Don’t Get Pushed Into a Premature Exit

The primary reasons to exit early (early being Phase 2 or Phase 3) is that a) you are sick of operating the business and cannot find a suitable person to step in (or quickly enough OR b) you want an ‘entity’ to finance its growth off its books essentially (i.e., bypassing the investor stage). Shaka Tea from Hawaii pulled off the latter, an extremely rare move, by selling to King’s Hawaiian (without giving up operational control). It’s not wise to start your venture with such an early exit in mind since the vast majority of consumer brands do NOT have attractive book values (or enterprise values) when they are in the seven figures. This is different from saying that there are very few profitable seven-figure businesses. I just worked for one.  But that alone will NOT provide exit opportunities. Buyers have to believe you can scale to get the return they want, and they are doubtful to come to this conclusion when you’re this small.

Shaka tea’s early exit was an aberration, not a ‘path’ to utilize or bank on. Honestly, I imagine that positive corporate PR played an outsized role in King’s Hawaiian’s decision to buy a business in a highly competitive category they knew nothing about. 

If you’re going to ‘exit,’ though, basic capitalist logic would say you want to exit with a sell-side advantage that maximizes your profit in the transaction. And most likely the scale of that profit pile. 

The idea that any investor could know, in advance, while you’re in Phase 2, that you can’t scale much farther is laughable to me. You might need to tweak some things to scale past $5M, but if you got there, you almost certainly could get to $15-20M. And, just that difference, especially with a higher EBITDA, would lead to an exit that would pay you more than if you exited right now. 

Don’t let investors push you right now to exit if you are confident analytically that there is more upside to gain as currently structured. Patience and discipline will yield you a bigger prize. Any investor who is suddenly interested in exiting, right now in Q1, is most likely just trying to lock in some kind of return on their portfolio before the economic unknown of 2022 ends. This is where poorly chosen investors out themselves as real problems: when they bully you to a premature exit.

Dr. James Richardson

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