What’s your exit strategy?

By: Mike Southon

Date: 13 July 2011

Recently, I have been spending quality time with people who have been offered large sums to sell their very successful companies.

The mentoring I provide is not about the complex technicalities of a trade sale. They are already receiving the best possible advice from finance professionals, who are negotiating with the prospective buyer on their behalf whilst also ensuring the entrepreneurs’ own personal tax affairs are in order.

Rather, I help them cope with the emotional impact of selling their company, based on my own experience in 1989. We had found ourselves in this enviable position only five years after starting the company. This was a combination of our highly focused sales activity in a booming niche market, a good hiring policy and strict financial controls.

My co-founders had allowed me to ramp up revenue year-on-year, while they quietly prepared the company for a potential trade sale by hiring the best advisors from day one. When the big offer arrived, the purchasers were able to act swiftly and ethically; the entire transaction lasted no more than a few weeks.

Not everyone has had this positive experience. I have heard many tales of unscrupulous purchasers enticing their smaller competitors with promises of great wealth, only to draw out the process as long as possible before finally offering a derisory offer.

It then transpires that the real reason for their supposed interest in acquisition was to find out competitive information from the smaller company. The process of due diligence distracted the principals of the company from their day-to-day business and revenues soon suffered. This eventually made them desperate and sometimes willing to accept a much lower offer, out of desperation.

There is a much more ethical path. In the heady and euphoric early days of a potential acquisition, both sides should agree an abbreviated timescale for the process. The smaller company should also receive a non-returnable deposit on the transaction, in exchange for exclusivity of negotiation for a limited period.

This should be reasonable to any potential purchaser who should have already done their homework on the company to be acquired, putting a specific financial value to their assets of the company as well as their client base and associated goodwill.

But even such a swift and ethical acquisition will have some emotional fallout for the entrepreneur. For them, the process of selling their company can be best described as like a bereavement.

Their valued and much-loved staff will likely be upset or angry when suddenly finding themselves part of a much larger organisation, especially one who was previously a fierce competitor.

There is a less painful way for founders to exit their companies. To grow a company past thirty people requires the hiring of industry professionals; I often call these people ‘grown-ups’. They will put in the procedures and processes required at this stage, often curbing the excesses and unprofessionalism of the founders.

These ‘grown-ups’ are usually ambitious people with the right skills to grow a company to 150 people and beyond. They also speak the same language as private equity professionals and are the right people to arrange a management buy-out or buy-in.

The inward investors will feel more comfortable negotiating with these seasoned professionals, rather than the unpredictable entrepreneur, who can make a dignified exit while still watching their ‘child’ grow into maturity from afar.

The best advice I can give to anyone thinking of exiting their business one day is to hire these ‘grown-ups’ and let them get on with growing the organisation professionally. Eventually, you will be able to sell your company to people you actually like.

Originally published in The Financial Times. Copyright ©Mike Southon 2011. All Rights Reserved. Not to be reproduced without permission in writing. Mike Southon is the co-author of The Beermat Entrepreneur and a business speaker.