Most successful entrepreneurs are visionaries who can execute. But not all successful entrepreneurs know how to maximize their enterprise value and their own financial success when they exit. That was my case, because I was a serial entrepreneur who focused on operations and building great companies. After becoming an investor, there are some perspectives I wish I knew better while exiting my businesses.
While selling your business and deciding how to exit it may sound like a question for CEOs of the largest corporations, the question of how to do it should be at the top of your mind and relevant for any business owner. This is equally true for founders of small businesses of less than 500 employees that make up the majority of companies in the U.S., according to the U.S. Small Business Administration Office of Advocacy’s Economic Bulletin Report for December 2022.
There are some well-worn options that come to mind when it comes time for an owner or founder to exit their ownership in a business: a merger, private equity buyout or initial public offering. Not surprisingly, the number of options that most owners consider is limited. As an entrepreneur, one doesn’t often get much advice without asking.
To be sure, many business owners have had plenty of distractions over the past two years while running their business: a global pandemic, supply chain disruptions, geopolitical conflict and volatile capital markets. Even though the severity of some of these issues has started to diminish, today’s entrepreneurs may not see other ways to grow their business without cashing out by selling their own business.
Know Your Options
One option a lot of owners may not consider is selling a minority interest in their business in exchange for receiving a “structured capital” investment – a hybrid combination of debt and equity capital – and subsequently becoming a platform company and partnering with a private capital firm. Bringing in an outside investor can be exciting, profitable and a good decision for CEOs who are vested in their business’s future success.
Timing is Key
Recognizing there are a myriad of considerations involved in even selling a partial stake in their company – the best time to think about selling is when the owner has grown 70 percent to 80 percent of their business by themselves. But the worst time to sell and raise more capital is when your business desperately needs more money. If an owner teams up with the wrong partner out of a sense of urgency, they may not feel like they have the same autonomy in running their business as before. And, selling in the wrong market environment may not result in an owner realizing full liquidity on their investment.
In 2022, for example, the valuations for many privately held businesses declined and many sellers put their liquidity plans on hold. Similarly, the number of IPO offerings declined by 45 percent, according to Ernst & Young’s EY Global IPO Trends 2022 report. It’s worth noting that pursuing an IPO has become increasingly expensive and difficult for all but the largest, most well-heeled companies.
Why Structured Capital?
As a hybrid credit and equity investment often comprised of junior debt, mezzanine debt and/or warrants that convert into equity, choosing a structured capital investment that’s non-control and non-dilutive in nature would seem to be a “no-brainer.” But it’s still surprising how many entrepreneurs aren’t aware of this type of investment.
If these owners had turned to structured capital and became part of a firm’s platform company it could be used to support their business’s growth opportunities, such as the development of new products, geographic expansion, opening of new offices or financing the hire of additional sales, marketing or executive talent. Becoming part of a platform company is a good option for growth – if it’s done with good guidance and in the spirit of collaboration.
Be Prepared For The Aftermath
When selling a business most owners struggle with experiencing a poignant ‘what now?’ moment. I know, I’ve been there.
The sad truth is life as an entrepreneur can be lonely – while many share the glamour of success, few tell an owner what it’s like to sell a business or how many fail after trying to launch their second or even third business.
You must know that an owner’s identity and involvement in their business is personal – when that livelihood and your experience running a company for several years is suddenly gone, it can be a difficult and traumatic experience.
Fortunately, becoming a platform company of a firm that invests structured capital enables an owner to take some chips off the table, realize partial liquidity and fuel their business with new capital for pursuing growth, while allowing an owner to still have “skin in the game” via equity ownership and the purpose that comes with running a business.
The Road Ahead
In my experience, the best time to think about selling a business or finding a good private capital partner is when your business is operating at about 70 to 80 percent capacity based on what you, as owner, have done to build your business. Becoming a platform company can be an effective means for driving growth and generating value creation.
Lastly, we can reasonably expect that America’s small and middle-market businesses will continue to attract plenty of interest from private equity and strategic acquirers alike. Thus, it’s imperative that founders take it upon themselves to explore all of their options to realize liquidity and not just the most common avenues for doing so.
