Exit Planning

When Is An Exit Not An Exit?

Business Exit Strategies

As I mentioned in my previous post, some exits don’t mean you’re leaving.  In fact, many types of exits are simply partial exits. 

Poker players have the hardest time quitting when they are winning. When things are going well, you’re having a blast playing the game.  Sometimes it feels like everything is going your way.  Knowing when to press, and when to call it a day and savor the win, is a skill that every good poker player must master.

Owning your own business can be the same. When things are going great, your business may (or may not) be at peak value.  You may not be exactly sure where peak value is.  You do know, however, that you’re having fun and doing it with the people you love working with.

The good news is, you don’t have to choose to quit or keep playing.  You can find ways to take some chips off the table so that you have the best of both worlds.   These banked chips can be used for many different goals:

  • Recapitalization or buying out a partner that is ready to move on
  • Setting some aside for the security of your family and yourself, helping you personally mitigate against the uncertainty and volatility associated with having all your eggs in one basket.
  • Keeping your stakeholders engaged and focused on pressing the strategic envelope.  Nothing keeps people more excited than not only seeing a vision come true, but also seeing the investor dividends start to pay off.
  • Perhaps in conjunction with raising capital for a major strategic enhancement, you want to de-risk your personal position at the same time
  • Rebalancing your personal assets.  Often an owner has such a considerable percentage of their family worth in that one company that it presents financial risks.  Diversification is always a key to managing risk.

Regardless of the motivation, you probably owe it to yourself and your stakeholders to keep an eye out for good times to bank some of your winnings.  As with any major decision, business or even in life,  , there’s a whole spectrum of options out there.  They range from small minority positions where you retain all the same levels of control, to large majority stakes where another entity now maintains the majority stake.  There are many reasons why different parts ofof this spectrum might make sense to you personally.

Let’s start with the scenario where you retain majority ownership. 

The pros for this option are clear if you are not wanting to leave the company any time soon.  This allows you to meet a variety of goals while retaining the control of how the company is run and sticking to your own personal timeline.

As mentioned above, often pulling some value out of the company coincides with a greater strategic plan. You can accomplish your capital goals for funding a new strategy without changing the control element you enjoy currently. That can often lead to a much-increased value of the chips you left ON the table.

There are also cons to this option. The value placed on 1 minority owned share will be lower than the value placed on 1 majority owned share.  This is called a “minority discount”.  Since owners of minority shares cannot solely drive or control the strategic direction and outcomes of the company, they will pay less for these shares. These minority shares can still recognize substantial upside, but that recognition process is mostly out of the hands of that investor.

That said, there are many investors out there willing to take on a minority stake. Consider also that these investor types may also require representation on your board of directors, or changes to your existing partnership agreement, granting them additional rights or risk mitigation.

Who are these investors?  They take many shapes. 

  • They may be an individual angel investor who has access to capital.
  • They may be a private equity organization that makes minority investments as part of their charter.  Most of these require majority stakes but there are exceptions. 
  • It could be another company looking to invest in your segment.  These can be very complicated though, and I prefer looking at a merger and recapitalization rather than a company investment. 
  • They may even be your own employees.  A minority ESOP (Employee Ownership Stock Plan) can be an excellent long-term tool to getting your people very engaged as owners, while taking a few chips off the table for yourself.  ESOPs are an intricate topic that deserves its own article.

The other option is bringing in a majority ownership partner

This option comes with many of its own advantages.  There are several types of majority investors/partners.  One of the more likely candidates is a Private Equity fund.  These organizations bring capital, expertise, and a network to help you grow the company. The expertise and network they bring to the table can have substantial positive impacts on the future of your company. Though some of these funds will do minority investments, most require majority control.  Majority investments will typically be higher since they don’t carry the minority discount “penalty”. Some benefits of this option include:

  • Possible additional new channels of access to depth of expertise in your business domain (elaborate this sentence, it doesn’t flow well with the previous questions). Your investors may have access to experts, prior military leaders, customers, business models that can supercharge your existing expertise or fill in holes that your current ownership team has.
  • Expertise in professionalizing your back office to ready it for growth. Best practices in finance, government accounting, human resources, government contracting, etc that supplement your existing state.
  • Robust network of executives and recruiting organizations to assist getting the talent you need to level up.
  • Superior expertise and experience in the M&A process if part of the pan is to bring other companies into the fold.

There are many other possible benefits.  Each of these private equity firms have their own strengths and weaknesses.  You need to do your homework and perhaps even run a competitive process where they each pitch their value (and how they value your company). When done correctly, the added value can supercharge the worth of your remaining stake in your company.  You will recognize that value when you finally do sell the enterprises.

The cons revolve mostly around majority control.  They will now control the board and the major strategic moves for the company.  That’s true for any majority partner.  These types of partners clearly exist for their own exit though.  They are not looking for a lifelong investment. Their underlying funds have their own lifespans that factor into timing for the greater exit.  If your personal timeline is somewhat shorter, this lesser control may not be as important to you, and the pros may make up for it. This is not a good option if you have a ten-year plan for your company.

Both branches I have covered revolve around you continuing in the company as both a leader and a major equity holder.  They are exits without exiting.  I always encourage successful companies to think about these things far in advance.   Discuss them with your partners, even if it is uncomfortable.  These moves are too complex to do correctly at the drop of a hat or in a time of crisis.  When things are smooth and the business is doing well, the last thing you want to do is rock the boat or worry about what you might do later.  The truth is, that is the best time to be considering your options and learning.

And if things do take a turn for the worse, and the cards start to go against you, you’re going to be very happy about those chips in your pockets.

These are broad-brush overviews of complex and individualized solutions.  It’s always best to walk through the specifics of your circumstance.  We’ve been there and are available as a resource if you need someone to talk to. If you are interested in learning more about your different exit options, contact High Stakes Partners today!

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