Prepping for Exit - a Founder’s Perspective on M&A - Issue #21





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Issue #21 — View online — Suggest a link
Prepping for Exit - a Founder’s Perspective on M&A

Is it time to consider selling your startup? Looking for a founder’s perspective? Dave Parker is a five-time founder with >10 exits. This reading list is practical advice on prepping for exit, pricing and the process.

Crisis framework applied…

Crisis Framework Applied
Bain and Company has put together a great post on A CEO Plan for Coronavirus: Actions to Take Now. It’s a great read.
This is a post from - reposted here to help you process the difficult decisions we’re facing as we balance our business and our teams.
I attended a Board Meeting last week with Guidant Financial, a company I’ve been fortunate to join the board on 14+ years ago. We reviewed the company’s response to the coronavirus pandemic and its interim plan. This was not Guidant’s first crisis. The company successfully (although not perfectly) navigated the collapse of the US economy in 2008. My assessment is that the company has flawlessly implemented the Bain framework and put themselves in a place to weather the pandemic and emerge a better business.  
First, a note on what Guidant Financial does:
  • We help new businesses owners find the capital they need to buy or start of small business or franchise. The primary services they provide support securing an SBA loan, unsecured credit and Rollovers as Business Startups (ROBS). ROBS allows an individual to invest up to 100% of their retirement assets into a business without taking a taxable distribution or getting a loan.  
  • Last year Guidant helped nearly ~2,000 companies, in all 50 states secure ~$350M dollars to invest in their own businesses
  • About 40% of these businesses are franchisees (i.e. UPS Stores, Orange Theory) and the remaining are starting or buying a local businesses like breweries, coffee shops and supplements stores.
I’m definitely an insider for the company - but not on the executive team or an operator. So I have a bit of an arms-length perspective on their process. I wanted to write about my observations of how the CEO and team applied the Bain framework. My goal is to help you as a Startup Founder implement the framework and connect it to the tactics you can apply it to your startup.
Many of you have made many of these decisions already. Some have more hard decisions ahead. I’m a fan of frameworks, they provide sidelines and endzones as a guide. 
Protect our team
The split this strategy into two categories: physical and emotional. 
Starting with the physical, they made sure they created an environment that ensured the team knew they were a priority. The office initially stocked up on hand sanitizers and increased cleaning frequency and communicated the need for washing hands and keeping distance. This quickly elevated to a self-imposed “shelter in place”, implementing a travel ban early (even while much of their industry was continuing on as if little was happening) on and increasing work hour flexibility (it seems kind of quaint now in retrospect). The message they wanted the team to see and hear: we value you and your family above all else.
Emotionally, you need to communicate, communicate and then communicate again. The team implemented an all-company Zoom call twice weekly led by the CEO. This is very important because absent of directly addressing important topics – your team will fill in the blanks if you don’t. The Guidant team was able to quickly and consistently review important data, get caught up on important initiatives, set expectations for the next 48hrs and answer questions on the team’s mind.
Thoughts for founders:
In a crisis, you must communicate with great intention. My mentor told me, “it’s not enough to tell people what something is, you have to tell them what it’s not.” 
Stress test our financials
The team at Guidant was able to analyze data both the 2008 downturn and make assumptions using current trends. They created a model that allowed them to play with key levers and historical data to estimate the impacts of different scenarios. This proved to be a very important well as other previous years of data. 
Once they had their “best guess, worst cases scenario” they established a system to bring visibility into the key metrics that proved or disproved assumptions as things unfolded. 
Defend against significant revenue declines
Based on the new model the team knew they must reduce expenses - the question was the philosophy from which they wanted to approach. David Nilssen, a cofounder and the CEO was very clear on the strategy, “we were going to protect our tribe.” No one knew how the pandemic would initially affect the business nor what the lasting impacts would be. They knew that cutting hard and deep was a must - but we were going to prioritize our people. This would also help Guidant continue to best serve our customers in a time when they would be under significant pressure. They aggressively reduced non essential expenses, cancelled perks, eliminated bonuses, implemented a hiring freeze, cancelled underperforming lead sources and more. As part of the hiring freeze, they repurposed many individuals internally into many open positions as a measure to save jobs. Nilssen said, “in 2008, we had to let people go at a time where we knew they weren’t going to be able to find employment. This time, we were hell-bent on avoiding that.” They also implemented temporary compensation adjustments that disproportionately impacted their highly-compensated individuals (starting with the founders who chose to cancel 100% of their compensation) and protected those below a certain threshold. The entire company had full visibility into the changes and more importantly their why: move aggressively and decisively now to protect the tribe – our clients and team members.
