You’ve built your baby from scratch, but when selling, it may be better to extract yourself from the business’s value. By TOM McKASKILL.
By Tom McKaskill
You’ve built your baby from scratch, but when selling, it may be better to extract yourself from the business’s value.
Few entrepreneurs are willing to admit that they may be more of a liability than an asset to a future buyer of their business. Because they often see themselves as being a critical part of the enterprise, they wrongly believe that they will get a better price for their business if they commit to working for the buyer. In fact, because they are often a critical part of the business, this is exactly what worries a buyer.
You need to see this from the buyer’s viewpoint. On the one hand, you have a talented individual who can bring essential knowledge and is willing to commit to the future of the business. An alternative view, however, is that this critical individual is unlikely to stay and thus all that essential knowledge will walk out the door.
Even if the entrepreneur is enthusiastic about his or her new role and contribution, the truth of the matter is that few last the distance. Buyers understand this and are very wary of taking on ventures where a major shareholder is essential to its success.
This is not an unreasonable attitude on the part of the buyer, if you look at the circumstances. Basically, you have a cashed up entrepreneur who is used to being in charge, making quick decisions without being accountable, and is the person who has determined the strategy of the business. To expect them to suddenly be resigned to being an employee, taking directions and having their actions reviewed is a little bit unrealistic. Couple this with the fact that they now have enough money to do what they want in life, and probably don’t need to work, and you can see the problem facing the potential buyer.
However, there are a number of ways that this can be approached by the entrepreneur which can create positive value for the potential buyer without creating undue risk. First, the entrepreneur has to ensure that the business is able to be managed without their active involvement. They might achieve this by putting in a competent COO, establishing a board of directors and then concentrating their efforts on longer range business development. Some founders stay active by taking on the position of chairman of directors and/or export development.
Second, the entrepreneur might suggest that they join the buyer in a different area away from their previous business but be available for consultation. They might also suggest a role with considerable challenge and future rewards tied to performance to show their degree of commitment.
Smart acquirers anticipate that founders won’t fit into a large bureaucratic organisation and assume that they will leave. Thus they look for businesses that can be managed without the founder’s involvement beyond a short handover period.
While there are numerous examples of founders who have made successful transitions into large corporations, the normal experience is the opposite. Given this trend, the smart entrepreneur anticipates this and plans the sale of their business so that the buyer does not see the founder’s role as a potential risk. In the majority of cases, it is usually better for the continuing business and for the founder that they move on and devote their energies to the next venture.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.