How to Set Up Your Company for a Great Exit – with Lowell Ricklefs
Matt Wolach, the host of the SaaS Story in the Making podcast, interviews Lowell Ricklefs in this episode. He is the founder of Traction Advising M&A, a team of B2B SaaS specialists who help software leaders sell their businesses by setting them up to attract suitable acquirers.
Lowell shares tips on how to make your business look worthy and presentable to your potential purchasers. He walks us through the key parts of the process when setting up your business’ exit and how to do it successfully.
Podcast: SaaS-Story in the Making
Episode: Episode No. 180 “How to Set Up Your Company for a Great Exit – with Lowell Ricklefs”
Host: Matt Wolach, a B2B SaaS sales coach, Entrepreneur, and Investor
Guest: Lowell Ricklefs, Founder/Managing Partner at Traction Advising M&A
TOP TIPS FROM THIS EPISODE
Spend Your Finances Wisely
When you venture into SaaS business, part of your plan should include your exit.
Whether it’s a five-year short-term plan or something that spans decades-long, it makes sense to be prepared to put up your business for sale.
There are many reasons why software leaders would eventually decide to sell their business, and every reason is valid.
No matter what your reason is, it’s always crucial to have a smart path to follow, and that is to plan for a great exit.
Focus on Your Finances
The first thing to keep in mind is to spend your finances wisely, especially in the first stages of your business. Your expenditures in the present affect your company’s future. It doesn’t matter if your business is performing well, and you can burn cash whenever.
Find balance when it comes to your finances. According to Lowell, it’s better to minimize your expenses for things that do not have a lot of short-term gains.
Clean your financials and make sure you’re properly accounting for all of your expenses. As early as now, be smart about handling your company’s cash flow.
“I encourage people, just get it buttoned up now. Do it yourself or have someone come through.”
Set Realistic Goals & Expectations
The biggest mistake a software leader could make when trying to sell their business is setting unrealistic expectations.
As someone who has worked with many companies at different stages, Lowell says this is what he often encounters: leaders with unreasonable goals when selling their business.
Be clear about your numbers. Whether they’re your financial assets, revenue, your profitability, set realistic goals while considering these factors. Be yourself and don’t try to be something that you’re not, Lowell points out.
Do not exaggerate. Do not oversell. Be factual about where your business is at the moment.
Reach Out to Your Potential Acquirers
Now that you have an exit plan, the next thing to do is to look at the potential acquirers in your industry. Meet these people. Reach out to them.
By establishing a connection with your potential buyer, it jumpstarts the process of selling your business.
Consider what kind of relationship would be desirable between you and the purchaser.
Top Factors a Potential Buyer Considers
Selling your business does not happen overnight. It undergoes a long process, and the first step is to make your business attractive to your potential buyer.
Purchasers have a strategic approach when it comes to buying a business. They also consider factors, such as geographic expansion, particularly if they are looking for a footprint to grow on a global scale.
One of the significant factors is your business’ breakeven. Buyers are more inclined to acquire your business if it’s profitable. They’re more likely to take the leap of faith.
According to Lowell, this is why many purchasers pay high multiples for SaaS companies due to their repeatable venue.
Growth is a big deal, he adds. If your business has a declining growth, it might get difficult to sell it.
“At least being breakeven is important.”
Is Your Business Attractive to Buyers?
The “Rule of 40” comes into play when SaaS leaders measure their company’s growth rate added with the cash flow rate.
According to Lowell, if your growth percentage plus your EBITDA (earnings before interest, taxes, depreciation, and amortization) percentage is 40% or higher, it makes your business extremely attractive to highest performing private equity firms that acquire companies.
If your business has that rate between 40 and 100%, most companies will find it worthy of acquiring you.
The Best Time to Sell Your Business
Looking for a sign to sell your company? Newsflash: there’s no right or wrong answer. Some leaders put their businesses up for sale simply because they don’t want to do it anymore, and that’s fine.
How would you know if you feel like you don’t want to do business anymore? Again, it depends on your current situation and where you want to go in the future.
But for Lowell, his wife has a strategy called the Regrets Theory, wherein you would think of which one you would regret more – selling your company and finding out it will be more valuable later on, or not selling it and it goes down in value?
[00:02] “Being able to exit your company is the ultimate dream.”
[06:03] “Buyers are trying to get as much as they can. They might see an opportunity for somebody who maybe doesn’t understand what they’re doing.”
[12:21] “People will buy you for the financial performance, not just an add-on to an existing platform. So revenue’s a big deal and the multipliers.”
[13:07] “You don’t have to be super profitable, but I would argue that at least being breakeven is important.”
[13:38] “The reason people pay high multiples for SaaS companies is because it’s repeatable revenue.”
[16:31] “You don’t want to kill the future, but you don’t want to spend a lot of money on things that won’t show a return for three or four years because that will hurt you in the short term.”
[20:51] “Just be yourself. Don’t try to be something that you’re not.”
To learn more about Lowell Ricklefs and Traction Advising, visit https://www.tractionadvising.com/.
You can also find Lowell Ricklefs on LinkedIn at: https://www.linkedin.com/in/lowellricklefs/.
For more about how host Matt Wolach helps software companies achieve maximum growth, visit https://mattwolach.com/.