Start-Up School | Chapter 7: Plan Your Exit Strategy | BoF Professional, Start-up School

When Nicole Najafi was ready to sell Industry Standard, the jeans brand she founded out of her apartment in 2014, she wanted to ensure the buyer understood the fabric — both literal and figurative — of the company she’d worked so hard to build.

An attempt to find a buyer on an online small-business marketplace fizzled. So she wrote a “letter from the heart” explaining her decision to sell, and sent it to Industry Standard’s email newsletter list. One of the customers who opened that email was Molly Crossin, an advertising executive in Brooklyn ready to make a career change, much like Najafi had been five years earlier. On January 11, Crossin became the proud owner of Industry Standard.

“In my gut I don’t want to do this, to sell this company to a conglomerate in China,” Najafi said of the motivation behind her email pitch. “Then I was thinking, I want to find someone who already knows the brand, already likes it and would get what it’s about.”

Najafi’s story may be unusual, but the problem she confronted wasn’t. Exiting a business is one of the toughest decisions an entrepreneur will make. It’s a chance to reap the financial rewards from years of hard work and, just as important for many entrepreneurs, to ensure the company they nurtured from the start ends up in good hands.

I want to find someone who already knows the brand, already likes it and would get what it’s about.

An exit doesn’t always mean walking away.Founders routinely stay involved in their businesses even when they are no longer technically the owner. Indeed, many exit paths will require that the founder stays on for at least a few years after an acquisition.

And aside from the lucky few who can self-fund their business from the start, at some point there will be pressure to cash out. “If you have VCs or private equity investors, the day you sign that deal, [you know] there’s going to be an exit,” said José Neves, founder and chief executive of luxury online marketplace Farfetch, which went public in an IPO last year that valued the company at nearly $6 billion. “They’re not in the business of collecting dividends, or to be in the business for 20 years. They’re in the business to either sell, or to go public.”

That’s why founders say it’s important to envision an endgame from day one — whether that means running a business for decades or cashing in with an IPO and living out one’s days sipping cocktails in an island paradise (or buying an island paradise).

Here’s BoF’s guide to navigating your exit:

When to Exit

Najafi wanted to try something new. Neves had investors looking to make a return, and his own ambitions to dominate the global online luxury market, requiring the massive proceeds of an IPO. Others see mounting competition or slowing growth and seek the safety of a big corporate parent. And of course, a founder happy to work 100-hour weeks at 22 and single, might have different priorities at 30, married with a baby.

All of these factors may prompt the decision to exit your business. The key is to start planning well before it becomes a necessity.

Many founders of fashion brands fear they’ll be seen as “over” if they sell. But having a new, cash-rich parent just when a company is hitting its stride can ensure a long, successful future.

I liked the idea of there being a natural lifespan.

Sneaker marketplace Stadium Goods was in the middle of planning a funding round when Farfetch came knocking; founders John McPheters and Jed Stiller sold their start-up to the luxury marketplace in November 2018. Stiller said Farfetch already had much of the infrastructure they needed. Under their new owner, the two founders intend to build a market leader in the online sneaker space just as they originally planned.

Preparing to Exit

Often, it’s professional investors who are driving the timing of an exit. People who put money in start-ups want it back — and then some — and sometimes, they want it within a few years. Founders should be upfront about their long-term plans when seeking outside investment, and be sure their goals align with the objectives of their new backers.

Adam Brown, founder of luxury swimwear brand Orlebar Brown, said he sold a minority stake to Piper, a private equity firm, in 2013 partly because he knew his new partners planned on cashing out within five years and would help make the business as successful as possible in that time. Even before that deal, Brown had been meeting with potential acquirers. Chanel eventually bought the brand in 2018.

“I liked the idea of there being a natural lifespan,” he said of Piper’s investment.

Founders looking to sell need to have their finances in order, as they will need to pass through due diligence. Everything should be documented, from financial details needed to satisfy regulatory requirements ahead of an IPO, to data on orders and customer demographics that can demonstrate the underly- ing health of the business to potential buyers.

The same goes for processes. Buyers want to know that what made a business successful will continue, whether or not the founder and other key people stay on. Founders might agree to stay for a set period, particularly if they are the creative force behind a brand. Others codify out core processes to demonstrate how the business can thrive long after the people who built it leave.

