There are several ways of exiting a business. The most common types of exits are listed below, although the majority of business owners who wish to exit their business (non-forced) will either sell the business to a third party or allow a family member or management team to buy into the business.
- Private sale – selling to a third party (Strategic/Owner operator)
- Management/Employee buyout
- Remote management/Lifestyle exit
- Investor (part or whole)
- Succession to a family member
- Liquidation or ceasing to trade
- Listing the company on the stock exchange (IPO)
Micro businesses will often sell to a third party, owner operator who is looking for a self-employment opportunity. Owner operators may be individuals who have recently retired or been made redundant or people who are looking for a change in professions.
Sometimes this group of buyers choose an industry that is an extension of a hobby, for example, someone who is a keen fisherman might decide to buy a fishing shop. In these cases, there is a degree of passion attached to the decision making process, which can work in the seller’s favor when negotiating.
If a purchaser intends to make a living from running the business, its ability to generate cash flow will be a key consideration. An owner operator will also focus on how long it will take to earn back the investment.
An owner operator business usually has a well-defined life cycle and most buyers will want to purchase a business in the latter half of its life cycle when there is still an opportunity to add value but the customer base is solid.
Owner operators can also be people coming to this country under a business migration program.
THIRD PARTY – STRATEGIC INVESTORS
Strategic investors will often pay more for a business than financial investors. Therefore, a good exit strategy will identify other businesses that have a strategic fit with the business for sale, or the exit strategy could identify a strategic pathway to become more attractive to a strategic buyer. Usually, strategic investors will be found within the industry in which a business operates, so people thinking of selling must be aware of what is happening within their industry. People considering selling their business should think about the products that fit around their niche.
Even though strategic investors are likely to be more educated and better negotiators, they will pay more for a good fit. The key is to show a strategic buyer the big picture, so there needs to be a different sales pitch than for an institutional investor or an owner/operator. The seller should highlight the value that can be gained by integrating the business for sale within the potential strategic investor’s existing business activities. This can make the sale look like great value.
REASONS WHY STRATEGIC INVESTORS BUY
Strategic purchase decisions can make good sense as growing a company organically can be expensive and
slow. Research and Development (R & D) and Intellectual Property (IP) protection can be lengthy and costly and sometimes it is cheaper to buy a company that has already made that investment. Buying a competitor or strategic fit business can instantly provide a new product or service that can be sold to an existing customer base.
A purchase can provide a new or extended distribution channel. The key here is that both businesses need to have the same target market, so the products can be cross promoted to a larger database and then distributed to a wider network. Another reason strategic buyers invest is to lock in supply, so sellers should think about their supply chain.
Creating a brand takes many years and is usually expensive, so acquiring a brand is another reason strategic buyers may invest. Sometimes, people are buying the human capital of the business. Maybe the buyer needs the management expertise, sales force or technical skills that lie in another company’s employees.
Strategic buyers may see an acquisition as a way to expand into new markets, both nationally and internationally. State representation can be attractive, as can a presence in regional markets. A strategic purchase can also provide entry into a dynamic market or sector of a market.
A strategic buyer may be a competitor seeking to reduce the number of competitors in the market place. This is a strategy often used by large multinationals, which find it easier to purchase a competitor than fight for market share.
In some cases, an entrepreneur may wish to exit a business but cannot find a buyer prepared to offer a commercially realistic price. Rather than reduce the sale price, an owner may decide to pull back from the day-to- day running of the business and appoint outside management or encourage the existing employees to take over the tasks of the owner.
PART FUNDING & EQUITY EXITS
Sometimes a buyer is not in a position to purchase the entire business but can afford to become a part-owner. In this situation, it is important the original owner thinks carefully about offering someone a majority stake in the business, as this effectively means he or she will lose control of all strategic and operational decision making.
In some instances, the best investors are already a part of the business. In a management or employee buy-out, an owner offers employees the opportunity to buy into the company, often funded over time, out of the growth of the business. There is risk attached to this arrangement because if the business’s profitability declines, it may be difficult to make payments. For this reason, it is recommended that management buy-outs only take place if the owner is a secured creditor and appropriate guarantees are in place.
The largest portion of small businesses are family businesses and in some cases it is the wish of the owner to keep the business in the family. Currently, around 10% of business owners took over their current business from the family. Of the family businesses with employees, three quarters employ at least one family member. Research also shows that 92% of family business owners are prepared to pass the business onto children and 57% are prepared to sell it to them.
Sometimes, emotive factors come into play in family businesses, which change the family dynamics and can negatively impact the business. An example of this may be intergenerational conflict.
In a family business, it is essential that a Succession Plan is created and well documented, and that family members are aware of its contents. Some family members may automatically expect to be given first right of refusal for purchase of the business.
A Succession Plan often has two stages. The first is the transfer of managerial control and the second is the transfer of assets or ownership.
Commonly, the shareholders of a business are a husband and wife. Where divorce or separation has interrupted a good relationship, selling the business and transferring shares becomes difficult. It is best to consider this possibility when a business is started and structure it accordingly.
There are two groups of institutional investors:
Angel Investors are less-sophisticated, cashed-up individual investors who typically invest in 1-5 businesses that need capital to grow. An Angel Investor is looking for a return on investment and an exit strategy.
Venture Capitalists or Private Equity Firms are more professional investors who normally make larger investments than Angel Investors and are also less flexible than Angel Investors. Venture Capitalists look for higher returns through high-risk investments. The due diligence required before a Venture Capitalist buys a business can be onerous.
LISTING THE COMPANY ON THE STOCK EXCHANGE (IPO)
An Initial Public Offering (IPO) is the process by which a company is listed on the Stock Exchange and it is usually a way for a medium-sized business to obtain the capital needed to grow into a large business. It requires a sizable financial investment to prepare for listing and there are significant demands on the business owner’s time in the lead up to the float. An IPO is usually not an option for a small business.
This listing is often associated with a previous capital raising in conjunction with a private equity firm.
Do you understand your exit options in terms of potential buyers?
What do you think will be your chosen pathway or pathway options?
Understanding your exit options is intrinsic to the development of a good exit plan.