Thoughts for founders:
The average US SMB has 27 days of cash if sales went to zero. If you just completed a round of funding, congrats! But don’t gloat, if you were that good at the timing you would have picked the market and you’d have retired already on your own island.
I’d also suggest the timing that you are going to evaluate making changes back to normal. Your team needs to budget for those changes. One other company I’ve “met” with pushed a 25% decrease into variable compensation based on company performance.
Defend where you can defend. Optimism is your enemy here. Look at everything that is not essential. Then, challenge everything that you “believe” is essential.
For another company where I sit on the Board, the company has mostly enterprise companies as their customer. That’s good… however, some of them are in the retail vertical. The day after we talked about the CEO’s lack of concern for churn, one of the larger contracts called to cancel. They are a subscription business, so he offered that they could pay in 90-120 days but they could keep the service (it helps to drive revenue). If they survive, he’ll have a customer. If not, their loss will be minimal. 
Stabilize operations to a new norm
In one of their all-company Zoom calls, they literally ripped up the annual plan. They clearly communicated that the plan didn’t exist any longer and instead - they would start to operate hyper-focused, on a rolling 30-day basis. The key areas of focus:
  • Urgently support our customers near-term needs.
  • Enable team success in a decentralized environment.
  • Broadcast with impact to our key stakeholders (team, clients, partners, prospects).
In one week, the company reorganized, decentralized (everyone working from home) operations, radically reduced expenses while also building an online application portal for clients to secure crisis funding (from the Paycheck Protection Loan or PPP and Economic Injury Disaster Loans or EIDL), developing a comprehensive pandemic resource center on their site and launching a new funding product for recapitalizing a small business.
Guidant’s results are a great reminder that teams can accomplish so much when they have strategic clarity and a shared purpose.
Thoughts for founders:
In a crisis, throw out your annual plan and shorten your planning cycle. Reset your expectations lower and allow the team to exceed goals. This is for everyone’s emotional benefit. Continue to recalibrate on this weekly/monthly cadence. Communicate with the team, stakeholders, and board members.
Get very clear on the most important levers in your business and track them incessantly. And if it’s not obvious, one must be cash.  
As the dust settles, continue to stabilize around these norms. Don’t look to push back to the old normal too quickly. In fact, I’d challenged you to ask – “will it go back to normal or has something fundamentally changed?”
Play offense
The Guidant story isn’t done. And, I probably shouldn’t share the strategy from here but how you play offense varies. David Nilssen suggested that their version of offense was developing organically by listening to their customer, partners and team members and then reconciling that feedback against their long-term vision and values. “A crisis is never comfortable but it forces us to really focus on what’s most important now and in the future. It’s important not to lose that focus as the dust settles.”
Thoughts for founders:
Now that you’ve stabilized as much as you can. Where can you begin to play offense vs just defense? Where are their opportunities where you can take advantage? Are there opportunities to take market share? Can you fill a role in thought leadership? 
This process is all about synthesizing your inputs from customers, your team, and the broader market conditions. It’s not about taking huge risks, it’s about de-risking the decisions based on data. 
As we come out of this crisis, where can you look for advantages?
A top early-stage VC thinks the coming economic crisis could disproportionately hit startups with fundamentally sound business models
Why venture capital can't bail out startups during the coronavirus crisis - Axios
Startup Ecosystem Faces Capital Crunch over Coming Months – What We Expect & Why It Matters - National Venture Capital Association - NVCA
Techstars Startup Digest Prepping for Exit - a Founder’s Perspective on M&A is curated by:
Dave Parker Dave Parker
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