It’s exciting to start your own business and see it grow, but what happens when the owner wants out? Here are four ways to exit gracefully and for which companies these strategies work best.
Especially in the East, some businesses are created as a family effort. Because it is a labor of love, current owners find it difficult to exit the business completely. Instead, they turn over handling day-to-day aspects of the business to trusted relatives.
Succession planning works well for businesses grooming younger members to take over. Said members must be involved in the business before the current owner’s departure to be mentored and build rapport with management, customers, and suppliers before the actual turnover. This transition period also gives time for everyone to get used to the changes; the last thing an organization wants is a loss of confidence in the business due to a change of leadership.
Current owners may retain a chairperson or advisory role even after succession to ensure a smooth transition, so long as both parties, even after succession, navigate the tricky dynamic personally and professionally among family members. While keeping the business in the family is highly preferred, it is not for the faint of heart.
Sometimes one need not look far to see who to turn the businesses over to; the best people might be under their very nose. A management buyout is when internal management pitches capital to buy out the current shareholders. This is a great exit strategy for businesses with no clear succession plan but developed a high-involvement management team. This strategy also ensures that succession planning is merit-based–only the best within the company, regardless of relation to the current partners, are eligible for this promotion.
A key benefit to a management buyout strategy would be the owners’ level of trust in the people taking over. These people are tried and tested; keeping them would also keep the culture, work environment, and even trade secrets of the business intact. Aside from the owners’ buy-in, a management buyout would, more often than not, receive consensus among staff as they work alongside them day in and day out.
The challenge lies in developing talent ready for this jump. Not everyone has the talent pool or resources to pull this off once it is needed. But those that do can see that a management turnover is a smooth way to exit the business without disrupting morale. A buyout results in increased ownership and loyalty among staff towards the company. Who knows, the new owners might want to keep their old bosses on board as advisors as well.
Acquisition generally refers to the partial or complete ownership of a company by an external company through purchasing shares or assets. This could be done privately between companies through mergers and acquisitions or publicly through an IPO.
Best for companies with big growth or innovation potential, the strength of acquisition is obtaining ownership and funding through like-minded individuals. Companies with similar goals are likely to acquire or invest in others of a similar nature as they play a strategic long-term role with the mother company, whether it be to achieve synergies or grow in market share. On the other hand, IPOs allow companies to expand their funding sources publicly by engaging individuals who would like to invest in their growth.
A big benefit to this exit strategy is owners get to end on a high. Because a company acquisition plays on the company’s strengths, owners can negotiate the price, terms, and details of the sale. If they play their cards right, owners can also negotiate their level of involvement and its flexibility after the acquisition. Meanwhile, companies undergoing IPOs leverage the industry’s strength as stock prices are benchmarked against market standards.
However, only 20% of acquisitions come to fruition, so it’s best not to put all of its eggs in one basket if the company is itching to get sold. IPOs also have to deal with increased audits, compliance, and reporting to go public. The costs involved with compliance may be too high for smaller businesses.
The simplest solution is to close up shop. Liquidation means selling assets for cash and ceasing day-to-day operations. This exit strategy is best for companies not doing as well financially or without a clear succession plan. While it is simple, liquidation is one of the most disruptive strategies as it affects the business’s relationships with its suppliers, customers, and even its employees. However, it only stops future transactions; the business is still obligated to use its cash to fulfill its payables. As such, don’t expect high returns on this option. The goal is simply to be cost-neutral once fully closed.
It can seem extreme but, rest assured, this does not mean the business failed. For those who do not see a future for their business, liquidation may be the best option to close this chapter.
Every new beginning comes from another’s end. Deciding on ending one’s ownership of a business isn’t easy, but depending on what kind of company will be left behind, there is always a good way to end gracefully.
For businesses with a clear plan as to who can take over the helm, a good strategy would be to either execute a succession plan among family members or seek a management buyout. An acquisition–public or private–would be the best bet to leave the company in good hands for those looking externally. And for those looking for a quiet and conclusive end to the business.