Exit Strategies: 4 Roads To Letting Go
Selling your business can take many twists and turns
As discussed last week, when considering an exit strategy there are four basic ways to leave (or transfer) a business: 1) to heirs or family; 2) to a key employee or team; 3) to an outsider; 4) to no one, by shutting it down.
Before exploring each approach, a few thoughts. First, as a business owner, you face several strategic options. Do you want to sell 100 percent, take the money and run? Do you want to keep your hand in, help guide the firm during its transition? Do you want to retain an ownership percentage to supplement your retirement fund, make a loan to the buyers to provide an ongoing source of income?
Second, no matter which person or organization you transfer the business to, there is the question of valuation. How much is it worth today? Should you invest in remodeling or upgrading before putting it on the market? If transferring it to your family or heirs, should you give them a break? Many choose to sell at full price - to anyone, family included - since the new owners will have a chance to build the business, and this is the seller's last shot at amassing money that will have to last the rest of their days.
Also remember that, in any sale, franchisors usually have a right of first refusal in the franchise agreement. This can play a role not only in determining the seller, but also can affect the final selling price. Communicate with your franchisor early to ensure you are able to carry out your exit or transition plan as to your best advantage.
1) To heirs or a family. For many business owners, the ideal choice is to keep the business in the family. In fact, many businesses are started with the express purpose of leaving a legacy to their children, of giving them a career path to grow into. Unfortunately, the statistics on this option succeeding are not favorable, at least according to two sources that study family businesses and transition planning:
- Two thirds of family businesses fail or are sold out of the family after the founders leave the company. And by the third generation, just 15 percent still exist as family businesses. (Family Business Center, University of Massachusetts at Amherst).
- Eighty-five percent of business owners want their business to continue in the family. Yet only 30 percent of family-owned businesses transfer to the next generation; and of those that do, fewer than half (45 percent) will be in business three years later. (Avastia Business Transition Team)
Keeping the business going, seeing their creation live on, is almost always the wish of the founder or owner. Yet, as the numbers show, many challenges stand in the way of achieving this goal. Business succession experts tend to agree that the main obstacle is not financial or legal, but inadequate planning and preparation of the younger generation. How do you train your successors to run the business? How much of the enterprise is built around you as the voice and face of the business? Do your kids have a head for business, your sense of the market, your flair for making deals and for keeping customers happy?
2) To a key employee or team. Who knows more about your business than the people already managing it? Turning it over to an inside individual or team makes great sense in theory, and often is the path of least resistance. However, when pursuing this approach several issues can get in the way. First there is money: if the management team cannot afford a clean buyout, are you willing to finance a sale, or would you rather exit completely by selling to outsiders? Second, is there someone on your management team who can step into an executive role? Being an executive and leader is not the same as being part of a management team. And if you've run the company as your own, creating a culture to match, can a multi-headed team create the same results?
3) To an outsider. Many options exist here, including selling your units back to the franchisor. Other potential outside buyers include venture capital and private equity firms; existing franchisees (often people you already know and trust, and who understand the business); new franchisees; and, increasingly, multi-unit, multi-brand professional management companies that acquire franchise units to create a diverse investment portfolio.
4) Shut it down. Sometimes there just isn't a buyer, and even the franchisor isn't interested. Perhaps the demographics of your territory have changed, and the customers have departed; or the cash flow to keep the business viable is longer there; or perhaps time has passed by for the brand, service, or product. There can be many reasons for not finding a buyer. In these unfortunate situations, it's time to dissolve the business and get as much as you can for the assets. If there is real estate involved, some owners keep it as an income stream, or negotiate a phase-out, say over 5 or 10 years, to facilitate the sale.