The Path to a Successful DTC Exit: Planning and Preparation
Whatever your reasons are for starting your DTC eCommerce business, knowing how you want to exit is critical. In this four-part blog series, we’ll discuss the main paths to exit for any DTC business and how you can set yourself up for success when the time comes.
Here in part one, we focus on the steps you need to take to prepare for an exit. Parts two, three, and four will dive specifically into paths to exit — how each path works, how you’ll be valued, and key things to keep in mind.
There are four main paths to exit for any DTC eCommerce business – you could launch an IPO, negotiate an acquisition, sell the business, or choose to run the business forever (an anti-exit, really). So when is the right time to start thinking about your exit? Earlier than you think.
☝️ While you may change your mind, it’s best to begin preparing early in the lifecycle of your eCommerce business. Too many companies fail to properly prepare for an exit. They see an exit as a daydream or a vision for the future, and promise to deal with it “when the time comes.” I’ll give it to you straight: this is short-sighted and wrong.
Not only does that attitude often preclude you from opportunities along the way, it also ensures you will be ill-prepared when the time comes, reducing your chances of completing the exit. Founders fail to appreciate how often deals fall apart. To prevent this from happening to you, give some thought to your exit now and do the work to maximize your opportunities and your ability to capitalize on them.
Get Your Books in Order
Your DTC eCommerce business isn’t just a children’s lemonade stand. At a minimum, you need to get your books on a common platform (such as Quickbooks Online), hire a bookkeeper, and set up a proper chart of accounts to manage the business. As you scale, it wouldn’t hurt to have an outside accountancy review or prepare statements on your behalf.
Being disciplined with your financial tracking and reporting will help you better understand your DTC eCommerce business and make you less likely to miss important details that can impact your growth and success. Plus, investors and acquirers will take note. If you have your books in order, they’ll remain confident that other parts of your business are similarly well thought out and disciplined.
Have a Good DTC eCommerce Financial Model
In addition to keeping diligent records and reports, you need to develop a good financial model. Your model demonstrates your ability to visualize and plan for the future. A good model reflects the quality of your thinking and insight into your business. A bad model says you don’t know, or worse, you don’t care.
Prove You Can Hit Plan Milestones
Plans and milestones are essential. You need an annual plan that sets strategy for the coming year as well as a rolling forecast that you review and adjust monthly. And even more important — you need to track your progress toward your milestones consistently. To do this, you will need an accounting function and a good model. You want to track progress and record your performance of actual results to planned results in board meeting decks, investor reports, and internal dashboards.
If you haven’t started doing this already (or are looking for a better way) check out the planning and tracking tools within Bainbridge. Our platform makes it easy to set a plan and track progress, plus we have a comparisons feature built right in.
A demonstrated ability to project your business and hit milestones proves to investors, acquirers, and buyers that you understand your business well and you know how to execute. Everyone loves massive growth, but they hate surprises. The ability to plan well shows you will be consistent and credible.
Get Your Systems in Place
In addition to hitting milestones, you also need to set up systems to help ensure investors that your business is poised to remain running for the long-term. As morbid as it sounds — a good test here is to think about how easily the company could continue on if you were hit by a bus. If the answer is that the entire place will fall apart and go bankrupt in a month, you have some work to do. Buyers and investors want to be confident they are buying a company, not a one-person band.
Get Your Filings, Agreements and Regulatory Compliance in Order
This is another red flag for investors and buyers. If employees aren’t covered under intellectual property agreements, contractors haven’t signed agreements, or you are behind on paying taxes or submitting regulatory filings, buyers can get skittish. After all, if these elements aren’t in place, what else may be out of order? Buyers will worry about other shortcuts you’ve taken with the business, and be wary of surprises or hidden bills that may be in store the second they take ownership of the business.
Practice Explaining Your DTC Business and Results
It’s not enough to sell your business with financial reports. As a founder, it’s essential that you are able to simply and concisely explain your business and results. As Albert Einstein said, “Genius is making complex ideas simple, not making simple ideas complex.”
💬 Your ability to distill your business down to its core principles will help you better drive and focus your efforts. At the same time, you will impress investors and buyers.
Buyers and investors have seen hundreds of deals and they will likely already understand most of what you tell them in a pitch meeting. Instead, they want to see how well you know what you are telling them. Long, convoluted explanations with too much detail don’t instill a lot of confidence. Save the deep dive and technical tangents for the right moment — when you’re specifically asked. At the end of the day remember that buyers and investors always have to convince others of why they want to buy you. Help them remember your pitch by keeping it simple.
Line up Your Lawyers
This tip really applies to the acquisition and business sale paths. For the IPO path, you will need a specialized firm that can handle the volume of work at speed. Your underwriter will also be able to help you.
I am not suggesting that you hire expensive lawyers right away if you don’t need them. Instead, focus on vetting some options and creating a list of lawyers and firms you can call when you do need them. Acquisitions can move very quickly and you are going to need good counsel very early in the process. You don’t want to be forced to stall as you try to find someone or end up winging it and negotiating term sheets without counsel.
Depending on the path you expect (acquisition or business sale), research law firms that are good fits for that type of transaction and your scale. From there, set up introductions via your network or reach out to the relevant partners. Law firms want business. You can set up a (free!) 30-minute call to introduce yourself and your company and let them know that if/when a transaction happens, you would like to retain them. At worst, you are sending them an email every six months with an update. But when the time comes, you want to know that a good attorney is going to pick up the phone and help you negotiate.
Experience and capacity should trump all other considerations in choosing your attorney. This is not the time to throw a bone to your buddy who dabbles in real estate law. Focus on experience and capacity. If you find multiple firms that fit the bill, you can worry about price.
Referrals from other companies or founders can be really helpful here, too. Acquisitions are some of the highest stress business situations and people’s true colors always come out in the heat of negotiation. Give special weight to the recommendations you receive from people who have gone through a deal from start to finish with a firm.
But, Which Exit Is Right for My DTC eCommerce Business?
Preparation is just the first step. Once you have the above items in order, you can confidently consider your options and decide what makes the most sense for you. In our next installment of this blog series, we’ll talk specifically about the IPO path. We’ll review the different ways companies go public, some key things to keep in mind, and personal considerations that may impact your decision to choose this path.