I’ve had the privilege to work with many exceptional business founders. Many of them are my contemporaries, middle aged, grown children, starting to think about slowing down or taking some money out to buy that cottage in Tuscany.
When it’s all said and done, there are only a few motivations for exiting.
I’ve done it twice and it got harder as I got older.
It’s important to understand your real motivation for exiting.
I want to retain control of the business but pay off some bills
The founder usually loves to work and loves being around the people at work. They love being in control. They aren’t ready to retire and would miss their people, work environment and the challenges of expanding and improving on what they achieved so far.
However unforeseen events or “life” sometimes throws up financial hurdles which can be hard to control. Founders often wonder how to avoid borrowing more money and instead how to capitalise on the great business they have built so that they can pay off some debt or bills, for example during divorce or from an unexpected tax liability or long term bank debt. However, they also want to retain control of the business.
This type of exit is well aligned to an IPO or staff and management buy out. An IPO exposes the financial accounts of the business to the entire world and requires staff to be be hired for regulatory and financial work and as corporate advisors. It often exposes the founder to a new world and additional costs they are not used to. However, the founder can remain in control and continue to grow the business in the way that has worked for them in the past.
The valuation for an IPO is generally much more attractive compared to business valuation for trade sale or merger. It also means only part of the business needs to be sold down and the founder can retain ownership of whatever percentage they need to in order to overcome the financial hurdles.
I want to retain ownership but don’t want to deal with the headaches any more
This is a transfer of operational control to a new leader while retaining ownership of the business, the opposite to the above situation. The founder could be exhausted, needing a mental health break or just bored with their daily routine. They may be ready for a change in lifestyle or have health issues they can’t tell their staff about.
This exit is well facilitated by transferring control to one or more family members or hiring a new CEO or management team.
There will be costs in the introduction of this additional layer of management and consequently a need for an injection of capital. This can be managed through new debt funding or a progressive sell down of the founders shareholding.
Any new shareholders, especially from inside the same industry, can bring with them the potential for identifying and hiring new leadership and operational talent. Consequently, the new management hires can help create strong alignment for continued business growth if they have come from the investing organisation.
I want to reduce my responsibilities and also get some money
This is a blended approach compared to the above two. The founder is looking to retire after a long career and go travelling or sit on a beach somewhere. Many founders at this stage also want to cash out and start something new for the buzz and excitement of building the enterprise from scratch, perhaps in a completely different industry. Some founders want to embrace philanthropy and the arts.
A buy out or trade sale is often a great option because the acquirer often has access to or can recruit leadership and executive talent. The acquirer often has strong capital management capabilities which will help properly fund business growth and ensure a transition of the business over a longer period of time.
Using the acquirers capital means the business founder has the best opportunity to ensure that all existing staff entitlements are well funded and looked after, existing customers can be properly resourced to ensure satisfaction and longevity and the existing supply chain can be looked after and even improved by using the acquirers scale and networks.