Trapped By Your Own Success

Trapped By Your Own Success? Build an Exit Strategy
By Stephen J. Kerr

I sell companies for a living and some of my best listings are for entrepreneurs whom I cannot quite figure out why they are selling. After 10 years it still seems a little strange to me when a 40's something couple call me up and ask my firm to list and sell their profitable, growing business.

My first reaction is usually, "Why sell now, you're young and have years ahead of you to grow the business." "You don't understand," they reply, "we're tired and want our life back. The only way we're going to be able to do that is sell the business."

In a well planned exit strategy the owners should strategize when the optimum time should be to sell the company they have founded. This is probably not the time that is most convenient for the owners, but it is the point where your company is at its maximum value to would-be buyers. Being "burnt out" is not a great reason to sell your company. If the business has expanded past your ability to manage and finance its growth - then it is probably time to sell the company.

Many entrepreneurs cite their inability to find a trustworthy or qualified general manager or president as their primary reason for wanting to sell. Sometimes this is a result of a former trust gone awry. Back in 1991 the owner promoted and groomed a successor to run the business - but when they stepped away from the day to day management responsibilities - they found that person simply could not cut it. The entrepreneur finds that by the time they step in and take back the controls, business is off 20% and heading the wrong direction.

More often than not, small businesses are run more like tribes than corporations - one chief and a bunch of Indians. Good Indians, but not a brave chief in the bunch. Going outside the tribe to recruit a chief is almost unthinkable.

Even the most energetic business owner can get tired. They have been running their business like it was a track meet that never ends. Every day they put on their track shoes and start down the same circuit. The view changes little every day - so they just keep running and running - until they run out of ideas, they run out of time, they run out of health, they run out of money or they simply run out of steam.

Sometimes the race is exciting and that's what keeps them going. Sometimes the race just gets too rough…and they can't make payroll, can't pay the taxes or can't keep up with customer demands. Sometimes it all gets to be too much - and it just isn't fun anymore.

Is that a good reason to sell the company?

Often it is not money that is the problem. It's life…or the lack thereof…that is hurts most. The kids are growing up too fast, the boat you bought last year hasn't been touched and everyone else seems to be going on vacation - but you! Some entrepreneurs have never known failure. They worked hard and have gone from one success to another until they have built a little empire that has given them everything but happiness. We Americans are supposed to crave success more than anything else in life. But you don't have to fail at business to feel like you're loosing out on life. Many small companies today have to turn away business because they cannot get the manpower, inventory or raw materials to keep up with demand. Raising prices is not necessarily the cure if you are already making huge profits and another price hike might finally push your key accounts to start looking for another supplier.

Every entrepreneur wishes that they could simply clone themselves. Then they could just sit back and watch that clone work themselves to death. "If I could just clone myself, then maybe I wouldn't miss my son's 5th birthday or my daughters dance recital. Heck, I could probably start working on that business plan I started 10 years ago or actually finish something." The really hard cases just want to clone themselves so that they can work twice as hard.

You start to ask yourself, "What good is making all of this money if I don't have time to enjoy it?" The houses get bigger, your cars get fancier and your bank account really looks great. You'd be a success if you could just solve that little NO LIFE problem.

We baby boomers are struggling hard not to be our parents. Our parents, the WWII generation, knew the meaning of sacrifice, they knew the meaning of a dollar and most worked hard to put us through school and put away a little for retirement. It is not unusual for boomers to have better homes, better cars and better lives than our parents - thanks to their hard work and sacrifice. But the one thing we DON'T want is to be them. I think that many 40s to 50s age business owners are not content to work out their days at the company and sell it off when they get too old to go to work anymore. They want balance in their lives - and they want it now!

One of my clients hired our firm to sell his New Jersey based distribution company. He had run it for 20 years and it was making excellent money. The corporation had an excess of $6 million cash and securities in the bank and was growing nicely. When we started working together he confided to me that he and his wife had not taken a "real vacation" in years and their marriage was on the rocks. We listed his company for $20,000,000 and had just started to market the business - when he died of a massive heart attack. He was 54 years old.

Dying at 54 years old with $6 million cash in the bank and a marriage on the rocks is not anyone's idea of success.

If you have failed to hire and train people who are as smart as you are and could run the business while you are sitting on a beach in Barbados, then maybe it is time to start. Building an entrepreneurial organization and management team to carry out your vision is the key. Distribute power and delegate responsibility to qualified managers whom you have groomed and trained to do their jobs. Give them clear goals and let them share financially in the fruits of their good decisions. Holding on to all of the decision making power and not hiring people who can do the job as well as you can is a sure way to find yourself buried with all your loot.

