Evaluating Your End Game

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Larry Grypp, President of The Goering Center
January 2017

“What is your exit strategy?” That is an expected question for any company seeking seed money, venture capital or private equity. Not only does it clarify when and under what conditions the investment may be monetized but it also signals a discipline, and focus, about the end-game.

Ask that same question of some family businesses, and you may get a blank look.

Exit? No, I plan on running this for a long time, or pass it on to my family. The notion that they might exit the business is new.  Family businesses, by their nature, lean toward retaining ownership in the family instead of being sold to strategic or private equity buyers. Some of that is rooted in the sense of family legacy and wealth built up across many years; some of it, honestly, is emotional and sentimental.

Therein lies the rub. To not have exit strategies is actually to put wealth, legacy and family harmony in peril. And note that strategies is plural.

If you were focused on a sale to a strategic buyer, your concentration would likely be to develop capabilities that would be attractive to a major player in your space.

Similarly, if you were leaning toward a sale to private equity, you would need to focus on the success measures for those investors -- perhaps increasing recurring revenue, market share, cost management and capital planning.

If you were determined to pass the business along to the next generation, you might focus a great deal on developing the management skills of your family, or building up the market value of a family-based business brand.

None of those areas of focus is mutually exclusive. Most embrace good business practices. But clearly, you do lean one way or another if you want to realize the greatest value from whatever your exit event turns out to be.

And turn out to be is often what is missed.

If you were focused on developing the leadership skills of your next family generation but, for whatever reason, you needed to pursue a strategic sale, it is unlikely the new buyer would keep that family management team around. Lost value. As well, the investments and effort to drive valuation alone in hopes of an outside sale can be ill-advised if the business stays in family hands with a long-term focus.

So, there are two mistakes one can make when posed with the question of “What is your exit strategy?”  The first is to not have an answer at all. The “exit” need not be an end to the business, but there is a clarity of purpose that comes with a definitive transition in mind.

The second mistake is to commit too early to one course. As Scottish poet Robert Burns wrote “The best laid schemes o' mice an' men often go awry...”  Family members may decide to stake their claim elsewhere; major players can come into a market and diminish your differentiator; private equity might ask too much of you or threaten your legacy and management team.

Transition planning -- perhaps a more accommodating term than exit planning -- is an options play. It is a matter of staying open long enough to measure the success factors that apply to each business purpose, whether it be retained family control, private equity infusion or an outright sale.

While the Goering Center certainly is dedicated to helping family and private businesses carry on through generations, we are equally committed to helping them weigh the optimum exit strategies at the right time. You need not commit early to a particular exit path, but it’s crucial to understand the considerations and consequences of each -- and stay open to them as long as possible.

Over the last few years we have been asked to develop an educational program to provide insights on the various transition options available to private and family businesses.  We are answering that request with a new multi-day institute starting this April.  “Evaluating Transition Options" will take place over three half days on April 27, May 4 and May 10, 2017.

Enrollment will be limited to 20 businesses. To learn more, contact Lisa Jonas, Director of Operations & Programming, at 513-556-7403.