So you’ve worked for 15, or 30 years, or more, or you’ve taken over this business from your family, and it is thriving and successful. On a regular basis, private equity, other investors or even other corporates want to meet with you to discuss buying a stake in your business.
How should this situation best be managed? Should you have a family business exit strategy?
The answer to this question depends on your situation. If you enjoy working in your family business and owning it and controlling it completely, then having an exit strategy may not be a priority. The cash flow your business generates is allowing you a very nice life style, or may be making you really rich too. Why let somebody else in on such a good deal? And why deal with another co-owner or partner?
Reasons to keep 100% of your business:
- The first reason is to keep full control. Why have to debate strategic decisions with another person who may have diverging interests?
- The returns are so good, you wouldn’t get as good returns in another investment. By the way, this business is what you do best, so you keep your capital in it and stay focused on getting the best return on your capital.
- The business valuation is just not where it should be or at least not where you would like it to be for you to be comfortable to share control or to find an alternative better use of your capital. (Read more on the importance of business valuation in my next blog.)
However, there are several circumstances where it may make sense to plan an exit from your family business by selling off either a minority or a majority stake in one or more transactions over time.
Reasons to let investors in:
- Get some chips off the table: Things are great today, but will they always be this good? No one knows what the future holds… What if a new technology comes in? Or foreign competition crushes margins? What if there is a change in the market? Or if you or another of your key people become incapable of fulfilling your responsibilities in full? Hedge your risks, protect your down-side by getting a nice amount of cash out of the business now, and keep the full upside on the remaining majority stake.
- Do you want to penetrate a new market or develop a new market but do not want to put more money into the business? Similar to the scenario above, you keep some of your spare cash and let another party share some of this new development risk.
- Get a fresh pair of eyes looking at your business. These seasoned investors have seen more businesses than you will ever get the chance to see. They may know something you don’t know about the competition, market trends, or the most optimal way of cutting costs or expanding the business internationally.
- Governance: Yes, having an extra person on the board (or having a board in the first place) may be a nuisance when you are used to calling all the shots. But what about the benefits this brings? Jim Crocker wrote about Corporate Governance for Private Business here, and Nasser Saidi Blogs on Corporate Governance here.
If you decide that now would be a good time to start preparing an exit strategy for your family business, here are some suggestions for doing it right:
- Find someone you feel you can trust and get along with. This is your business and you need to have an alignment of views with your investors. They are not just bringing money, they should also be adding value in other ways and you need to enjoy their company.
- Make it clear that you are still the boss: They know that already but you will feel better by reinforcing the point.
- Explain any no-go areas and deal breakers early and agree on them upfront: No Separation of Chairman and CEO roles? Any key decisions you need to retain full control on? Branding issues?
- Make sure you get the right financial deal. Hire an independent financial advisor to be your personal consultant on this matter. I will be writing more on the best way to choose advisors in the near future.
My next blog will deal specifically with the importance of business valuation to any family business exit strategy. In the meantime, you might find it helpful to download a complimentary copy of the 17 questions every business owner should know the answer to with respect to business valuation and exit planning. The following video will provide you with more information about this series of three blogs.
In case you missed it, here’s a link to the first blog in my series, Why Business Valuation is Essential for Strategic Decision Making.
As always, I welcome your comments and questions below.