Exit Planning Common Mistakes with Tom Stoten

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Planning a successful business exit requires foresight, preparation, and a clear strategy. This article provides a structured roadmap to help businesses optimise their value, mitigate risks, and prepare for smooth transitions, whether through trade sales, private equity (PE), or IPOs. This guide distils complex processes into actionable advice tailored to small and medium-sized businesses (SMBs). It covers essential aspects like valuation drivers, transaction types, due diligence, and benchmarking while addressing common challenges faced by founders during the exit process.

Inspired by the principles shared in a session led by Tom Stoten of Cavendish Corporate Finance during a recent Cyber Runway: Scale session provided by the Department for Science, Innovation & Technology and hosted by Plexal, where I attended on behalf of Cyber Tzar, the Enterprise Supply Chain Risk Management platform. Tom shared invaluable insights into scaling strategies, preparing for investment, and executing successful exits, offering startups a clear framework to achieve their growth objectives.

Contents

Table of Contents

Exit Planning Common Mistakes with Tom Stoten

This video is publicly available on the Plexal YouTube playlist for the Cyber Runway programme.

Summary

This guide distils the intricacies of exit planning into practical advice tailored to SMBs, helping founders mitigate risks, build investor trust, and achieve a favourable valuation in the competitive M&A landscape. From diversification strategies to adopting GAAP accounting, the focus remains on maximising value through early preparation and addressing key valuation drivers.

Key Takeaways

1. What Is an Exit Strategy?

  • How Much? Define the capital value you aim to achieve.
  • What Type? Identify the type of exit (e.g., trade sale, IPO, PE).
  • How? Develop a plan to achieve your valuation.
  • When? Timing should align with market conditions and business readiness.

2. Getting the Timing Right

  • Align shareholder objectives, valuation targets, and business readiness.
  • Monitor the state of the M&A market and sector trends.

3. Transaction Types and Objectives

  • Trade Sales: Faster exits but often involve significant management changes.
  • IPOs: Offer high valuations but require extensive preparation and compliance.
  • PE: Requires strong management teams and offers future upside potential.

4. Valuation Drivers

  • Focus on growth rates, recurring revenues, scalability, and customer retention.
  • Larger businesses tend to command higher multiples.

5. Preparing for Premium Multiples

  • Strengthen barriers to entry, diversify customer bases, and ensure scalable operations.
  • Avoid common pitfalls like founder dependency or weak performance metrics.

6. Key Areas of Focus for Due Diligence

  • Customers: Long-term contracts and diversified client bases.
  • Technology: IP ownership and minimal technical debt.
  • Financials: GAAP compliance and detailed revenue tracking.

7. Benchmarking

  • Regularly compare your business against industry standards to identify improvement areas and validate valuation.

Comparing the Exit Types

Exit TypeAttractivenessChallengesBest For
Trade SaleQuick, premium valuation through strategic synergies.Potential loss of independence.Businesses with unique assets or in consolidating sectors.
IPORaises capital and enhances credibility.High costs and ongoing compliance.High-growth, scalable businesses in mature stages.
Private EquityFlexible structure, operational support, and growth.Pressure to meet growth targets.Scalable businesses needing financial backing.
MBOSmooth transition, retains culture and continuity.Relies on management’s capabilities.Businesses with strong internal leadership.

Key Recommendations

  1. Start Preparing Early: Begin exit planning years in advance to identify and resolve weaknesses.
  2. Focus on Key Value Drivers: Enhance growth rates, recurring revenues, and customer retention.
  3. Build Resilience: Diversify revenue streams and minimise reliance on founders or key personnel.
  4. Keep Financials Clean: Transition to GAAP accounting and maintain detailed records.
  5. Establish a Data Room: Organise key documents to streamline due diligence.
  6. Regularly Benchmark: Compare performance against peers to identify areas for improvement.

Conclusion

A successful exit is not merely a transaction but a strategic milestone that reflects years of planning, operational excellence, and market positioning. This guide emphasises the importance of early preparation, clean financials, and diversification to maximise valuation and mitigate risks. By aligning shareholder goals, leveraging market trends, and focusing on scalability, businesses can command premium valuations and ensure smooth transitions.

Timing remains critical—balancing business readiness with favourable market conditions ensures that opportunities are seized at the right moment. While challenges like resource constraints and sector-specific nuances exist, proactive planning and prioritising key areas provide a solid foundation for success.

Whether you aim for a trade sale, PE investment, or IPO, the principles outlined here equip you to navigate complexities, build resilience, and achieve outcomes that reflect your business’s full potential.

Appendices

Appendix 1: Industry Terminology Explained

  • Customer Concentration: Reliance on a small number of customers for revenue, which can pose risks during exits. Diversify to reduce this dependency.
  • Recurring Revenue: Predictable income from subscriptions or long-term contracts, preferred by buyers for stability.
  • Technical Debt: Costs arising from outdated systems or quick fixes, which can deter buyers. Address proactively to boost scalability.
  • GAAP Accounting: A framework for transparent and standardised financial reporting that enhances buyer confidence.
  • EBITDA: A profitability measure often used in valuations. It excludes interest, taxes, depreciation, and amortisation for a clear view of operational performance.
  • Gross Retention: The percentage of revenue retained from existing customers, excluding new ones. Aim for >90%.
  • Barriers to Entry: Factors like IP, regulatory compliance, or brand strength that deter competitors and enhance valuation.
  • Data Room: A secure repository for key documents used during due diligence.
  • Valuation Multiple: A financial metric that determines a business’s value (e.g., 10x EBITDA).

Appendix 2: References and Resources