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- [00:02]
A
Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.
- [00:20]
B
Hello and welcome everyone. I'm Mike Lyon, founder and managing director at VistaPoint Advisors, and this is the Path to Exit. This show is dedicated to helping founders of software and Internet businesses understand what it takes to raise capital or sell their business and how to do it well. I'm joined again by Sarah letourneau from Goldman Sachs. For our frequent listeners, you'll remember Sarah from a previous episode on tax and estate planning. Today we're diving into a topic founders ask about a lot the pitfalls to avoid on the Path to Exit. Please enjoy my conversation with Sarah. Sarah, welcome back to the podcast.
- [00:49]
C
Thanks for having me. Mike, as a refresher. As Mike said, I'm a private wealth advisor at Goldman Sachs. I've spent over 19 years advising clients in the financial markets and my team specializes in helping founders and entrepreneurs navigate liquidity events. We've seen the full spectrum of deal processes and outcomes.
- [01:08]
B
Sarah, you've been in the trenches a lot on obviously a lot of successful transactions and maybe a few that didn't go quite to plan. Let's start with a big question a lot of founders have what are the most common mistakes founders can make?
- [01:20]
C
So I like to break this into a few categories. First. First is deal timing and the myth of perfect execution. Many founders want all the stars to align. Flawless retention metrics, a strong new product launch, perfect macro conditions. The reality is that everything almost never lines up at once. If things are mostly good and you're personally ready, it might be wise to start the process rather than waiting for perfection. Yes, you might leave a little upside on the table by not waiting for one more product release. But you also reduce the risk of growth stalling or an external shock changing the landscape in fast moving cycles. Think like we are in now. Major technology shifts like rapid AI adoption, valuations and buyer priorities can shift quickly. You can't predict everything. Don't let the perfect be the enemy of good.
- [02:07]
B
I think that's really good advice because when we talk to founders who try to exit too late, that can be catastrophic. Exiting too early. Obviously you can leave some money on the table, but there's some ways to really diminish that. Like sometimes we see founders exit stages where they do like a private equity recap and they sell 30, 40 or 60, 70% of the business and they keep quite a bit of upside. So there are some ways to minimize how much upside you give away. But if you wait too Late, that can be catastrophic. Right. Particularly if the market changes dramatically as AI is kind of showing in some industries. And you know, as you kind of said, markets don't really wait for calendars. Right. They do their own thing. So the takeaway is if the business is healthy and you're prepared and it's mostly green lights for you and a good idea to think about an exit. What about anchoring on a target price? A lot of times when we talk to founders, they think more in terms of the dollar value of exit, not the multiple they're getting. Like you hear a lot, I need a hundred million or two hundred million. What's the dangers in anchoring on a target and how do you think about that?
- [03:06]
C
It's a really common trap. Anchoring to either a specific headline number, whether it's a hundred million or certain multiple. That can often become a little bit more about ego rather than economics. We feel that really narrows your field of vision. You risk overlooking potentially great partners or strong offers simply because they don't match some type of preconceived figure. It's more productive to focus on fit, structure, certainty of close and how the deal supports your long term goals.
- [03:36]
B
Absolutely. And you know, one thing founders don't often think about is what life is like after the deal and how those returns grow. So one of the things we hear a little bit is the price isn't right. I won't have enough money. Right. I have this $100 million mark in mind, and if I don't have that, I won't have enough money. But talked about how the money you get from a transaction, it's not really a static amount. Right. You're making other investments. How does that play in.
- [03:59]
C
Yeah, exactly. That dollar number is not static. The proceeds become an investable portfolio that can help support your spending over time. So in my role, we often sit down and translate deal terms into a practical spending plan. I. E. What can you comfortably withdraw every year without materially eroding principle under a range of market conditions? Seeing that math often gives founders confidence. It expands a set of acceptable deal sizes and structures. Because now you understand how the portfolio can work for you. It's not just sitting in an account.
- [04:31]
B
That's kind of a big lifestyle shift for founders. They might be used to full autonomy and more ad hoc distribution. Based on how the business did that year, how much they reinvested in growth after a sale, you might prefer a more steady distribution. How do you think about that?
- [04:44]
C
That we absolutely encourage them to think about that and kind of see how cash flows look. So what we'll often do is set up a monthly or quarterly wire to function just like a salary. And it's kind of based on that lifestyle number that you're backing into. If you're staying on with the company or launching a new venture. Portfolio distributions can also kind of top off your earned income.
- [05:08]
B
Can you give us an example of how that plays out, especially when there's a rollover and a post close commitment?