To repeat what I said before, selling your business because you are "burned out" is not a very good reason. You could end up leaving millions of dollars on the table. Don't count on the buyer recognizing your company's unfulfilled growth as an asset that you will reward you for.

If you find yourself "Trapped By Your Own Success" - What do you do? The following is a list of ten things that any business can do to plan a proper exit strategy and virtually guarantee that they will be able to sell their business whenever they want to:

1. Keep impeccable records. Many companies can be rendered unsellable or certainly do not achieve the value that they should because their record keeping is so poor. Good records make for easy transactions. Also, pay all taxes on time and don't play games with the IRS.

2. Keep a high profile. It doesn't help your value if no one knows who you are. Get active and get your company well known by your industry's trade publications, associations, vendors and competitors. Image is often more important than reality. If you generate $2 million a year in revenue - you want the industry thinking you do $20 million. If your business does $20 million a year, you should appear like you're doing $200 million.

3. Hire key managers and shore up weaknesses in your organization. A strong GM, hot shot VP Sales or super-efficient production manager might just be the key to upping the value of your business. Your business probably wont be boxed up and moved another city so the quality of your management team is critical.

4. Rapid growth is more important than big profits. Buyers would rather see your company growing at 25% a year than making 25% profits. Most buyers know that fast growth usually leads to high profits eventually. That's why these Internet companies growing at 500% a year, and loosing money like water are so valuable to investors.

5. Consolidate your power within your niche. Remember, it is better to be a big fish in a small pond. Buy up weaker competitors if you can and eliminate the competition. Controlling market share even in a small niche market can contribute to a big valuation of your company.

6. Innovate and lead. Build on any technical or creative advantage you have over the competition. Your marketing presence, your Internet presence and your customer base might be more valuable than the actual products or services you sell.

7. Go national or global (while keeping within your niche). The best buyer for your company might be in the Chicago or even London. If they don't know that you exist - they can't make you an offer.

8. Star Power. Nothing increases perceived value more than having a hot selling, exclusive product or service. It is important not to let that business run past its prime before cashing in. One key market advantage can catapult the value of your business to new heights.

9. Lock up as many rights and markets as you can. If you own exclusive rights to your products and services you will be more valuable to others than if those rights are non-exclusive. Take equity in anything you make. When all you have to sell is your time and machines - you are really selling from an empty wagon. Build equity and you are building lasting value in your business.

10. Stay out of lawsuits, bad distribution deals and confining contracts. You can't expect a buyer to pay big bucks for your company if your products and rights are tied up in disadvantageous relationships. Terminate bad relationships before they impinge on the value of your business.

I was recently contacted to sell an educational video producer, who had created an fast selling foreign language learning series. This program was very successful in the corporate market and was generating over $5 million a year in revenue. The problem was that their distributor controlled all the marketing rights. The creator/producer received little more than a royalty. Other than a studio, some camera equipment and some editing equipment…what did they really have to sell?

Beware of the trap of spending all of your profits on toys and technology. Your value is, and always will be based on your growth potential and your profitability. One can never recapture the full value of the equipment you have purchased. To reap a higher value, it is better to use slightly older or rental equipment - and generate superior profits.

In planning the sale of your company it is a good idea to strategize who you would want to sell to and what benefit they would derive from owning your business. Also, focus on a buyer that can actually afford to buy your business. Your nearest competitor probably doesn't have any more money than you do. Here's a priority list of potential buyers in order of highest payers to lowest payers: 1. Public companies pay the most because they are valued at public company multiples that can be many times higher than those for private companies; 2. Very big private companies in the same business (those with 10 times more revenue than you); 3. Large suppliers, clients or vendors that need what you do; 4. Roll-ups (financial buyers consolidating players in the industry.); 5. Competitors; 6. High wealth individuals. Forget the notion that there are bunches of millionaires out there who have nothing better to do than to buy your company. It's mostly a myth.

Follow these ten suggestions and I guarantee that you will not only pump up the value of your company - you will have more fun running it. You have to learn how to solve your little delegation problem before you can solve your little NO LIFE problem. Just remember that your company is a "storehouse of value" measured in growth and profits. And someday that business can give you more than just a good living - it can give you THE GOOD LIFE.