Yale Case. By: Keith Burns / A. J. Wasserstein
This Yale case study, titled “Exploring post-exit dynamics for SF entrepreneurs”, explores the often-overlooked realities faced by SF entrepreneurs after their businesses are sold to new equity partners. Drawing on survey data from 57 exited SF CEOs, it sheds light on the dynamics of these “post-exit” relationships and offers insights for aspiring entrepreneurs. The study aims to bridge a gap in understanding, helping entrepreneurs anticipate the challenges and opportunities that arise in this crucial phase of their journey.
1/ The SF lifecycle
– The traditional SF path includes: 1-2 years of searching for a suitable acquisition, and 5-6 years of operating the acquired business.
– Exit day, envisioned as a culmination of hard work, often becomes a transition instead of a conclusion. CEOs frequently roll equity and continue leading the company under new ownership, extending their commitment by several years.
2/ The exit reality
While investors cash out during the exit, CEOs often stay on to ensure operational continuity, especially when the business is acquired by financial sponsors (e.g., private equity or PE-backed firms).
Post-exit roles may involve:
– Continuing as CEO, sometimes for 1-5 years.
– Reinvesting part of their equity (“rolled equity”) into the new deal, often as a requirement.
3/ Challenges with new equity partners
– Transactional Nature: Relationships with PE investors are more transactional than the mentoring style of original SF investors.
– CEOs report diminished:
– Autonomy and independence: New equity partners often impose stricter controls and reporting structures.
– Personal connection: CEOs describe a lack of meaningful engagement, with 73% citing a weaker personal relationship.
– Support and mentorship: Coaching, once robust under SF investors, often fades.
58% of CEOs surveyed said relationships with new investors worsened over time, reflecting a drop in satisfaction as the initial honeymoon period faded.
4/ Equity and compensation post-exit
– Rolled equity:
– 65% of CEOs reinvest part of their proceeds, with a median roll of 30%.
– Rolled equity carries risks, including valuation disputes, illiquidity, and dependence on the new owner’s success.
– Compensation:
– CEOs typically negotiate increased cash salaries, with 57% seeing a >30% pay rise after 5 years.
– New equity grants are significantly smaller, averaging 3.1% of the business compared to 25-30% in the original SF structure.
5/ Positive aspects of new partnerships
– Resources for growth: New equity partners often bring financial resources and strategic expertise to drive expansion through acquisitions or organic growth.
– Potential returns on rolled equity: If successful, rolled equity can generate a 3x return, with tax advantages until monetized.
6/ Net Promoter Scores (NPS)
– The majority of CEOs (60%) would not recommend their new investors to others, resulting in a negative NPS score of -33.
– Relationships with financial acquirers fared better than with strategic buyers, but overall dissatisfaction remained high.
7/ Strategies for entrepreneurs to avoid pitfalls
– Retain control through a self-funded search or holding company model, bypassing the need for new investors post-exit.
– Define terms upfront, including timelines for transitioning out of the CEO role and conditions for cashing out rolled equity.
– Target selective buyers who do not require equity rolls or CEO retention.
– Negotiate with original investors to explore buyout or recapitalization options, avoiding partnerships with external PE firms.
Conclusion
The study highlights the complexities and unexpected challenges faced by SF CEOs during the post-exit phase. While financial gains and growth opportunities are possible, the personal and professional dynamics with new equity partners often lead to frustration and dissatisfaction. Aspiring entrepreneurs are encouraged to think beyond the “exit” and plan strategically to align their financial and career goals with the realities of post-exit relationships.
This summary captures the core insights of the study, but the full document offers a wealth of additional data, including CEO testimonials, survey breakdowns, and nuanced recommendations for entrepreneurs. If you want a deeper understanding of these dynamics and practical strategies to navigate them, the full study is highly recommended for its robust analysis and actionable advice.
