How to cash in and sell out

An exit strategy should be part of any business plan worth its salt.

An exit strategy should be part of any business plan worth its salt. 

The process of commercialising an idea has its endgame built-in. Investors need to know when they will get their money back, and it is almost certain you will not be able to give it to them without selling the business you have created. So as your company scales up, you will tend to own and directly control less and less of it.

Because you are a full-blown innovation addict you will want to invest your money on a different ride anyway, to feel the rush of risking the unknown once more. There’s no such thing as a job for life any more, and you certainly didn’t go through all this in a futile attempt to create one, did you?

Timing is everything. You are the most important investor in your company, and you want to cash in at just the right moment. Getting this right is an integral part of the business plan, in which the company slowly stands on its own two feet, independent of your input and finances. Then you can walk away without it toppling over. For this to happen, you have to systemise the business and strip the personal aspects out of it so that anybody can take it over and run it.

“You need to plan your exit from the moment you turn your first dollar,” says Aaron Wallace of Hayes Knight. “You don’t have to sell, but you need to be in a position that you can sell when you choose to, at the price you want.”

Deane Purdue specialises in succession planning and holds special advice sessions and workshops with BNZ clients. “People don’t think about this early enough,” he warns. “This is just a human phenomenon. We tend to procrastinate and keep our options open. We don’t like to put them in writing, as that commits us. Things then get done by default, rather than by design.”

The basic tools are a written statement of your business plan, and your personal goals. Writing down what you wanted to get out of all this is important, as it is easy to lose sight of. You also need a basic safety net: an up-to-date will, the right level of life and health insurance and the appropriate insurance on the business itself and its operations.

If you don’t get this stuff sorted, bad things from the life you dimly remember—before all this started—can come lurching into your office and wreck what you are doing.

For instance, about one in three marriages in New Zealand ends in divorce. This even includes marriages where one partner hasn’t re-mortgaged the house they are now rarely seen at. And coronary artery disease is the cause of one in five deaths in New Zealand, so presumably you haven’t been under any severe stress while living on junk food and coffee lately?

On the other hand, wonderful things do happen.

Derek Handley co-founded The Hyperfactory. He and his team have not sold all of it, but they have managed to carve off a multimillion-dollar 19.9 percent stake for the US-based Meredith Corporation. It’s also easy to imagine him rubbing his hands in glee at the recent US$750 million Google buy-out of rival mobile-ad company AdMob.

“I used to look at New Zealand companies that sold out and think, ‘Why did they do that?’” he says. “But the ordinary person has no idea what it feels like for someone to say, ‘On Monday you could have $5 million in your bank, or you can keep working.’”

Assuming you don’t lose half to that bitch/bastard, you don’t drop dead next to the photocopier, and the man from Google doesn’t make you an offer you can’t refuse, how do you know when to move on?

Jonathan Kirkpatrick, former chief executive of AUT’s incubator, the Business Innovation Centre, has found that this can be tricky for some. “You can reach a point where the innovator says, ‘This is getting too big for me, I don’t have the skills to drive this any more,’” he says. “That is great self-knowledge. Normally people think they can take on the world, and they can’t. Most people have an inflated perception of their own abilities.”

If you have been leading the business properly you will have encouraged, supported and promoted people who are better than you at your job, and inspired them with such enthusiasm for the challenge that they just can’t wait to get started. They should help push you out of the door.

If you haven’t been doing this, you should leave the company now anyway, before you do any more damage to its future. Toddlers are obsessed with ‘I do myself’: you should have grown out of it a long time before now. Other signs that you should fall on your sword include spiralling costs undermining cash flow, falling sales and demoralised staff. Rough times are to be expected, but if this has come to be normal, you should get packing.

Purdue says, “You only have to spend half an hour in one of these organisations with a cup of coffee to see what’s happening.”

Whether you have personal, positive or negative reasons for wanting to sell up, you want to have a realistic idea of what the business is worth ahead of time.

You can be a genius at some aspects of entrepreneurship, but if you haven’t played a team game, you have fundamentally undermined your long-term return. If your entire business is predicated on your input as charismatic leader, the trust your contacts have in you, and much of the detail is in your head, then no matter how successful your business is, you won’t have much to sell.

Another way you can set yourself up for disappointment is to pull all the value out of the business and then try to sell the dried-out husk. Says Wallace: “If you are going to sell it based on profitability for the year, maybe times four, then for every dollar you take out now you lose three additional dollars you could have had at sale time.” So don’t snack—you’ll spoil your dinner.

The ultimate value of what you have to sell is, as always, as much as anyone is prepared to pay for it. There is a market for businesses, just as for everything else. Unfortunately, in recent gloomy years buyers have been relatively cautious and prices are low.

Whether you can buck the trend depends on what niche you have managed to carve out for yourself. But Wallace warns that too many entrepreneurs have wildly optimistic views of their business’s worth based on their unshakeable belief in its ‘potential’.

More often than not these days, the end is a little less dramatic than you may have envisaged. You will usually have 18 months or so of due diligence, sale process and handover. Depending on the deal you do, the new owners may choose not to take on your debt, your creditors, your tax liabilities, your property leases and more. What you may be left with is a ‘shell’ company that needs to be wound up properly, something that can take up to a year.

And there’s no reason why the change of ownership should happen overnight. Consider, for example, a staged management buy out. “You find a good manager and do a deal with them,” says Wallace. “They could buy a ten percent share every year for five years based on certain KPIs being achieved, and at the end of which they will control 50 percent of the company with a view to taking out the remaining shares. This locks in good staff, unlocks you from the business and gives you income in the meantime.”

It also gives you time to pack up your box of memorabilia, organise a farewell hoedown and work out what to do with the rest of the money.

Here is Hayes Knight business improvement director Aaron Wallace’s take on an interesting feature of the current market for businesses in New Zealand. It should be food for thought for would-be buyers or sellers alike.

“There is no really up-to-date and reliable research on the demographics of business owners in New Zealand. But our best estimate is that a major chunk of business owners are aged somewhere between 58 and 61. Everybody sells at some point, but because we are looking at the tail end of the baby boomers, this is creating a ‘succession wave’, with a lot of people looking to sell in the near future.

“That wave can be slowed or accelerated by economic factors like the recent slow-down, and we don’t know when the big surge of sales may happen. But it’s got to hit the beach sometime.”

What you are really selling when you sell your business

Your client database

This may be all you have. But if you have your data secured and organised in ways that can make money, it’s gold.

The intellectual property

To be valuable, your company cannot just be based on the exploitation of a single idea. You are selling your company’s future, not its past.

Your unique product or process

You may have made money by being a good practitioner of other people’s ideas or purveyor of other people’s products. But other people won’t need to buy your company to do that too.

The outstanding team of people you have brought together

Whether you have an internal successor or not, any buyer is going to want to know that there will be somebody left who knows how to drive this thing when you leave.

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