit strategy worked perfectly.  In February of 2007 the company agreed to be sold for $14.8 million. The transaction closed in May. The story of how the price grew from $10 to $14.8 million is the topic of a future article in this series.

I'm very pleased to say that Inc. Magazine has selected my book, "Early Exits" as one of their "Best Books for Business Owners of 2009."

"Written by a seasoned early-stage investor, Early Exits is a must-read for any entrepreneur who has wrestled with the dilemma of taking outside funding. Peters makes the case that marching toward an exit is a good thing, and not nearly as impossible as it may seem. A surprising number of business owners are cashing out after only two-to-five years and for between $5 million and $30 million, he asserts—making this period, for all its turbulence, a golden era for entrepreneurs." Recommended by Bo Burlingham.

The Inc Magazine article is available here.

The list was also discussed on these blogs:

800CEORead Blog's Inc. Magazine’s Best Books for Business Owners

WorkingPoint Blog's Christmas Reading List for Entrepreneurs

The main thesis of my book Early Exits is that entrepreneurs and angel investors would make more money, and have more fun, if they built companies around a strategy of early exits.

In "Early Exits" I show that most M&A transactions are under $30 million. More recently, I have been saying that the median price might be as low as $15 million.

Part of my message to entrepreneurs is that they don't need to build companies to be profitable before they can execute very good M&A exits. This is a main theme in why I think this period will come to be called a Golden Era for tech entrepreneurs.

The fundamental driver behind this trend is that big companies have learned that M&A is the best way for them to grow.

But even I was surprised to learn just how early Google wants to do acquisitions.

Charles Rim, is one of the five most senior M&A professionals at Google worldwide. He did an interview for Corum's online "M&A Class." I am grateful to Corum for organizing this event and for posting the archive. (If you are interested, I've converted an excerpt to flash and posted it here. There is also a transcript here.)

A few of the fascinating points from the interview are:

"90% plus of our transactions are small transactions.  So that would be less than 20 people, less than $20 million and that is truly the sweet spot"

"we do prefer companies that are pre-revenue"

"technical staff, engineering, a strong engineering team, these are the things that we think are very important to the future success of Google and important for us to use acquisitions in that manner."

This provides some excellent insight into how a very large company like Google thinks about acquisitions. This is a good confirmation of the trend toward early exits, but it goes even further than I did in my book.

Google actually prefers companies that are pre-revenue. In other words, Google doesn't want to buy the business, they want to buy the team. The people. The entrepreneurial ingredient that they know they need to keep their company growing and healthy.

You've heard it from one of the guys who really knows - you can sell a tech company today long before it's profitable, even before it has revenue. And if it was up to Google, it would be the latter.

This video is from a Bellingham Angel Group Education Breakfast on Angel investor term sheets. Dan Rosen, Chair of the Alliance of Angels in Seattle, and I talk about how term sheets for angel investors have evolved over the past few years.

Term sheets are an especially important topic right now as angel groups work to develop best practices on syndication (or co-investment.)

Dan introduces the Rosen Light Pref Angel Term Sheet as a model for future angel investments.

We discuss:

• Preferred shares, exchangeable shares and common shares
• Vesting, protective provisions, reporting obligations, governance terms
• When common shares work and when they don't
• Everything flows from the valuation - Excel is your friend
• Participating prefs, protective provisions, being entrepreneur friendly
• Drag alongs, anti-dilution, discounts and warrants
• Board compensation, lead investors, working with entrepreneurs
• Why all directors should make a meaningful investment, selecting good directors
• Exit alignment, redemption rights, exit 'push' and 'pull', valuation
• Balancing protective provisions and governance
• Working with lawyers and negotiating with entrepreneurs
• Why it's a good idea to negotiate the term sheet and valuation first
• How lead investors help before and after the investment
• Optimum financing strategies, valuation, capital efficiency
• What Angels and VCs think of each other and how its changed recently
• Is valuation a science or a black art

The full high definition video of this education event is online here (click on "Fullscreen Toggle" for best viewing.)

As the it becomes increasingly obvious that the traditional Venture Capital model is broken, and as more angels start funds, there is a growing interest in the best fund structure for new angel funds and similar early stage/seed funds.

This post describes what I believe is the optimum structure for today's early stage equity funds.

This is the high def video of my keynote at the Capital Connects! Southeastern Regional Angel Capital Association Meeting in Greensboro, North Carolina - October 1, 2009

Highlights of the ‘Exit Early - Exit Often' video:

• Why I think this will be called a "golden era" for entrepreneurs and angel investors.
• Successful investing requires two things: buying right and exiting well.
• The median price for private company M&A transactions is under $20 million.
• Today, the corporate buyers are competitors to the traditional Venture Capital funds.
• Traditional Venture Capital could shrink to half, or even a quarter, of it’s current size.
• 92% of M&A exits don’t work for these traditional VC funds - but they all work well for Angels and entrepreneurs.
• So Angels and Entrepreneurs have a choice - an exit in 3 to 5 years without VCs or 10 to 14 years with VC investment.
• Angels alone are "as likely as the VC backed firms to have successful liquidity events".
• Checklist to determine whether an individual company should be financed with Angels only or VCs.
• It depends on how much money the company will need, how long before the exit and the likely exit value.
• It’s possible to sell a company much earlier than most people believe - all you really need to do is prove the model.
• Developing the optimum exit strategy is one of those things that requires experience. Angels, directors and coaches can help.

The video is online in 720p high def here.