Am I ready to sell my business?

In Part 2 of our Founders exit series articles, we look at the range of options available to founders looking to exit their businesses or to raise capital. In this article we focus on the type of seller.

Ok, you’ve worked hard and your company is now making money.  You have achieved product/market fit, you are revenue positive and while cash is always tight and there are always bills to pay, the accountants tell you that you are EBIT positive.  Importantly, you have decided that now is the time to think about your exit, and you are wondering whether its time to sell, or time to sell down some equity. 

Rather than rush straight into the market, lets pause and consider three critical questions that define an exit strategy, as distinct from a sale.  The answers to these three questions define the optimal exit option for a founder, and (believe it or not) they might actually define the next phase of your life. These are:

1. How ready you are to leave your business?

2. Whether you have already achieved your financial goals in life or whether these are yet to be achieved?

3. Are you mentally and emotionally ready to work with a capital partner to see your business grow beyond you?

Lets explore these questions and what they mean for exit.

Can I see myself leaving my business behind?

Being ready to leave your business is a mental as well as a financial milestone.  Often founders are addicted to their businesses; this makes sense as starting a business can be extremely satisfying and watching it grow and prosper even more so.  Being addicted to something makes it difficult to imagine being without it, and the endorphine rush of high wire success and failure is what drives many entrepreneurs. Leaving a business means leaving it behind, or perhaps considering a sale to a rival company which will take the assets and customer contracts of the business in whole, and the team, and fold it into their own ambitions.  For some, this prospect can feel like failure. For others, it can provide an escape.  A realistic assessment of your own motivations and readiness is the first step in defining your future options.  For those seeking to stay in the business (irrespective of financial readiness which we cover next), partial sale can be the best option, a rolling employee stock plan which divests over time, or a management buy out which accomplishes the same outcome.  These latter options could, for example, include long term contracts whereby the founder can stay involved, but not interfere in the next generation’s continued ownership of the business. 

Is the business worth as much with me as without me?

For many business owners, their wealth is their business.  It provides them with a paycheck, dividends, and often a range of pre-tax perks such as telephones, leased vehicles and the like. These business owners tend to look at a business sale as an opportunity to gain access to this capital, and often cause the owners to (a) underestimate the impact that they personally have on the revenue and profit of the business, which can be a significant risk to an acquirer seeking to buy the business; and (b) overstate the value of the business as a going concern. Being financially ready to leave your business means understanding that your own financial needs are important to you, but not to a new owner or investor.  Put simply, if you don’t want to be in the  business post sale, then the business cannot be drawing any value from your involvement. 

Placing these two questions together provides four possible exit options for founders.

1. For those mentally ready to leave, and where the business can survive without them, either complete or majority sale is the best option.  You are either already wealthy and ready to move on, or ready to sell for the highest possible price to fund your next phase of life.  In most cases, the best buyer will be a strategic buyer; a company which needs what you have built and can quickly place it within its own growth aspirations and goals. Valuation will be maximized in this case.

2. For those not mentally ready to leave what they have created, but where the business could survive without them, you have a range of options.  These can include reducing your shareholding through sales to management via ESOPs or through buy-outs, or majority (buy-out) divestments to private equity groups seeking to leverage your wish to stay involved towards growth goals over a 3-5 year private equity hold period.  Value won’t be as high as option 1, but you don’t mind.  You are selling down, but staying involved, and that’s what matters.

3. For those mentally ready to leave, but where the business relies on them heavily, real patience will be required.  Sale valuations will be adjusted by investors or buyers through a process called EBIT normalization to remove any revenue or profit attributed to you, and it is likely valuation won’t meet expectations.  Sometimes it can be possible to sell the company to a strategic investor – perhaps a competitor or operator in an adjacent industry – who will value the team, your assets and your customers and may not need you in a leadership position anymore.  It is likely that a period of time where you will need to work in the new business however to bed the team and the customers in, which can be frustrating after being independent for so long. Value will not be as high as option 1, and a period of lock in will be required,

4. For those not mentally ready to leave, but where the business is maturing from being dependent to being independent on them, a partial sale can be useful and this is where growth equity can be most valuable.  Growth equity is a partnership between a founder or group of founders, and a PE fund which works with founders to scale and mature their business.  Provided that the partnership is strong, and established with trust and a clear perspective on strategy and growth, thee partnerships can provide the founder with a springboard to see the business achieve its true potential while still allowing them to lead it and be involved as it grows.

When we meet founders for the first time, we often advise two things. Firstly, the raise / divestment process is more about you than the business.  As can be seen above, the perspective of the owner and the strength of the connection between the owner and the value of the business are intertwined.  It is essential that we understand what you want to do, as well as the underlying financial health of the business and its customers. 

Secondly, if a partnership is the best option, then we need to be aligned on valuation but not driven by it.  Most private equity funds will, for example, adopt standard valuation metrics based on multiples of EBIT or revenue.  The quality of the partnership is far more important; how the fund will work with founders to support growth over and above “just money”; how the Board will be established and how decisions will be made; and whether the fund can genuinely help the company grow through leveraging their relationships in the market. 

Making the right decision on what to do next means being honest with yourself about your own readiness to leave your life’s work behind, whether your business can survive without you, and whether you are up for the challenge of growing and maturing the business any further than you have already accomplished.  What you do next is up to you.