No Exit Is A Panacea The Pros And Cons Of External Transfers

Feb 28, 2011

No Exit is a Panacea: The Pros and Cons of External Transfers

It is human nature to think in terms of things beginning and ending.  We tend to stereotype and categorize events in our lives, such as the exit from a business.


What images come to mind when you think about your exit?


Do you think of your exit in terms of selling a home where the house is cleaned and painted, the value is relative to other sales in your neighborhood, buyers arrive, papers are signed, proceeds are exchanged, and each party moves into a new and better situation?


Well, the exit from a business is rarely that clean and easy.  And, as you investigate the different options for exit, you will quickly see that no exit is a panacea.  In other words, the detachment from a business is an event that is both financial and emotional and both elements can last for quite some time . . . no matter how you structure your exit. 


This newsletter examines the pros and cons of ‘external’ transfers, reserving discussion of ‘internal’ transfers for another writing.


Although there are two primary exit options for an external transfer, i.e. a sale to either an industry player or an investor (or investment group),

each has its pros and cons and it is likely that neither option will fulfill all of your needs and be ideal for your situation.  Let’s begin with the most obvious and intuitive exit option – the sale of your business.


Selling your business


The most obvious exit option for many business owners is the sale of the business to another buyer, perhaps someone in the same industry.  The immediate vision that forms is that someone else is going to take care of the problems that you currently face and they are going to pay you handsomely for the privilege of owning your business while you celebrate and dream of spending days in an idle manner, fulfilling the desires that you did not have time for previously.


Let’s take a look at a more realistic picture and why a sale may not be a panacea.  Two (2) primary questions arise.  First, will the business sale be successful?  And, next, what will you do with your time?


Take note that only a small percentage of businesses, less than 20%, successfully sell to an outside buyer.  That is an 80% failure rate.  So if you do not know if your business is saleable, you may want to hold off on dreaming for right now.


However, even if you discover that you are one of the lucky owners who can successfully sell their business, realize that many business owners find it difficult to see their business being taken over by someone else – sometimes by someone they consider the ‘competition’.   And, even if it isn’t a competitor who buys the company, it can be hard to step away and see changes that were not in line with how you ran the company or the goals you had planned for it.  Unlike your home, your business is a direct reflection of your life’s work and the relationships that you built within it.  It is worthwhile to give consideration to what your business means to you and, moreover, what it means to be the owner of a successful business. 


This leads to the larger issue of what you will do with your time if you are not staying with the business after the sale.  Sure you have a large investment portfolio and some financial security now that you have sold the business, but how will you replace the feelings of accomplishment and community status when you are no longer in charge of major – or any - decisions at your company.


Private Equity Group Recapitalization


So, if you think that you might want to cash in a majority of the business today and continue working, you may think of bringing in a financial partner – an investor or an investment group such as a private equity group.  You might even begin to think that this type of partnership will allow you to continue to grow your business while you stay actively involved as a minority owner in the business.


But here’s the flip-side to that coin.  And it begins with a simple question . . . do you think that you can work comfortably as someone else’s employee?  Further, do you think you can do so as your new owner makes changes to the business that you disagree with?


Private equity groups typically hold investments – by the way, that is how they look at your company, as an investment - for five to seven years before they look to sell to a larger entity.  So, if you stay with the business after the transaction, you need to ask yourself if this period of time will liberate your business to a higher level of accomplishment or will it serve as a period of time more akin to an occupation of it – and of you?


Will you be comfortable with the cultural changes that a recapitalization imposes on your business?  Will you be comfortable reporting to a board of directors?  Did you really build a business independently so that you could sell a majority stake and work for someone else?

Now, in terms of the financial ‘scoreboard’, you did cash in a majority of your shares for a large sum of money.  However, you also exchanged your autonomy for an employment agreement that could be highly disagreeable to your day-to-day running of the business.


There is One Way Out


There is one way out of this dilemma but, if it applied to you, it is unlikely that you would be reading this newsletter.  The way out – and when a successful sale does become a panacea – can be when the following apply:


1.     You are dispassionate about your business and who owns it in the future,

2.    You build a company that is completely saleable to many different buyers,

3.    You have the flexibility to work with any type of partners, and

4.    You have a definite plan for how you will spend your time after the business sale, and

5.    You have an equal amount of dispassion for satisfying the need for success and achievement that the business provides to you.


Once again, this is a rare type of exiting owner and it is unlikely that this applies to you.


How to Choose the Best Exit Path


An exit plan is rarely the process of discovering the right answer to your problem.  Rather, it is a calculation of which of the options head you towards achieving the highest percentage of your desired outcomes.  


Are you ready to work for someone else? Can you live without the thrill of running your business day-to-day? Which of these options seems best for you? It is your ability to answer these questions that will be the best guide for your future exit decisions and whether or not an external transfer is right and which one is best for you.


Remember that there are trained professionals who can assist you with the process of determining which exit option is right for you.  It is highly advised that if this newsletter got you thinking about which option is best for you, then you consult with a trained and experienced advisor to see which options best suit your personal situation.  This is known as ‘exit planning’.

  © Copyright 2011 Pinnacle Equity Solutions, Inc


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