Published by TechExit.io
August 9, 2022 | Stefan Palios
Someone wanting to buy your company is a huge accomplishment. But what are you going to do after? In most cases, it’s one of three pathways, according to Paul Yancich, the Managing Director and Co-Founder of Arcadea Group, a long-hold majority investor. Speaking with TechExit, Paul explained the three ways founders can structure a transition after selling their company.
- You need to know the transition you want before you begin due diligence so you can tell your buyer.
- In all cases, you need to understand which tasks you want to keep versus which you want to offload or stop doing.
- Regardless of your transition path, act with empathy for your buyer as they learn the ropes, nooks, and crannies of your business.
Someone wants to buy your company! Now what?
It’s a wonderful problem to have, but a problem nonetheless. When founders build and ultimately sell (all or a majority of) their company, their whole world turns upside down as soon as the ink is dry. Suddenly they go from being in charge of everything to needing to find a new job—and in many cases, a new self-identity.
Paul Yancich is familiar with this problem. As Managing Director and Co-Founder of Arcadea Group, a growth-oriented, long-hold majority investor, Paul and the Arcadea team have collectively been involved with over a hundred investments. Speaking with TechExit.io, Paul shared the three most common pathways founders take when they sell their company and what you need in place to make that transition successful.
A good transition starts with self-awareness
“As a founder, you need to know what you want after the acquisition and communicate it during the transaction,” said Paul.
In Paul’s experience though, when founders want to change their fundamental relationship with their business (i.e., excluding when founders want to remain as CEO but “level up” in the role, itself a great path not offered by most PE firms), founders most often want one of three transitions, each with its own criteria for success.
Goal 1: Specialize and niche down
A lot of founders might be done running the whole organization and want to get back to their “first love” in the business. For example, becoming head of product for technical founders or focusing on sales and marketing for business founders.
This type of exit, said Paul, typically requires the founder to stay in the CEO position for four to 12 months post-acquisition to identify, train, and properly announce a successor. Most typical acquirers—particularly traditional private equity—make these decisions for founders, said Paul. This is one area where Arcadea differentiates, since its preferred path is to bring a strong number two in command up into the CEO role once the founder steps down.
Here’s the process a founder needs to follow for this outcome:
1. Steady the boat: New owners often make big changes in the first three months. As a founder, you and your number two (if you have one ready to take on the CEO role) need to stick this out to implement and establish important changes that are made, while steadying the boat after all the changes.
2. Identify the CEO successor: If the candidate is internal, the decision might already be made. If you don’t have an internal candidate, start looking for one externally as soon as possible.
3. Onboard: Give your successor opportunities to step up and take the lead on things. This might mean joining board or strategic level meetings, presenting to the company, or similar. Paul calls this the “training wheels” phase of a CEO succession. Then move to a more formal announcement. It’s critical to ensure the former CEO makes it clear to their team & customers that the new CEO is the person in charge. This takes deliberate action—otherwise, employees and customers will fall back on old habits and come to the former CEO for help when it should be the newly installed leader.
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Goal 2: Step out of day-to-day operations into a more visionary role
This type of transition is when a founder is done with day-to-day operations entirely but wants to remain involved. Paul said in these cases it’s common to remain CEO for a few months then transition upward to President or non-executive Board Director.
A transition like this allows you, as the founder, to remain involved in key strategic decisions and remain an ambassador to your company without getting into the weeds. This might mean as a leader of a collection of businesses—Arcadea would call this a Group President or Portfolio Manager—or as someone who is focused on inorganic growth opportunities within the sector.
Here’s what the process looks like:
1. Identify which tasks you want to retain: Moving to a President role might still mean owning strategy (rather than simply informing it) or owning capital allocation for the company. Knowing what you want to keep doing in your new role will help guide what kind of CEO you need to find.
2. Pick a new CEO: Whether internal or external, a new CEO needs to complement whatever tasks you’re keeping for yourself. For instance, if you continue to own strategy as President, then the CEO needs to be a little more operational—almost like a COO, said Paul.
3. Find your balance: A new CEO taking the reins can be tough to get used to for an involved founder, so this step is a delicate one. Make sure you respect the CEOs boundaries and authority just as they will respect yours in your new capacity.
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Goal 3: Ride off into the sunset
Sometimes, you’re just done with your startup. Maybe you want to start a new business. Or maybe you just want to retire. If you’re planning to ride off into the sunset, you need a plan so the company is handed over in a successful manner. And usually that means staying in your role for 3-6 months to help work out the kinks.
However, Paul said the process is nearly the same as moving into a visionary role (goal number two). The only difference is that instead of staying engaged as a portfolio manager or an acquisition scout, you just leave.
Paul also noted in this case it’s critical to have empathy for your buyer. You’ve been running it for years and know all the nooks and crannies. They don’t have the benefit of context when it comes to your organization. During the transition period, be patient with them as they figure out how to run the ship without you onboard anymore.
Beware the nature of the buyer
Different types of buyers have different motivations, timelines, and needs. Be aware of that as the wrong buyer can kibosh your plans.
Paul talked about a few types of buyers and noted their motivations. In private equity, for example, buyers usually have 18 to 24 months to buy a company, maximize profit, and sell again. Big strategic acquirers like public companies usually just want to buy revenue to make their overall organization larger or to fill a product gap or even just eliminate a competitor.
“I can’t overstate this enough,” said Paul. “Who you sell to matters.”
Companies like Arcadea, on the other hand, have a lifetime horizon. This means Arcadea wants to see sustainable, long-term companies because it never plans to sell a company once it buys into it. While this might seem counter-intuitive to the “get rich” mindset of many people in finance, Paul thinks it’s where the future of business is heading—and where it ought to be anyway.
“We don’t believe the purpose of business is to make private equity firms rich,” said Paul. “We believe businesses should serve customers and solve problems that matter while providing humane and rewarding work environments for employees…and the absolute best way of doing that is planning for—and facilitating—the long term potential of a business without the distraction of short-term exit paths that often are at tension with building something truly great.”