- [05:14]
C
Sure. We recently worked with a founder, one that we share with your team. They received multiple private equity offers that included a rollover and they required the founder to stay on for two years. He was worried about having enough since he wasn't selling the entire business. We ran scenarios using Goldman's proprietary modeling, which incorporate different interest rate environments, market cycles, different return profiles, and there were a couple takeaways. First, the proceeds from the first bite of the apple were sufficient to fund the family's lifestyle. Second, we could afford to take a healthy level of risk in the portfolio because his new salary covered much of the baseline expenses. And third, even in a conservative scenario where the rollover later ended up being flat or zero, the family was still okay. So that gave them the confidence to turn kind of a nervous maybe about a deal process into an informed yes, absolutely.
- [06:08]
B
Maybe let's pivot a little bit to finding the right deal team. So in our experience, the quality of the process, how it's run, and ultimately the outcome is often a function of who's around the table on the deal team. Talk about kind of what the dream team or the A team looks like and what mistakes you see there.
- [06:24]
C
To me, the dream team has two core sides. On the transaction side, you've got a strong investment bank with deep knowledge of your sector and a top tier M and A attorney and your bank can help you identify one. On the personal side, a private wealth advisory team who's going to help you quarterback pre and post transaction planning. And they are working in close coordination with your estate attorney and your cpa. Think about those as kind of the three legs of the stool. On the personal side, where we see founders go wrong with construction of these teams is often working with advisors who aren't specialized enough for a complex exit. Early day CPAs are invaluable, right? Like they were there from the get go. They've helped you along, but they're often not experienced enough with some of the more technical issues such as qualified small business stock or more complex deal structuring. So that's a time that we See people really needing to kind of upgrade, for example, again to a new CPA with deep transaction experience. Another kind of pitfall to avoid is we see people trying to go it alone. They'll often skip hiring an investment bank or they will rely solely on cp, say a board of advisors or even friends who have experience in the industry. That can work in rare cases, but it absolutely reduces competitive tension and negotiating leverage.
- [07:42]
B
I think another point I would just add is if you think about the buyers you're negotiating with, they have all likely worked on a lot of transactions together. So let's say it's a private equity firm who owns a portfolio of companies. You have the PE firm, the CEO of the company and maybe the law firm. They've all worked together on many deals and it's a well oiled machine sometimes what we'll see, and I'm speaking mainly on the legal side, if you use a lawyer who's not super experienced in M And A or SaaS, they're kind of defensive because of that experience. And what they tend to do is silo information which can lead to some bad outcomes if it's not a high performing team. So I think sometimes you want to look at changing the CPA and even maybe the lawyer you have. That doesn't mean there's no role for them, but it's probably means they're not leading the negotiation or the really complicated issues. They're helping you with some of the more mundane parts of the process that they understand the business really well. But maybe aren't the best negotiators or have that much experience. But I think that's great advice. Let's kind of make that a little bit more concrete. I mentioned a couple of examples. But what can happen without a bank and what does a strong team really enable you to do from your perspective?
- [08:49]
C
Let's give an example of the downside. So we worked with a founder who sold a business without working with an investment bank. They negotiated terms directly and they went through and signed an loi. During diligence, the buyer raised concerns and pushed the price down. They didn't have a banker there helping guide the response. And the founder ultimately closed at around 15 million below the LOI. And the process was very painful and it was drawn out and obviously a worse outcome. Here's an example of on the flip side with the strong team, we have a client who engaged a bank early, brought us in well before launch, looped in the CPA and their attorney, in this case our estate attorney, there was a potential tax issue around an F reorg. So what we did is we coordinated closely with Goldman's internal tax specialists, again, the client's cpa, in this case the M and A attorney, and we all aligned in a solution. And that happened fairly quickly. The founder closed in 30 days. Excellent outcome.
- [09:45]
B
I think that tends to happen a lot. And you know, some of these buyers are very sophisticated in how they negotiate with a founder like this. Some of them go in thinking they're going to retrade, right? Like, we know if they're in exclusivity for 45, 60 days, we have an opportunity to retrade. So we call that the strategic retrade. And then sometimes they just don't know enough about the business, largely because the selling company didn't give them enough information upfront. So they're actually kind of surprised about what they find. But it also leads to that painful retrade. That one, frankly, is a little bit more on the seller. We should have made sure they had the information before you gave them exclusivity. But a really common example. And the other thing, I would just say we talked a little bit, or you talked a little bit about board members and going it alone. I would say everyone is a victim of their past experiences, right? We ought to respond to our past experiences. But if you only have two or three experiences, you're over indexing to the two or three things that happened in that deal. If you have hundreds of experiences, you're a little bit more well balanced in what you're a victim of, so you have a better sense of what the issues are really going to be, rather than this one random thing that happened to your friend when he sold his business. But you really spoke to the power of preparation, alignment. Let's talk a little bit about the final stretch towards a transaction closing. It's exciting. It's definitely very stressful for founders. What missteps do you see in that window when the pressure's really ratcheting up and founders just trying to get to a close?