IPOs vs. Acquisitions

For many founders, there’s nothing quite like the rush of an IPO, the traditional benchmark that a start-up has “made it.”

“Going through the journey of an IPO and ringing the bell… it’s just fascinating, and something maybe you do once in your life,” Neves said of Farfetch’s public listing in September 2018. “It’s a personal milestone, and for the team as well. Everyone on that podium, and the 3,000 Farfetchers watching via livestream — it was a huge moment of celebration.”

The proceeds from selling shares to the public can fund massive expansion and create an insurmountable lead over competitors. They also typically generate a windfall for investors, founders and any employees who received stock-based compensation.

We’ve explored every sort of buyer — you’ve got to, it’s too important a decision.

For founders, an IPO doesn’t necessarily mean handing over control of the company to a faceless crowd of investors. Recently, it’s become common for IPOs to involve dual share classes, which allow a founder to maintain voting control over a company even if they only retain a minority stake. Neves owns a 14.8 percent stake in Farfetch — worth about $1 billion in March 2019 — but controls a majority of votes.

But an IPO can have its drawbacks and is not for everyone. Going public is an expensive and time-consuming process, from hiring lawyers, accountants and auditors, to clearing regulatory hurdles. It also means disclosing sensitive information about the business if it might be material to potential investors. It tends to be larger start-ups that list their shares. On average, firms that went public in 2018 raised $239 million before their IPOs according to CB Insights.

Acquisitions are a more common path to exit. If a brand is growing fast and appears to be well managed, buyers are likely to start circling. Their motivations break down into three general categories:

  1. They might want the product or access to a new set of customers.
  2. They might want the team, sometimes called an “acquihire.”
  3. They may fear disruption. (Facebook’s acquisition of Instagram is one example of this.)

Or it might be a combination of all three.

Founders should cast a wide net for buyers, both to see what potential acquirers can do for their company, and to ensure the highest possible sale price.

Brown, of Orlebar Brown, said he was less interested in who wanted to buy his company than what they would do with it. Potential buyers who wanted to start selling “£10 T-shirts” were out, but he wasn’t dead set on selling to a luxury giant like Chanel.

“We’ve explored every sort of buyer — you’ve got to, it’s too important a decision,” he said. Though he has sold his stake, Brown said he remains “very much involved” with the company he founded since the Chanel acquisition.

Erica Cerulo and Claire Mazur said when they explored selling Of a Kind, an e-commerce platform that features emerging designers, many prospective buyers were more interested in stripping the business for parts than building on what they had accomplished. Then they heard from an unlikely suitor: Bed Bath & Beyond. Though not known for its fashion, the homewares chain seemed to grasp Of a Kind’s business model in a way few others had, Cerulo said. They agreed to a sale in 2015.

What Comes After

Of a Kind’s team operates out of its own office in Brooklyn. They work on projects for the site as well as Bed Bath & Beyond, and can draw on their parent’s resources to launch new products and enter new markets.

According to CB Insights, 36 percent of founders leave their business behind within six months of selling it. But the second biggest group — nearly one in five founders — stick around for three years or more.

The first group represents serial entrepreneurs looking to move onto their next project, or founders sticking around just long enough to cash out their stock options.

It’s not easy selling a company to another company. Most founders don’t make it more than a year or two — if at all.

In fashion, it’s routine for founders to stay on long-term; after all, it’s often the designer’s name on the tag, and much of the value of the business is tied up in their creative energy. Some founders stay as long as they’re designing clothes or dreaming up new products; they’re content for others to handle the finances and logistics.

Bobbi Brown said that was the pitch Leonard Lauder made when he approached her about selling her cosmetics brand to Estée Lauder Companies. Brown said she wasn’t looking to sell at the time — she’d only just secured her first wholesale account, at Bergdorf Goodman, four years earlier. But when he promised to handle distribution, finances and other back-end matters, while giving her complete autonomy on creative matters, “we were smitten,” she said.

Brown ended up staying at Estée Lauder as chief creative officer for her namesake brand for nearly 22 years, departing in 2016.

“It’s not easy selling a company to another company. Most founders don’t make it more than a year or two — if at all,” she said. “I felt like I was in charge — when I went into work, it was like I owned the company.”

Created in tandem with the Start-Up School series is The Entrepreneur’s Toolkit. This BoF Professional Member Exclusive resource includes quick reference tools, practical templates and bite-sized videos to help you build your business.

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