On Growth

The Right Kind of Exit Strategy

• By Mike Harvath
• November 01, 2010

Never in the recorded history of commerce has an industry been so populated with companies planning an exit strategy almost at the same time they open their doors for business as today in the IT industry.

It could be that the industry attracts entrepreneur types more comfortable with getting new ventures up and running than in managing them over time. Or it could be that executives see a quick path to riches in an industry that in just a generation has grown to more than $3 trillion. Or it could be the constant stream of innovation that brings new products and services to the market. Or it could be any number of reasons that every startup IT business plan has an exit strategy component.

With so many executives thinking as hard about getting out as they are about getting in, we thought it would be a good time to provide our experience, opinion and counsel to those thinking about the former. Given the pace of M&A activity in the market these days, you'd have to believe that getting out now is good timing.

Let's start off with our really big piece of advice; don't ever start and build a business to sell it. Now let's back this rather contrarian bit of advice with why building a business to sell will often not be the right road to the riches you envision.

The main reason for this point of view, quite simply, is that at some point after you've made the decision to sell your business, you'll start talking yourself into making some not-so-smart business decisions. Maybe you'll try to improve earnings by forgoing the investment that in an earlier day you would've made in a heartbeat. Or you won't bring on the technical hotshot or the ace salesperson that you salivated for the year before. We see this happening all the time.

Executives may have gotten away with this short-term exit-strategy planning years ago when the industry was a mere pup and companies were spending like drunken sailors to buy anything with a pulse. But now, times they are a-changing. Buyers today are more sophisticated, more selective and savvier. They can smell a bad deal from a long way off. Buyers today have their antennae set on high alert for companies that fit specific profiles that are accretive to their overall valuation, and that are aligned with already-established expansion strategies and culture. There's no wiggle room for mistakes.

So what do you do to build the business that captures the attention of the smarter, strategic, savvier buying community? Here are some characteristics that are attractive to the types of companies who will pay well for what you've built:

• Double-digit annual growth in both revenue and profit.
• Healthy balance sheet with strong retained earnings and minimal debt.
• Clearly differentiated offering, ideally positioned as No. 1 or No. 2 in the market you serve.
• Recurring or subscription revenue of at least 30 percent of total revenue. More is better.
• Continuous stream of one new breakthrough expansion strategy per year. Maybe it's an expansion into a new geography. Or getting into a new service line. Or a new delivery system. Show some vitality.
• Make yourself obsolete. That is, get yourself away from the grind of managing the day-to-day operations. Position yourself to focus on the bigger picture of thinking about, planning for and implementing the bold expansion strategies that demonstrate your company's vision for the future.

Manage your business as though you're planning to work it to the time you retire or to the day you pass it along to your children. Then one day you'll get a knock on your door -- or a call -- probably from someone like us, saying, "Hey Mr. Smith, we like the way you've built your business; we like how you've positioned yourself in the market, how you've smartly driven revenue and profit, and how you've invested for the future. Can we talk?"

When that call takes place, you know you have your exit strategy. Remember, an exit strategy is not what you start with; it's what you build to, and end with.

Next Time: Managing Through the Curse of Growth