E-Class #1: Creating Your Exit Vision

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1 I. INTRODUCTION E-Class #1: Creating Your Exit Vision In this e-class, you will create your Exit Vision. Your exit is the method by which you will eventually leave your business and extract the maximum value from it. Importantly, getting a clear vision of what your company looks like when it achieves a successful exit will allow you to create (in subsequent e-classes) a plan to achieve this success. Without this vision, achieving success is nearly impossible. Whether you expect to eventually sell your company or not, it is a great business practice to build a business that lots of other companies would want to buy. Why? Because other companies would only want to buy your company if it: Has real value Can run without you Has a low risk profile Generates profits, or has the ability to generate profits for the acquirer And this is exactly what you should want -- to build a valuable and profitable company, that can run without you, and has little risk of experiencing a significant downturn. The exercises in this e-class will establish your Exit Vision so that can grow this type of business. II. LESSON/EXAMPLES Question 1A in the Exercises to Complete section below asks you to list the types of firms that might be interested in buying you. To give you an example of how to complete this, I will give you the example of Tiny Prints, a photo sharing and printing site, that was acquired for $330 Million by Shutterfly. In Tiny Prints case, I identified 5 types of firms that might be interested in acquiring the company: 1. Internet-based photo-sharing sites 2. Photo sharing and printing sites Page 1

2 3. Printing companies 4. marketing companies 5. Greeting card companies Question 1B in the Exercises to Complete section below asks you to list the specific firms that might be interested in buying you. In the Tiny Prints example, here are specific firms within the 5 key types that might have wanted to purchase the company: 1. Internet-based photo-sharing sites: Flickr (owned by Yahoo), Picasa (owned by Google), Photobucket, etc. 2. Photo sharing and printing sites: Shutterfly, Snapfish, etc. 3. Printing companies: RR Donnelley, Valassis, Quad/Graphics 4. marketing companies: Constant Contact 5. Greeting card companies: Hallmark, American Greetings, etc. Your goal once again is to build a great business, and a business that will succeed as a stand-alone business. But, if you also build a business that multiple firms will want to buy, you will maximize the value you ultimately extract from your business. The next question in the Exercises to Complete section below is to determine how you will or might be valued by future acquirers. The first thing I d like you to do is to research acquisitions in your market (your market described by the types of companies who might be interested in acquiring you). You can do this quite easily by looking at trade journals and performing searches on Google. Simply do a search on any acquisitions in your industry (e.g., search Google acquisition of Picasa in Tiny Prints case, or do a search on retail acquisitions or software acquisitions (use the name your industry)). Read the press releases and articles about the acquisitions you find to learn what s going on in the market and most importantly, how companies value other companies. In Tiny Prints case, we found that acquisitions allowed acquirers to diversify revenues, penetrate new markets, gain a new customer base, and leverage new technologies among other things. The key information you are digging up in this research is answers to questions 2B and 2C. These questions are what metrics will your company be primarily valued on, and what assets multiple buyers will value. With regards to the Tiny Prints example, our research found that the number of customers and revenues were very important metrics for the acquirer, while EBITDA Page 2

3 (earnings before interest, taxes, depreciation and amortization) percentage was not. In this case, the acquirer felt that after the acquisition, it could increase the EBITDA percentage. With regards to assets, the acquirer valued Tiny Prints customers, products and product innovation, distribution network, intellectual property, reputation/brand, employee talent, systems/processes, strategic partnerships, merchandising, manufacturing, customer service and marketing. The key is for you to identify the metrics and assets that your company will be valued on. And thus create a plan to excel in these areas. Conversely, most entrepreneurs only focus on trying to grow revenue and profits; they neglect other key metrics, and fail to build the assets that could ultimately make them millions of dollars. Question 2D below asks that you summarize the key metrics and assets you should focus on to build value. Question 3A below asks you to set your specific Exit Vision by asking you how much you would like to sell your company for, and on what specific date. This is the big goal around which all of your plans will be organized. Set this goal such that when you achieve it, you will be truly satisfied. Think big! Finally, question 3B below asks you to identify the metrics and assets that you think you must achieve by that date in order to realize your Exit Vision/Goal. For example, you should estimate what revenues you will be generating at the time you exit, how many customers you will have, etc. Once you have this end game established, we can work to re-engineer this success in future e-classes. III. EXERCISES TO COMPLETE 1. Create List of Potential Strategic Acquirers (if you expect to exit via other means such as via an IPO or financial buyer, etc., still complete this exercise as it will help your company achieve those goals too). A. What types of firms might be interested in buying you? Page 3

4 B. What specific firms might be interested in buying you? 2. Determine How You Will/Might Be Valued A. Research acquisitions in your market (trade journals, Google) If you don t know of firms who have been acquired, do a Google search on [your industry] + acquisitions, such as retail acquisitions or software acquisitions. Then start reading the articles to find out which firms have been acquired and why. Note that when you read press releases concerning acquisitions, you generally won t find the why, but when journalists write stories about the acquisitions, they will generally interview company management and present the why. Findings: Page 4

5 B. What metrics will you be primarily valued on (for what reasons have other firms in your market been acquired)? E.g., Revenues, # of subscribers/customers, market share, EBITDA C. What company assets would multiple strategic buyers value: Customers: Products: Distribution network: Intellectual property: Location(s): Reputation/brand: Employee talent: Financial savings: Systems/processes: Permits: Strategic Partnerships: Other: Page 5

6 D. List/summarize the key metrics and assets you should focus on to build value: 3. Set Your Acquisition Vision/Goal & Metrics A. I will sell my company for $ on (insert date). B. Our company must achieve these metrics by that time in order to realize this goal: (Quantify the key metrics/assets listed in 2D; for example, how many customers do you need to have, what revenues must you achieve, what products must you have built, etc. in order to sell your company on that date on for that amount) Now that you know what your y long-term vision and goal is, you can map it out, and create plans for achieving it. We will cover this in subsequent e-classes. e Page 6