So you’ve built your company from nothing, survived too many business cycles to count, made hard decisions, pledged your family assets and now are thinking about your exit. Now is the time to reap the harvest from your hard work, risk-taking and business savvy.
What a shock it is to find that the business you have nurtured and grown is not worth what you thought is should be (and it’s not due to the economy, recession or other temporary factor.) The underlying cause of the low valuation may simply be the size of the business.
While a $3 million revenue business is a notable achievement, it won’t necessarily create the equity event you had planned. Small businesses are most often transferred/sold to other sole entrepreneurs, and matching your business with the right person is often like finding a needle in a haystack. Then when the match is made, the value becomes the overriding issue, and it still won’t necessarily provide the liquidity event you hoped for.
What to do?
You could choose one of several paths: 1. Don’t exit your business. Continue to manage it and grow as much as you can and hope for the best. 2. Settle for less than expected and live with the impact on your retirement. 3. Find other ways to build value more aggressively
Many companies have determined that their path to growth, while including ‘organic’ or internally generated progress, will focus on acquisitions, mergers and joint ventures that have the potential to create great value leverage.
Organic growth is a long slog and makes sense when a company is in its growth phase.
When your timeline is shorter, other avenues need to be considered. Typically, when well-conceived, executed and integrated, acquisitions can produce a sharp ‘step-function’ improvement in revenue, margins, profitability and cash flow. (Think about climbing a rock wall from the very bottom or getting a lift to a ledge part way up the face.)
Not only does the company become bigger and more profitable, it becomes noticed and more attractive to a broader group of prospective buyers. While a merger may affect your share of equity, as an owner recently told me, “50% of a $25 million business is worth a lot more than 100% of a $3 million business!”
For some businesses and owners, their way to achieve the business transition they hoped for is to broaden their strategy to get further in, in order to get out.