Protecting your legacy can be hard. Some small-business owners may plan to pass their company on to a family member, while others may have little choice but to liquidate a failing enterprise.
A bigger proportion, however, will sell their business on the open market. Deciding when to do so is a major decision with many factors to consider, with many owners concerned about the fortunes of their business after they sell – their legacy, in other words.
Stick or twist
In many ways timing a sale is a game of stick or twist. Your business might fetch £100,000 now, but what if it’s worth double that in five years’ time?
But there’s no guarantee your business will grow in value. Indeed, your fortunes could reverse – be it through falling demand, rising supplier costs or an economic crash – and it could actually shed value in the years ahead.
Young, possibly child-free and often with little to lose in terms of assets, start-up entrepreneurs are famously liable to take risks, as they must be to establish a new business in the first place.
As the years pass, however, they often become more conservative and risk-averse. If they’ve established solid revenues, a valuable asset and a team of employees who depend on them for their livelihood, not to mention perhaps having children and being closer to retirement, they might feel they can no longer afford to make bad decisions.
If this chimes with your situation, then you might decide that the business needs an injection of fresh ideas and bold decisions to take it to the next level, or even to survive in the long term amid changes in technology and consumer habits. Perhaps only a new, hungrier owner can make this happen.
Time for a change
A successful business can take many years and considerable effort to build. It’s hardly surprising then that many entrepreneurs eventually feel burnt out by the experience and yearn for a different challenge or simply a rest.
So whether your inclination is to retire and spend more time with your family, or to fund a new venture, it’s wise to exit the business if you feel your energy, passion and motivation have waned.
Sell on your terms
Plan your exit strategy in advance and you can sell the business on your terms and at a time of your choosing. And yet for all the benefits of doing so, “owners of closely-held businesses rarely have a succession plan in place,” said Clinton Lee from UK Business Brokers.
“Progeny are often uninterested in pursuing the family business or they lack the requisite skills,” he continues. “But founders/owners are often tempted to fit the proverbial square peg into a round hole as they feel unable to trust a stranger to run their business.
“The owners’ only other alternative to unsuitable family members taking over is the even less attractive option of liquidation.”
Is there no other alternative for protecting your legacy? Yes, says the broker.
“When faced with this dilemma, it may be worth taking professional advice on strategic options,” he says. “A proper analysis will lead to the realisation that the owner’s longer term financial interests are best served by selling part of the equity in a planned and carefully executed exit.
“Just the suggestion of outside involvement, or worse, giving up control of the business is anathema to small-business owners who are typically worried about damage to their legacy. But careful consideration and proper planning can deliver the best of both worlds.”
The broker suggests the following options for protecting your legacy and retaining some control or influence as you withdraw from the business:
1. Protecting your legacy with in-house succession
“If time permits, it may be worth positioning the business for succession by investing in the development of robust in-house leadership skills. This can lead to an eventual management buy-out (often with outside finance) where the firm continues to run with the ideals and principles instilled in the staff and management, and the owner walks away well rewarded for the business he or she built.”
2. Selling in stages
“Owners could consider letting go of the company in stages to a pre-agreed plan. In fact, buyers often have a preference for such an arrangement and can be persuaded to pay a price premium for the reduced risk such continued owner involvement guarantees. The ultimate in such partial sale strategy – to ‘take a bite out of the apple’ so to speak – is a sale to private equity.”
3. Private equity
“Private equity firms typically buy minority stakes in businesses – say 30 per cent – and assist the business to grow to about 10 times its size in circa five years, at which time they would seek to exit. This presents the founder with an ideal opportunity to sell 30 per cent of the shares at today’s valuation, retain control for a few more years, and sell the remaining 70 per cent at a much higher valuation based on the 10 times’ growth.”
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