Advice for Entrepreneurs, Mergers and Acquisitions, Private Equity, Pre-sale Planning, Selling a Business
After years, and often decades, of building a business, the sale and transition from day-to-day ownership responsibilities are life changing events. With the sale comes liquidity and the freedom to pursue interests beyond the business world. The transition from ownership responsibilities can be dramatic, even for those owners who stay on with the business. One question we see influencing founder-owner decision making on a sale is essentially “what’s next?“.
Thinking through how we’ve seen our clients make this big step, there seem to be a few schools of thought and ownership patterns that businesses follow.
- Serial Entrepreneurs. These founders often take a little time off after a transition period with the new owner and then begin considering the next company they want to start. In general, these folks are notorious for overestimating how much time they want to spend on the golf course. The drive to get back in the game comes from something fundamental in their personalities.
- Baby Boomers over 60. These founders, who are in their sixties to early seventies, are often looking at full retirement. Many owners in this category enjoy the sense of purpose that comes from running their company. It’s a common theme for our clients who are in their late 60s and 70s. For these clients, family considerations are often in the forefront, as is thinking around succession planning. Nurturing interests outside the business can be an important part of the transition from full-time ownership responsibilities.
- The “Early Retirement” Crowd. Early-retirement is just that – the 50 year old founders who’ve realized enough wealth to take care of their families for the next generation or two and want to devote their time to personal interests, be that world travel with their families, skiing, golf, sailing, charities, or other endeavors. Some enjoy the activity that comes from investing in start-ups, doing real estate deals, and other investing activities that don’t demand daily attention.
- “Push it to the Next Level”. This group tends to be motivated by a combination of liquidity (taking “chips off the table”) and continuing business and career success. These owners want to be part of taking their business through the next big step (usually a dramatic growth strategy, sometimes with acquisitions) but also want to de-risk their personal financial situation. Selling a business to a private equity firm who can fund shareholder liquidity and acquisitions, while bringing powerful board relationships and strategy can be the right step to suit these goals. Sometimes a recapitalization is the right way to go. A large strategic can also be the right fit – bringing the founder’s business onto a global sales platform, or global distribution network, etc.
- The “Fixer Uppers”. These owners often bring financial savvy, operational turn-around experience, strong relationships with customers, or other skills to underperforming companies. Typically the “fixer upper” situation involves a business that has suffered a downturn, perhaps following the death of a founder, which leads to the business being sold in whole or in part to someone with the skills to fix it. The transformation isn’t always quick. While the turnaround horizon that most readily comes to most people’s minds is the “90 day plan”, once the business is stabilized, rebuilding can take several years. These owners combine the short-term focus to right the ship with the mid-term patience to lead the team to a safe port. The “fixer upper” investor shares a lot of characteristics with the serial entrepreneur. Once the business is back in shape and successfully sold, the investor starts looking for the next opportunity. Investors in this market often benefit from long experience with multiple businesses over their career. Their “next thing” tends to be the next deal.
- The Dysfunctional Team. Sometimes businesses start off on the right foot with a team of founders who, along the way, develop differing goals and priorities. Some shareholders may want to see free cash flow invested in growth while others want dividends, some may have a very long-term view of the business while others are more in the “build it to sell it” school of thought. This situation is often the most difficult to work through. If you see yourself in this category, you’ll likely want to take careful steps. If the rules of the road for decision making around a sale aren’t clear, the business runs the risk of falling into litigation among shareholders.
- The Junior Partner. We often see this in businesses with two principal shareholders – an older founder with a background in the industry, teamed with a younger partner who brings energy and tech savvy to the business. The junior partner may own a small minority of the company, or may be equal or near equal partners with the senior founder. For the junior partner, a trade sale often represents some personal liquidity and the opportunity for a career with a larger organization, but also represents the loss of “optionality” – the chance that the business, left to pursue it’s own course, could have hit it even bigger. Sometimes, a buyout of the senior partner is the way to go in these situations. The “what’s next” for the junior partner is then a combination of increased ownership, sometimes from a minority to majority position, and the opportunity to run the show, often with a less risk averse capital partner to help fund growth and acquisitions.
Each situation is as unique as the people involved and the businesses they lead. Thinking through which of these groups your situation most closely resembles (and I’m sure there are more than I’ve listed here) can significantly help with planning around your post-transaction life.
Alan Fullerton is a partner with Mirus Capital Advisors. He works with owners of middle market businesses and can be reached at firstname.lastname@example.org.