Entrepreneurs feel emotionally committed to companies. It is difficult for them to think merely in economic terms. They perceive business as a child. They give birth when launching a venture. Increasing independence might be paralleled to infancy. When the child grows up, they essentially need to let go, which is defined as entrepreneurial exit. Similarly, if a business fails it constitutes as losing their child. The sale of a business refers to giving up business for adoption that, of course, involves a lot of strong emotions.
There are many strategies to exit the business, varying from giving it for family members (succession) to going public. When valuing a company for the exit economic, as well as additional factors play a crucial role. Because of personal commitments, entrepreneurs usually overestimate their business. One should choose an exit strategy that makes sense personally and economically. Key considerations such as firm’s capabilities, goals and potential changes in social relationship needs to be taken into the account.
Family business successor
Successor is an individual who want to play an active role in the business and must be suited for the challenging task.
The reasons why entrepreneurs choose to transfer ownership to members of the family are identified as following:
- These persons have often helped to build the company
- They already own a large block of shares
- Family members have trust and confidence of entrepreneur and know company well
There are different ways to transfer ownership. One could begin by gradual manner, form a limited partnership, translating majority of shares but act as general partner retaining control over the day-to-day operations. Entrepreneur may also set up trusts (agreements between entrepreneurs and trustees). Trustees receive legal title and hold benefits of trust while entrepreneur retains control for limited time. This depends on goals and relationship with family member and various tax considerations. One should seek expert advice before proceeding. Succession plan is adopted to the time entrepreneur is ready to transfer ownership and control.
It may prove to be challenging to pursue a succession because entrepreneur feels organisational commitment to remain and direct the future. Emotional commitment involves the fear to lose identification with the company. Normative commitment is identified with feeling an obligation to remain. Calculative commitment is a feeling when one fears to lose valuable investment and reward. Lastly, imperative commitment is related to belief that they’ll may not have comparable career opportunities if they decide to leave the company. It is also often difficult to name a successor.
Valuation becomes crucial when a group of potential buyers show interest in a company. These could be direct competitors who seek to expand their market share, non-direct competitors who wish to enter into the market, or companies who perceive your firm as a good opportunity to invest their surplus cash and management skills. Managers also could become business owners. They understand the products, finances, structure and prospects for the future.
Company’s acquisition involves hiring a business broker that specialises in arranging of sales of existing business. If business is large, this may require an investment banker services. It also involves preparation of selling memorandum, which is a marketing document designed to attract interest in business.
This constitutes as a good strategy as business becomes part of larger company. Costs can be greatly reduced or eliminated. Economies of scale and scope are likely to be benefited from.
This marketing document should put business in positive light but stay accurate and do not exaggerate. Companies should seek to achieve mutual trust.
Selling memorandum should have a sense that company’s house is in good order before putting on the market. This constitutes:
- Right stage of development – growing rapidly but not yet reached peak.
- Business cycle is strong
- If entrepreneur is leaving, there is someone to replace him
- IP is identified and protected
- Transparent and conservative accounting policies are appropriate to business sector
- Any open questions that might make it difficult to estimate value (tax, compliance and legal issues) are resolved
IPO (initial public offering)
Not a lot of companies go public. If you’re funded by professional investors with a track of record of taking companies public, you might be able to do this. It has a large preparation cost and effort to convince investors your stock is valuable. Initial public offering also involves a lot of financial analyst work. There are also fees to pay investment bankers and lock out period that constrains one from leaving for a certain period of time (90-180 days). Once you’re public, every move is studied and outsiders might signal incompetence even though the company is in perfectly healthy shape.
This is a very valuable form of funding. It also ensures venture capitalists retain shares value when lock out period expires. However, Only a few companies are successful at IPO. They also need to provide financial and accountability reports regularly. It takes a lot of time to prepare it that prevents you from actually running a company. Investment bankers take 6% off the top. Their transaction costs conclude in millions. After lockout period expires, your stocks become worthless.
Baron, R. and Shane, S., 2007. Entrepreneurship: A process perspective. Nelson Education.