“We did not want to take the business to the next level. It was at the point where it needed probably another five years investment in time and money, and another layer of staff. For us it had been a hard 10 years, a 24/7 slog. Potentially, we could have put in another five years and doubled its size. But we knew we would have to make more investment, and we didn’t have the appetite for that.”
These are the words of Marc Noel, a former client. His dilemma is typical of many entrepreneurs: having enjoyed dynamic year-on-year growth, his business hit a ceiling. Breaking through required more personal and financial investment than he was prepared to commit. Reinvesting company profits to fund expansion was starting to feel like a gamble. He was experiencing – in his own revealing phrase – “that stick-or-twist moment.” Crucially, Marc was also quick to recognize that moving on to that next level requires leadership with a different skill set. The shift from inventive, proactive entrepreneur to hardened, strategic CEO is often challenging. You may be reluctant to make changes that could unsettle the culture; maybe the idea of your enforcing such change unsettles you.
What are the options for business owners in similar positions? At one point in your career when capital seemed like the primary hindrance to growth, you may have imagined a silent partner with deep pockets to share the risk. But as ABC’s Shark Tank proves weekly, convincing someone to bankroll your unique vision – with you retaining control – is never easy.
Here’s where the business exit plan comes into play: handing over all or part of your business, either to internal candidates if they are fully capable and if they have access to capital, or to an external acquirer or investor. There are two clear reasons to consider an exit. First, because it’s the right route for your business. Second, because it’s the right route for you.
Sometimes the two are connected. Quite understandably, many business owners are far too focused on managing day-to-day operational matters to fully explore their range of options, exploit market conditions, and strategically grow their business with a sale in mind. Instead of the really big questions, you find yourself constantly answering a series of smaller ones. Where are those forecasts for next quarter? When is the renewal date on those contracts? Our VP of Sales has just resigned – who’s going to replace him? It’s so great that we signed Toyota as a customer a few years back, but they boosted revenue by 10% while absorbing 25% of our time.
Ironically, the more of your time you spend on these issues, the less you focus where you add your highest value. If you are great at winning new business, why aren’t you out doing that every day. Another former client put it this way: “when you’re too close to the elephant – all you can see is gray”.
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There are some business owners who are disciplined enough to take a longer-term view and are almost evangelical about the need to have a clear exit strategy in place. Take Jonathan Barker, who, with BCMS, sold his chain of luxury watch repair shops to the largest Omega, Tag Heuer and Gucci dealer in the world. “Sometimes a business is ready to sell but the people running it don’t realize it. But to carry on year-in year-out with no exit plan is not an option. It may take three years or 20 years to sell. The exit plan has to be part of being in business – and that should be considered every single year.”
These owners intuitively recognize that there are things that you can and should do years in advance. For instance, developing and then devolving responsibilities and authority to a quality management team. Upgrading the quality of staff. Codifying good systems, processes, and controls. Instituting a yearly budgeting process and developing future projections that are measured and reviewed. Formalizing a corporate governance structure. Upgrading the basis for financial statement preparation to enhance credibility with potential buyers. Establishing an organized, effective, and measurable business development process. Taking a longer-term view to staff training and development. Insisting on effective credit control and working capital management.
Sounds simple? Of course it isn’t, and the personal implications must never be underestimated. Many business owners see their company as an intrinsic part of their being, and feel emotional responsibility in its development, its people and its future. It’s pretty tough to look at your business as an asset in the simple sense of the word. It is even tougher to imagine it without you. Of all of the tough questions you may need to ask yourself, the toughest one may be: “Am I the right leader for my business moving forward?”
Still, you balance the potential benefit from change with the status quo. Status quo leaves you in full control but with significant daily constraints. A transaction and new partner might lead to:
- Cross-selling opportunities with you selling your products to a new partner’s clients and their selling their products to your clients were a large corporate to acquire you
- The value of combined resources to reduce costs such as unnecessary facilities and administration
- Employee development and growth opportunities
- The gaining of a high value CRM or other advanced IT platform
- Access to quality executives and staff
- Financial resources to fund key initiatives along with a more growth-oriented risk profile now that all responsibility is not squarely on you
- Ensuring the long-term viability of the business in ways you alone cannot
- A peer group, because it is lonely at the top and it is good to share the leadership burden with others
- The ability to focus on longer-term goals instead of managing from one day to the next
Along with the financial and commercial rationale, selling your company can be personally rewarding. As one of three shareholders at different stages of their career and with different ambitions, Jerry Abendroth engaged us to help sell his Texas-based building envelope engineering business. After the transaction closed, the message to his team was overwhelmingly positive: “We told them: ‘You are becoming part of a company that can afford you a lot of opportunities we can’t.’” That included his fellow shareholders.
Jerry’s advice to other entrepreneurs at the crossroads is equally clear-eyed. “Define your goal. Our first goal was to take care of our employees, and the second was to get a good and reasonable price for our company. We are living our goal right now.”
It’s all about recognizing the commercial and emotional triggers, and acting on them. Perhaps you’re a hard-wired doer, frustrated at the bureaucracy. Perhaps you are turning away work due to capacity issues. Perhaps you want to pass on the business internally, but to who? Perhaps you’ve fallen out of love with your business, and have a new idea you just have to pursue. Perhaps, quite simply, you are “just exhausted maintaining the pace”. Whatever the case may be, some planning today goes quite a long way.
The process for selling a business can seem intimidatingly opaque; an advisor can make it less so. The good news is that in 2018 there is probably more choice in terms of transaction types than ever before, if you know where to look. There are also record levels of cash on company balance sheets. Private Equity investment funds are at or near historical highs – $1.1 trillion in dry powder – available funds waiting for the right opportunity. With the right advisor, and a choice of potential buyers, deals can be shaped to suit you: a 100% cash sale; a sale and future partnership with a growth oriented private equity group; a Management Buyout or Buy in; the incorporation of a part-time consultancy role; an earn-out where you commit to delivering some key milestones; a recapitalization where you grow the business with a new financing partner.
There aren’t just three routes on the crossroads, as Marc, Jonathan, Jerry, and others will tell you. There are potentially dozens of different paths you and your company can take. Like any first-time journey, you will need a map and probably a guide. You will definitely need to take the initial steps to prepare you and your company for your eventual choice of path forward.