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Case Study: The Exit Strategy

Chris Schwalbach  ·  November 13, 2019  ·  8 min

It may seem counterintuitive, but guiding a company to exit is a common goal for AVL. 

As AVL’s CFO,  Anne Kreider puts it, “it means we’ve done a good job. Many of our target customers want to build something and then make a profitable exit. They are entrepreneurs who want to do it all over again. Getting a good result for the shareholders is, for most of our clients, the goal.”

That means exiting from AVL as well. 

Losing a customer is often a good thing in the AVL model. Everybody wins. 

Integrity and Visibility

When Anne Kreider first became involved with a Colorado-based healthcare software and services solution, the company was stagnant. They weren’t adding customers or impacting the market. They were doing about $1.5 million in annual revenue and losing money. But they did have a product that two new angel investors believed in. 

Both of these serial investors chose to take an active management role in the company, taking on the roles of CEO and COO, respectively. 

The investors reached out to AVL and Kreider to partner with them on tackling the next stage for the company. Kreider started by bringing in additional integrity and visibility to the historical financial statements. “You have to have a clear picture of where the company has been to know where it is going,” says Kreider. 

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Operational Issues

She quickly realized, however, that there was a gaping hole in the company’s operations. 

This hole involved hiring and firing, compliance, and insurance. There were also issues related to the corporate book including the articles of incorporation, where they’re allowed to do business, voting rights agreements and everything around previous fundraising efforts. 

Kreider also noted issues around customer operations. “We had this incredible software service offering that our customers were using, but we couldn’t measure how they were using the tool. That was important because we had a contingency revenue model. So, if we didn’t understand how they were using the tool, we couldn’t “drive the product roadmap”, and we couldn’t help them grow. We also couldn’t bill clients correctly.”

Kreider quickly embedded in the company operations and partnered with the different functional areas, including sales, IT and customer support. Together, they implemented a robust end-to-end process to onboard customers and deploy the solution. They installed ongoing training with the customers, as well as accurate billing and metrics going forward.

“We started to see a revenue uptick, which was fun,” says Kreider. “We figured out which customers were worth keeping and which ones we should cut loose because the cost to service them was greater than the revenue.”

Kreider then put together a financial model that mapped out objectives and measured success against those objectives.

Related: 5 Ways to Keep Your Financials on the Rails When You’re in Super Scrappy Start-up Mode

The Buy-Out

The company started to see success in market capture, revenue, and profitability. The CEO was motivated to exit and was looking for a buyer. Ultimately, he made a connection with a company that saw their product as part of a broader offering that would allow their customers a one-stop shopping experience.

The buyer was well known in the market with a perceived level of integrity.  They had already made a series of strategic acquisitions, so the company was a good fit. Kreider also felt it was a good match for the employees. It took about four months of verbal back and forth to come up with a term sheet that both the CEO and the board could accept. 

Kreider and the management team were most concerned with how much of the sales price was upfront versus an earn-out model based on future performance. The buyer wanted to hold back 20% of the sales price on the earn-out based on gross revenue. 

She and her team had to consider whether or not the buyer would have the scaffolding and structure in place to ensure the earn-out was possible. 

Due Diligence

Being diligence-ready was part of Kreider’s goal early on.

She ensured the company had a clean corporate book and cap table, signed stock purchase and option agreements, and audited financial statements.

Kreider also played an important role in readying the operational side for a potential sale. She drafted employment letters and gathered clean employee census data. 

“I served as their de facto HR,” she says. 

Documentation was also critical. Potential buyers will want to take a look at everything, and it should be easy to find. So Kreider ensured they had well-documented IT and security processes critical for a software company. They recorded everything around the product development cycle and its documentation, as well as customer-level metrics.

Of course, she also gathered signed customer contracts and appropriate insurance coverage and knew the employee benefit plans. 

Since the company was fielding an ongoing lawsuit, she maintained tight documentation on that as well. “From the beginning, we were just really intentional about having those things in place so that it wasn’t a scramble when the day came.”

Related: Case Study: Tennyson Center for Children

Relationship Building

Kreider and the management team also developed an excellent relationship with the company’s audit and tax firm. The buyer was able to go directly to that firm to do some of their diligence on their work papers. 

“Our auditor was able to answer questions about an audit we had just had. Of course, we could as well, but it was a very positive thing to have that relationship in place,” says Kreider.

It was a strong team effort that was several years in the making. 

When an acquiring company goes through their due diligence, they will typically deliver a list of hundreds of items they want. Tightly managing that list, including who is responsible for producing each item and where things will be housed, is something that Kreider sees as a critical part of her role. 

“You have to go through it and decide who should do what. You have to set up a document repository with a good naming structure. You have to keep people accountable, and it’s a lot to manage,” explains Kreider. 

That includes managing CEOs who may offer to take on tasks they fail to complete. The CFO has to keep everybody honest about what they can and can’t do. 

“Ultimately, that responsibility has to fall to somebody who’s organized,” says Kreider. “So, I wound up doing a lot of that organization and follow-up and managing that list of requirements.”

Potential Pitfalls

In the middle of this process, Kreider discovered a key area of exposure for the company and had to work quickly to cover it. The company had no confidentiality or IP protections for its employees. This meant that there was nothing in place to prevent employees from quitting and running off with the technology. 

They were forced to scramble to get employees to sign these documents in the middle of the due diligence process. It threw up red flags and was a distraction for the entire staff. 

“Lesson learned,” says Kreider. 

The End Game 

Ultimately it worked. The company was sold. But Kreider’s involvement did not end on that sale. 

The acquiring company had a fully staffed accounting department. Initially, they had planned to take over AVL responsibilities once they took possession. But there were two initial problems. The first was that they underestimated how deeply Kreider was embedded in the company operations. They had no idea how to transfer her responsibilities to their existing staff. 

The other issue was that the acquiring company had used Deloitte to do their due diligence. Deloitte had a strong understanding of how the acquired company did things, but the accounting department at the new company did not. It was a challenge for them.

In an unrelated move, the acquiring company had decided to physically relocate their accounting team a few months before the acquisition and had lost staff as a result. 

They asked Kreider to stay on and to help them manage another recently acquired company. 

Her two-month transition turned into a 14-month transition.         

The Transition

The transition put Kreider in a unique position, particularly when it came to meeting earn-out targets. She kept a laser focus on it. 

“I was able to watch things that were happening that could threaten our ability to make the earn-out,” says Kreider. “That included everything from pulling salespeople away to IT support to the way they measured revenue.”

Kreider considered it part of her job to manage this process with integrity by raising the flag when there was something that threatened the company’s ability to make the earn-out number. She was able to advocate for the original set of shareholders while still providing value to the new company. 

Ultimately, the new team did get up to speed. 

“Their audit wrapped up and slowly, we peeled away all of my operational duties. They were getting absorbed by different people, and they just left the routine backward-looking accounting as sort of the last piece they needed help with. “

It was Kreider who finally called for an end date. “It’s not serving anybody for me to continue to do this sort of in a silo, and it was time,” she said. “We decided on a date and then worked together to hit it.”

The Exit

Today Kreider is still available to answer questions and provide support. The transition served the company well. Things they may have missed in a more abrupt shift of responsibilities were handled. 

The product and customer teams have been integrated. The employees are adjusting well to the new culture. Of course, that’s been a mixed bag. “You know, there’ve been a handful of departures, but you’ll see that with any transaction like this.”

The company was also appreciative that the long transition wasn’t really what Kreider had initially signed on to do. 

“I think AVL wound up looking great for agreeing to do that last bit even though it wasn’t originally what we signed up for,” says Kreider. “AVL definitely made a friend.”