Entrepreneurs preparing for the exit of their startups often focus on operational and administrative excellence, but personal financial planning is equally crucial. Matt Ford, CEO and co-founder of Sidekick Money, emphasizes that founders must ensure they are in a solid financial position before entering negotiations. His experience selling Pariti, a debt management app, to Tandem Bank in 2018, has shaped his perspective on this matter.
The journey of selling a business can be fraught with challenges, especially when personal finances come into play. Ford recalls that Pariti was approaching break-even but hadn't achieved the growth expected. In such situations, entrepreneurs face multiple options—expanding into new markets, finding channel partners, or seeking a buyer. For Pariti, the third option proved viable through existing relationships, leading to its acquisition by Tandem Bank. The transition involved integrating Pariti’s functionalities into Tandem's operations.
Personal financial stability plays a pivotal role in making sound decisions during the exit process. Ford argues against the common belief that founders should live frugally while building their businesses. He believes that maintaining a reasonable salary helps founders stay aligned with investors and make better strategic choices. Stress from financial insecurity can cloud judgment, impacting critical decisions.
When it comes to negotiating terms, founders must carefully consider whether to opt for cash or equity. Equity offers potential for higher returns but carries significant risks. Understanding the valuation of equity is essential, particularly if the acquiring company is privately owned. Investors like Paulo Andrez caution that not all equity deals are equal, and founders need to assess various scenarios meticulously. Earn-out agreements, where payments are tied to performance milestones, also require legal scrutiny due to inherent complexities.
Post-exit, founders face new decisions about managing newfound wealth. Depending on the size of the exit, options range from purchasing property for security to angel investing or launching another venture. Personal finance planning becomes imperative at this stage, with tax-efficient investment vehicles being key considerations. Ford's Sidekick Money aims to provide guidance on these matters, offering advice typically reserved for private banking clients.
Ultimately, robust personal financial planning can significantly enhance the outcome of an exit strategy. By ensuring founders are financially secure, they can navigate the complexities of the sale process more effectively, leading to better decision-making and potentially more favorable terms. This proactive approach sets the stage for sustainable success beyond the initial business venture.