So you want to exit your business. You’ve worked hard for many years and you want a change. Maybe you want a change of pace, or to take a rest, or maybe you want to look at another venture using the cash from the sale to finance it. Whatever the reason you want to exit, you want to do so profitably, with as few problems as possible.
Maybe you have been approached by a larger company or even a corporate and what you have seen so far looks attractive. Selling to a corporate has its advantages. There is little risk that the sale won’t be completed and little risk the money won’t be paid out.
However as you read through the agreement you see that the sale is in two parts. An amount paid out on signing followed by a second amount a couple of years later subject to the business achieving a certain level of profitability. Also you are required to stay on (often as CEO) to lead the company to achieve the set target.
Sounds like a fair enough arrangement and one that in many cases has resulted in a good result for both parties.
However there can be fishhooks. In this article I look at three potential fishhooks and conclude with an exciting alternative exit approach.
Fishhook 1. You lose control of the chequebook
Since you have sold the business, you no longer have full control over your bank account. You are still required to achieve the agreed target, but the expenditures you would have made in the past without thinking, now have to be approved by the new CFO. Now no one doubts that CFO’s understand how companies work, but your new CFO may not grasp the ins and outs of your unique company, nor understand the particulars of the people you deal with and have dealt with for years. And so he vetoes your requests for expenditure. Or the delays in gaining approval mean the opportunity passes you by. How can you be expected to achieve the target while you are denied the means to achieve that target?
So in two stage purchases you want to hang onto the cheque book.
Fishhook 2. Your advice is ignored.
Should you be required to stay on not as CEO but as an advisor, or as a salesperson, then it is even harder to ensure that the company reaches the agreed target on which the additional sale amount is based. The people responsible for critical decisions may not accept your advice! Worse still, they may even act contrary to your advice to prevent the company growing until after you have exited fully.
Then once you have departed, they apply your ideas, the company succeeds and they gain all the accolades! You might think this is counter intuitive. Why would someone not what the company to succeed? Certainly not an SME owner! Precisely! The person now running your company is not an SME owner. S/he is likely to be an ambitious corporate manager, and your company is simply a step up the ladder in their career objectives.
Fishhook 3. No benefit from future earnings
The purchase price of your company is usually calculated on past performance rather than on future earnings. Yet the best years may be ahead. Especially if the buyer makes available the resources a corporate owner can bring. So it can be rather demoralising sitting round a table trying to persuade a purchaser to value your vision of the future. Even if there is a two stage purchase, with cash now and the balance once the business has achieved a certain target, that target is rarely calculated on the company reaching the potential you believe it could with the additional resources. So while you may be hoping for a great price, you don’t really want to sell until you have that great year - but that may be difficult without the benefit of the corporate resources.
But, there is an alternative exit option - Agglomeration.
What if you could trade the shares in your private company for shares in a big publicly listed company (PLC) and still keep full control of your business - and benefit from any future increases in company profit? What if doing so were to only take a matter of weeks with no upfront fees?
In the alternative exit option you do not lose control. You remain as CEO and retain full control - of the chequebook and of how to make best use of the resources the PLC brings to your company. You get to make all the strategic decisions about your company. Further you get all the benefits of being part of a global PLC - collegiality with some of the brightest entrepreneurs in your industry and outlets into markets you never thought possible.
Moreover, you get to trade future earnings for more shares in the PLC. Then, when you wish to exit your business you can do so at your leisure. Simply replace yourself as CEO and sell shares or retain them and earn dividends.
While taking a different route to listing, an agglomerated PLC retains all the elements of a listed company, and comes under the same jurisdictions. However, an agglomerated PLC usually has no debt, is directed by entrepreneurs and makes substantial profits. So agglomerated PLCs are highly sought after by investors.
You can find out more at www.agglomeratebiz.com
Agglomerate Your Business brings together three leading New Zealand business coaches who believe that entrepreneurs are the change makers in the world and that there are 'millions' of good small businesses run by entrepreneurs that deserve to have a level playing field with the big boys.