Succession, or exiting your business is one of the most difficult decisions you’ll ever make. So how do you know when the time is right? It’s likely not going to be when you think so one strategy is to always be ready for the conversation.
This topic came up recently in a Small Business Administration class I teach for entrepreneurs and we were talking about the different stages a business goes through. According to an article from the Harvard Business Review called, “The Five Stages of Small Business Growth,” Stage 1 is “Existence,” characterized by the owner doing everything and existence is really day-to-day. Stage 2 is called “Survival” and is all about getting customers, people and systems in place. Stage 3 is what they call “Success” when there is a relationship between revenue and expenses. You’re not worried about going out of business and you have people to delegate to – in other words, the business is not wholly dependent upon you. For most entrepreneurs, these are the three stages you live in, going forwards and backwards through them depending upon internal and external circumstances.
Stage 4, called “Take-Off” is where the question of succession pops up. The business is mature. Systems, operational and strategic planning are a part of the process, and the business is well established. You can use the business as a platform for growth or you can sell it.
Stage 5, “Resource Maturity” is when the business is firmly established and the owner and business are quite separate. The question here is whether there is enough to keep the entrepreneur engaged.
So again, how do you know when it’s time to leave or sell? First, I encourage entrepreneurs to examine their appetite for growth. If you think you have another 3-5 years leading the business through a heavy growth phase and are excited about the journey, by all means, go for it. However, if you’ve had a good run and think it’s time you gave the reins to someone else, start that process.
Often it’s not when you are ready, it’s when someone else is ready to acquire you. A strategic sale like this usually commands a higher multiple than an individual or outsider sale. It’s good to be prepared when these opportunities come along, because they are usually the ones that will be best for you and the company. You are worth more to someone who can leverage your platform, (products or services), or your client base. What can happen is that when these deals come along, the owner is not prepared and then thinks the value of the company is “x” and believes that by waiting it will become “x squared.” This does not usually happen. The owner is then left with regrets about not taking the deal.
The key to being ready for the sell is to have thought about “what’s next” for YOU even before the opportunity arises. If you don’t have this vision, no matter how great the opportunity is, you’ll pass on it. I’ve seen this play out multiple times. So spend some time on “what’s next” for you, and you’ll likely be ready when that strategic buyer shows up. This doesn’t mean you should not enlist the services of a good investment banker, or broker to help you through the sales process. Always hire the experts to do what is not an area of core competency for you. (Remember this is usually the rationale you use with your clients about why they should buy from you!)
The more you have reflected on what’s next for you, and the more you have prepared yourself mentally and emotionally, the more likely you are to make the right deal at the right time and exit your business with maximum success.
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