Entrepreneurs are exiting when they want to quit (and there’s a better way to do things)
After having successfully started and grown a business over a long period of time, many founders are ready to hand over the reins to new management and enjoy the fruits of their labor: a diversified personal balance sheet, family time, and opportunities for travel while unplugged from everything required to run a business.
Often, I encounter business owners who have mentally crossed the Rubicon and are ready to sell their companies only to realize that they have not adequately laid the groundwork to allow for a successful management transition or transaction. And this approach needs to change.
Business owners frequently decide to sell their companies based on exogenous variables: a hot M&A market, a banner year, a pending tax rate change, or even a health issue―these are all valid reasons to explore an exit process, but I have seen that when business owners wait for one of these outside variables to push their hand without having already laid the groundwork for a transaction, options, and their ability to sell become limited.
A better approach is to have already prepared a company for a sale and transition ahead of time, then be ready to act when outside variables suggest the timing is right. I have seen success where managers start early by investing in their team. The next layer of leadership needs time to learn the ins and outs of an industry, develop customer relationships, and master operations. If a CEO is closing every deal, making every purchase decision, and attending every trade show as the face of the company, this signals it is time to invest in a broader management team.
Similarly, a company needs the systems and infrastructure to be able to produce data to potential buyers in order to prove to others what managers already know from running their business. The mental pricing model and sense of a business’s cost structure is impressively accurate for many CEOs, but it is easily stymied when confronted by accountants whose approach is to verify and tie out every number.
A company without strong systems, where the CEO is also the de facto COO, CFO, and VP of sales, adds risk for any investor; and risk, whether perceived or real, can result in a lower valuation for a business.
You’d be surprised at the number of headaches that I encounter as a private equity investor during sale processes that could have been remedied if they had been identified earlier. Putting an audit or outside accounting review in place, settling any legal disputes, and implementing long-term customer contacts are all items we frequently see entrepreneurs trying to solve simultaneously while attempting to court potential buyers.
Outside advisors want to help entrepreneurs sell their businesses―and I have seen them put in a lot of leg work years ahead of a transaction at little or no cost to help a company so that when it does come time to exit, they can represent the business in a sales process.
There are tradeoffs in every transaction structure and sales process. The more a CEO is willing to stay involved in his or her company going forward, both via ongoing daily leadership and through maintaining some level of equity in the company, the more options they tend to have for an exit.
Buyers are often wary of entrepreneurs that want a full and clean exit immediately. A CEO knows their business better than any outside party ever could, and if that person wants out completely, there will always be a lingering question in the back of a buyer’s mind: if he or she wants out so badly, why should I want in?
Being open to continued involvement in their business, whether it be a transition period to full retirement over several years, moving to a chairperson role to mentor the next CEO, or showing optimism for the prospects of the company via continued equity ownership, helps to optimize valuation and will generally result in the most suitors for a company.
Building a business over one or more generations takes patience and foresight. From my decade in private equity, I have seen that entrepreneurs who take the same level of care in their approach to planning for their company’s sale and retirement as they have in building their businesses are set up to have the best chance of finding the right buyer at the right price on their preferred timeline.