In a previous article about exit readiness, I highlighted the importance of a systematic preparation process for exiting the business. An exit readiness process not only makes the eventual sales process a less stressful one, but it considerably increases the closure rates as well as achieving higher valuations.
Misalignment on exit expectations and timing at board and shareholder level is one of the biggest challenges. Such misalignments are not uncommon but can lead to value-destroying frictions if not addressed proactively.
Without an exit plan providing a roadmap to an exit for all stakeholders, the risks are as follows:
- Exit timing: executives might propose an exit sooner than the board and investors expected. As a consequence, investors might doubt (rightly or wrongly) the long term commitment of the executive team. On the flip side if executives are resistant in engaging in exit discussions investors might get frustrated about delays of getting a return of their investment.
- Valuation expectations: different stakeholders might have different financial pressure points and expected returns often vary hugely. Without a regular review and discussion around current and expected company valuations, it will be difficult to reach alignment.
- Expected exit outcome: maximising the return is an obvious common goal for all stakeholders but there is more to it. There might be conflicting views on how to achieve this (strategic buyer/PE/IPO?). Also, founders and executive teams might be keen on finding the right home for their employees and/or the best partner which guarantees to continue the mission of the business.
If these aspects are not addressed proactively wrong strategic decisions are made, frustration levels rise, trust deteriorates, and value is destroyed.
Regular, at least once a year, exit talks at board level as part of an exit plan can help to:
- clarify strategic objectives. Understand the rationale behind the investors’ and executive team’s perspective. Investors may want to sell based on their desired returns, and investment horizon. Executives may believe the business has more growth potential or that the timing is premature for a sale, focusing on the long-term strategic vision. Open and regular discussions help create mutual respect and understanding of each side’s priorities.
- assess the business’s true value. Conduct a realistic and objective valuation of the business based on current market conditions, financial health, and potential growth opportunities. An independent valuation can help all parties have a common understanding of the company’s worth, which may ease tensions about timing. If growth potential is a sticking point, present data to support whether immediate or delayed sale would yield better returns.
- review investment agreements. Check shareholder agreements. These often detail exit strategies, veto rights, or drag-along provisions, which can guide decision-making on when to sell. Ensure all sides are aware of any contractual obligations or mechanisms that may be in play if an investor or executive wants to initiate a sale.
- define a timeline. Establish a compromise timeline for a sale that aligns both short-term investor needs and the long-term vision of the executive team. This could involve setting up performance milestones or trigger events (e.g., reaching a specific revenue target or market condition), at which point discussions for selling the company would be revisited.
- explore alternative exit strategies. Consider all exit possibilities from partial exits, to strategic buyers, PE, MBO, joint ventures and IPO.
A regular exit talk at board level establishes a shared understanding and fosters trust allowing all sides to navigate future exit decisions more easily.