Before You Start a Business, Plan Your Exit

Posted by Brad on December 14th, 2011

Not usually the first thing you think of when starting a company, but where you want to end up impacts everything you do.

I sit on the board of ChatThreads, where we are in the process of raising an equity round to fund the growth of the company. Early in the process, an investor asked what the company could do to accelerate and maximize our exit.  I replied my standard response: “ We intend to build a great business. By building a great business, we create a great exit.” While my answer was accurate and sincere, I owe the investor a more nuanced answer.

What Makes ChatThreads Valuable
ChatThreads is a media research company that helps primarily Consumer Package Goods (CPG) companies evaluate with a 360-degree view in real time the effectiveness of their advertising dollars.  As an early stage business, with a coveted product offering and broad applicability, ChatThreads can grow in many ways:

  • Maximize the revenue from a few key customers
  • Maximize the profit from a few key customers
  • Maximize the number of top CPG companies they do business with
  • Maximize their penetration within a handful CPG companies, but capture all the brands within this limited number of companies
  • Replicate the success in the CPG market and extend their market reach to other verticals, like automotive, healthcare, politics and the like
  • Invest heavily to have the best possible, most automated, full-featured software product
  • Invest heavily to have the biggest/baddest sales and marketing team
  • Invest slowly

 

We have discussed many of these scenarios with investors and with each other.  I am also sure we could think of many other ways to grow the business.  The reality is that is that without planning your exit, at least where you want your company to be in five years, there is no way to make good decisions about any business scenario.

The planned exit scenario impacts all aspects of the business. Rather than analyze the whole business, let’s look at how an exit strategy impacts the classic 4PS of marketing:

Product
What features do we develop – great data visualization tools OR great automatic interpretation tools. Better automation means better margins, better visualization tools means happier customers, and higher market penetration.  If you are more likely to be acquired by a software (analytics) company, then it might pay a higher multiple for a more sophisticated analysis tools, whereas a financial buyer is likely to pay a higher multiple for a more profit.

Price
What is our pricing strategy? Do we want to show the best possible margins or do we want to run a profitable business and bring in more value-based customers.  From an exit scenario perspective, this question revolves around what interests potential buyers. Great profitability, access to additional customers, top line revenue?

Place (distribution)
Will we continue to sell the product directly to the brands or will we partner up with other service providers to sell through their network? Are advertising companies or other media research companies good partners for us? Having direct relationship with the brands makes us a very attractive acquisition for a growing company with limited access to the big brands. A large advertising company with established relationships to the brands would not value our sales channel as highly.

Promotion
How is ChatThreads marketing the company? Are we a media modeling company, consumer insights company, or an analytics company? Are we driving sales through Internet marketing or social media? (of course we are doing all of the above) How we promote the company over the coming months will for sure influence different potential acquirers.

Exit Door

So with a wealth of options, how is ChatThreads thinking about building the business?

We are focused on delighting and owning all the top CPG companies. We are driving development, sales and budgets to support this direction. We came to this decision based on how we can maximize our value to potential acquirers.  Ultimately, we will make ChatThreads an indispensible tool to all of the top CPG brands.

How are you building your business for exit?

 

  • http://twitter.com/rmoraes2011 Ricardo Moraes

    Great article. 

    Based on your exit analysis, where you scrutinize each area, it is easier to visualize a possible and more balanced outcome.
    I would add to that spending some time with sell-side M&A advisors specialized in your industry to give you insights and trends, so you can plan accordingly too. - Ricardo Moraes

  • http://twitter.com/marshsutherland MarshSutherland

    Part of the exit strategy is limiting how much outside investment to take so the company can be bought at a salable price that investors will be happy with their return.