Exit planning is part of owning a business. But when should you begin to think about moving on? Too many founders think of exit planning as an element of their retirement: something to think about as they enter their mid-60s, but not before then.
Understandable though it may be, this can be a limiting view of things—for a founder’s personal finances and for the company’s fortunes as well. The best approach and one considered by too few business owners is to exit in stages: first by exchanging some equity in the company for additional capital, and then a more traditional, largely complete exit when the founder is ready to retire.
This approach can inject capital for expansion at critical stages of a business’ life, and it can help resolve some managerial issues that affect many founders once their companies have established themselves. As always, timing is critical for any major business move, and finding the right source of new capital can make a world of difference as well.
Companies Have Midlife Crises, Too
Businesses tend to thrive on strong organic growth. But as a company establishes itself, organic growth can naturally slow down, even when things are otherwise going well. It may struggle to increase its market share in a field it helped to crowd. It may already run so smoothly that further operational efficiencies are hard to come by. Those things may make it a healthy company, but they may also prevent it from generating the capital necessary to fuel further growth.
It all amounts to a sort of mid-life crisis for many companies. The days of explosive organic growth, massive reinvestment of cash, and rapidly climbing market share are over, and expanding operations requires more capital and capacity than the company can muster on its own. This dilemma is often reflected in the founder’s own situation.
The Mid-Career Plateau
Great founders and business owners don’t necessarily make good managers. As your company grows, this distinction may become all the more apparent. Your company still relies on you for strategic guidance, but doing all the little things necessary to execute that strategy can easily become too much for any one person to handle, especially one who’s also captain of the ship. Eventually, most founders reach a plateau: having done a great job directing the company’s early stages, they find it increasingly difficult to sustain this growth going forward.
A strategic capital provider can get you break through the plateau both by bringing in the funding necessary to expand into new markets and by adding experienced voices to the company’s executive circle just when the founder needs them most. But it all depends on choosing the right time and the right partner.
Raise Capital When You Can Use It. Not When You Need It.
Before you sell part of your ownership stake in the business you founded, you should have a clear plan as to how you will use the resulting capital. And that plan should be linked directly to your growth strategy. There are other ways to cover short-term cash flow issues: equity financing must expand your company’s reach, not help it make ends meet.
For a fuller discussion of this topic, please see our article on when to raise capital.
Find the Right Financial Partner
Bringing an external financial partner on board will alter your capital structure. This may well be for the best: you might be well poised for the present, but ill-prepared for the growth on which your company’s future depends.
Working with an external financial partner is a terrific opportunity to accelerate your business plan, and it opens up a wide variety of considerations that a bank loan may not. You’ll be able to negotiate many of the deal’s terms, so be prepared to be just as choosy about your new partners as prospective investors are about your company.
Do you want to bring in someone with managerial experience, to help lighten your load in that area? If your growth strategy calls for entering new markets or territories, would you benefit from the expertise of someone who knows them well? If you plan to enter an overseas market, what restrictions apply, and what freedoms might you have to craft a beneficial deal that you would not have domestically?
The Bottom Line
In a time of increasing market uncertainty, cashing in part of the equity you have built in your company can be more than just a way to get a start on your retirement. It can also be an important way to balance your personal financial portfolio. And the extra capital and executive insight your financial partner brings to the table can help your business grow, letting you generate a stable income even when sharing equity in your company.
A seasoned expert can guide you through your options and help you arrange the staggered exit that works best for you. The first step is to maximize your company's value, typically by streamlining operations and processes. Next, you should decide how close you'd like to remain to your company's day-to-day operations and strategic decision-making. Do you want final say on all matters, with a clear majority equity stake in the company? Or can you use an executive partner to share the load?
The answers to those questions will help your advisor develop a plan to cash out some of your equity while staying as closely tied to your company's operations as you choose. When it all comes together, you'll enjoy the benefits of an even stronger leadership team–some companies bring their best existing managers on board as equity partners–and create strong working relationships with international business and financial experts. Your company will be ready for its next major phase of growth, and you’ll reap the rewards of all your hard work while still profiting from your company's renewed strength.
Selling some of your equity in the company you founded is a huge step, and for most founders a highly emotional one. It is also completely normal, especially for companies and founders who find themselves without a clear plan for sustained organic growth. The right advisory partner for a partial exit will help you accomplish things that you wouldn't be able to achieve on your own. Cap Expand Partners assist companies and independent (or fundless) sponsors through a network of associate partners with cross-border expertise, using modern methodologies to provide M&A and financing solutions in a structured manner.
This was also published by Coruzant on Dec 31, 2021