What are triggering events for an exit? (harvest)

A number of events may trigger a decision to sell your venture—since selling at the right time can provide substantial liquidity for you and your investors. And how important is the timing of the exit? Just like the window of opportunity for getting a venture launched, the window of opportunity for exiting and harvesting a venture opens and closes quickly as well.
Setting Exit Goals and Triggering Events for Harvesting
Venture capitalists and angel investors now share a long-term approach to their investing. According to Lawrence Mock, Jr., president of Pittsburgh-based Mellon Ventures, “It’s more realistic to have an exit strategy of five to seven years, rather than what seemed like eighteen months in the late 1990s.” In addition to keeping a pulse on the IPO market conditions, venture capitalists also look at their ROI on each deal. So an exit could be triggered if the venture has reached point when the IRR is very favorable, industry valuation multiples are most favorable, and buyers are churning in the marketplace.
Events That Trigger an Exit
The most common events that trigger an exit are listed here:
1. Macro-environmental issues
Government, policy, regulatory issues, will make the venture unattractive in the near future.
2. Completion of growth strategy
The transition from entrepreneurial management to professional management has been successful.
3. Product and technology lifecycles
The core products or product platform has become a victim of commoditization and the market is squeezing the life out of profit margins.
4. Competitive pressures
Direct competitors, new entrants are threatening the venture’s core competitive advantage.
5. Size of company
A preset valuation that matches the investors’ ROI.
6. Revenue model
Top line sales revenues are firmly established for a period of time going into the future and/or bottom line profitability is proven.
7. Marquee customers
Certain customer contracts, orders, or large backlog guarantees strong revenues for a period of time.
8. Number of employees
Getting to a predetermined number, where it becomes “too large to manage” for the core venture team.
9. Diversification of private wealth
The venture team’s equity position is at nearly 100% of their net worth; they would like to get something out of their hard work.
10. Personal issues
Members of the venture team reached a certain age; just got married, have new kids, have grave health-related issues, or it is just time for a family transition in the business.
11. Attractive opportunity
Investment banks, brokers and other companies have a deal in mind and are presenting letters of intent to purchase the company now.
Structuring the Transaction
There are many ways to structure a transaction and only three basic types of consideration.
1. Cash is the least complex but it can be complicated by payment methods. For example, the buyer can put portions of it in escrow to offset against undisclosed liabilities and misrepresentations or breaches of warranties by the seller.
2. The second type is equities. Common stock, if not publicly traded stock, will have problems in its valuation. Preferred stock is like a form of financing by the seller with the seller receiving regular dividends.
3. The third type is earn-outs and contingency payments. These are post-closing payments based on the performance of the business after the closing. They are typically used when the buyer and seller are unable to agree on the value of the venture, or when the buyer plans to retain the seller to manage the venture after the closing and wishes to provide a performance incentive. Earn-outs let the buyer commit a little money and then wait and see what the outcome is down the road. They are designed to help spread the risk in the deal and can last anywhere from eighteen months to about three years.
Seeing the Personal Side of Selling
It is important to keep your harvest options open and to think of harvesting as a vehicle for creating future entrepreneurial choices for you and your venture team. According to Herb Cohen, the author of You Can Negotiate Anything, “Although mentally exciting, in fact one of the most exciting moments in your business career, it is one of the most difficult decisions to make.” Follow his excellent advice and take comfort in knowing that you will grow and be part of something bigger rather than focusing on what you may have lost.
It is important to visualize the outcome of your life and work on creating a “win-win” scenario with all your venture’s stakeholders. Cohen recommends seeking comfort with your peers and entrepreneurs, who have been successful in completing this final stage of the entrepreneurial life cycle. They can help you visualize and understand potential outcomes and stay emotionally detached from the process. They can also provide support and comfort during the transaction, especially since during the process of selling your venture you are likely to have at least one blow-up among the parties involved. Finally, once you have the process of selling your venture in play, consider what your life will be like post-transaction, and what a relief harvesting and closing the deal will be. Be sure to take a step back and let the investment bankers earn their fees.
Photo: Iowa State University Photograph