- [11:06]
C
For sure, it's one of the more emotional periods for founders, especially first timers. Diligence is intense. Long days, heavy information requests and negotiations that, you know, run nights and weekends. This happens so often that we see people try to layer in big personal decisions. It's not the time to have distractions. It's not the time to think about upgrading your primary home or potentially closing on a second home. All of this just adds complexity and distraction to what is already a extremely onerous process. So my best advice, let the dust settle for about six months post close. Your life is about to change and you owe yourself the space to to experience that before making big commitments.
- [11:52]
B
Absolutely. Yeah, I see that all the time. It's stressful enough just trying to get the deal closed. Trying to make other big commitments or make big decisions just adds to that in a way that's not always super helpful. To simplify things for folks, let's talk about the planning that absolutely you have to do before you sign a deal. We've talked a little bit about staging some of these other decisions, but what's the priority in terms of getting something done before the deal signs?
- [12:15]
C
I mean, I obviously specialize in this pre transaction tax and estate planning. It's mission critical. The right structures can ultimately mean potentially multi millions in tax savings for your family. But you absolutely cannot bolt this on the day before the loi. It takes typically months to get these structures in place to understand the implications. And so often we'll say 12 to 18 months in advance of starting a process to have a conversation with folks like us and use time to your advantage to create adaptable structures that will really anticipate multiple deal paths. You know, much like you mentioned Mike earlier, maybe you're only selling a portion of the business. How do we think about that relative to the rollover component? Is that initial piece enough for your family? Or potentially is it going to be too much and we're going to have an estate tax burden? Those are situations that we want to think about when you're not in the deal process. So when the deal process comes and it's really heating up, you're just focused on execution.
- [13:12]
B
And one more dimension I feel like that isn't discussed a lot. Like I actually don't hear it come up a lot from our clients, but I know they're thinking about it and worried about it. Is the family communication aspect of obviously if you're maybe at life changing amounts of money and what that could do to your family, what do you advise folks to do there? Particularly as it relates to, you know, children?
- [13:32]
C
I think this is a very important topic. It's almost like you don't want to go there, right? Like you're so focused on running the business, getting the deal done, but the idea of then communicating what is a new life reality is something that kind of feels off in the distance. So here's what I would say. If your children are old enough to search online, they may learn about the deal from someone other than you. And typically people prefer to control that narrative and Control it at home so you don't have to share dollar figures, but you can acknowledge the change that's going on, invite questions and set expectations. It absolutely will help your children process what's going on and reduce surprises. And this is a topic that I do spend a lot of time with my clients on. Either it's thinking around next generation education or how to communicate around some of these changes. So, you know, I'm happy to point families to resources and frameworks that have worked for other clients. Another area that we see a lot of anxiety is how to communicate or give money to friends, family or charities, or, you know, other causes that are important to you. So we see people feeling nervous about those inbound requests. Again, this is an area we could talk a lot more about. What I would say is having a framework and a process for managing expectations and setting boundaries around those kind of inquiries. How will you communicate this with family? We do recommend that. And again, I'm happy to provide more information and share some of those frameworks with any listeners.
- [15:00]
B
Awesome, Sarah. That's super helpful. So to summarize a few themes that Sarah talked about. Don't wait for the perfect conditions. Basically, you're never gonna get the perfect conditions right. Be guided by your readiness and fit. And what I've found is when founders are ready to do a transaction, that's the best time. Assuming there's nothing catastrophic with the market. Avoid anchoring to a single number and think a little bit more about your long term goals. And don't forget to factor in the likely growth in your assets, which if you own a small private business, you probably put a pretty big risk premium on it when you're investing in the market. Right. There's a lot less risk and more predictability in what those assets are going to be like, depending on what you're doing. And then also think about the deal team. You're putting together the right people with the right experience to make sure you run a good process and reduce friction. Give yourself some time and space for planning and not make any big decisions right before a transaction. And we talked a little bit about the family communication. Sarah, what final thoughts do you have for founders out there?
- [15:56]
C
I feel so fortunate to work with amazing, extraordinary entrepreneurs who've taken, as you say, real risks to build companies. We take really seriously the trust that clients place in us to shepherd them through the transaction and to advise their families for the long term. My final piece of advice, you don't have to do this alone. Build that right team, align them early, and let them link arms with you through this extraordinary moment.
- [16:21]
B
Well said, Sarah. Thanks for joining us again. And for listeners who are thinking about a sale or even exploring the possibility, just start the planning process probably even earlier than you think. I'd say the biggest general mistake we see is people just waiting till the very last minute or they get a good offer from someone and there's a lot of pressure. Get the right people at the table and really focus on the outcome that best supports your life, not just totally focused on the headline number. There's a lot of other assumptions behind the headline number, but Sarah, thanks for joining us again.
- [16:49]
C
Delighted to be here. Thanks Mike.
- [16:52]
A
VistaPoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and Capital Raised Transactions. We are a fully unconflicted investment bank who only works for founders on the sell side, so you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member Finra Sipic. This has been provided for informational purposes only. It is not intended to address all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.