EXIT STRATEGIES: Fear of the exit

It is widely acknowledged that a significant portion of private firms will be coming onto the market over the next 10 years as the baby boomer generation nears retirement.

While some have family members to pass the business onto and others will reach an arrangement with employees to buy out their interests, most will be seeking to sell their businesses. With this background, it is hard to understand why so many fail to confront the issue and fail to undertake business and personal planning to provide the best outcome from such an event.

Some founders simply don’t want to let go of their baby. They have often put the best years of their life into building a robust business and the thought that someone else will take control is impossible for them to accept. While they know that a sale is inevitable, they are simply unwilling to spend any time planning for it because it means they are acknowledging they will be selling their business.

Exit fear is not just a characteristic of retiring founders; even younger entrepreneurs who have raised venture capital on the basis of a likely trade sale of their business seem reluctant to put the effort into preparing the business for sale. Most of them anticipate they will not have a job with the acquiring firm and this creates a good deal of uncertainty around their future – even though they have a reasonable assurance that they will take away a good deal of money with the sale.

I found the same reaction many times in my workshops on selling a business. Entrepreneurs attend the workshop in order to better understand how to sell their business but often express concerns about life after the sale. As one executive put it to me, “I just can’t face the thought of doing another start-up – imagine having to go back to not having any support staff, no infrastructure, to have to watch every cent and go through the slow grind of building it up again. Why would I do that to myself when I have such a good life right now?”

On the other hand, there are those entrepreneurs who are only too eager to sell their current business because they have another one going on the side or they are keen to invest in their next great idea. Others have a strong desire to take time out to recharge their batteries before they jump back into a new venture.

A normal condition of sale of a business is for the prior owners to agree a “non-compete” clause as part of the consideration. The buyer does not want the prior owners using their money to set up in competition. This can be challenging for the prior owners as it effectively denies them an occupation in the area they know best.

However, this would not normally prevent the sellers working or investing in complementary businesses, working under contract for the new owners or taking an extended break. The important consideration here is that the sellers have considered the impact of this restriction on what they will do once the business is sold.

Once you start to put some effort into preparing your business for sale and begin to consider what else you might do, possibilities start to open up. You begin to see just how much the business could be worth if you put the extra effort into the preparation and you begin to appreciate just how well off you could be later on.

At this point, most owners lose their “fear of exit” and their motivation is replaced by the entrepreneur’s “instinct for winning”. Preparing for a personal exit is an essential part of the preparation process.

When I have worked with entrepreneurs on this issue, their fears were nearly always dispelled when I was able to show them how to create a number of interesting and viable options. What few appreciate is that, in many cases, they don’t have to sell 100% of the firm at once. Often a business can be split into several components, each of which might be suitable for sale to different buyers. One strategy is to split off a portion of the business, prepare it for sale and then use the sale to take some value out of the business. This way the entrepreneur is realising part of their wealth.

The sale proceeds can be used to invest in new ventures or to establish a retirement fund. This strategy can be followed over a number of years with different parts of the business.

Another alternative is to work with a Private Equity (PE) firm to sell down part of the business. This way you get to take some of your wealth out of the business up front. The PE firm will work with you to inject new management into the business where this is required, fund acquisitions where this will increase the returns to the shareholders, arrange for debt financing to improve equipment, develop new products and markets and bring on a more experienced Board of Directors to prepare the business for an Initial Public Offering or a trade sale.

Many entrepreneurs use the current business as a platform to launch a new venture. Once the new business is a reasonable size, they can let go of the old one. Others develop an active interest in not-for-profit activities after the sale.

Some become angel investors and have an involvement in several ventures. All it takes is a little creative thinking!

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.