Top 12 ways to get the “big check”
First, I want to differentiate an "entrepreneur" from a business owner. The difference is fundamentally a mind set.
An entrepreneur is super driven to create the future. They see or experience a problem, put together the team and funding, and execute on their vision of a future industry, and leverage their market-changing innovation. Their companies are usually high growth. They'll usually have clarity in their exit strategy and work every hour to move towards it. They'll know what their company's valuation looks like every quarter. I have found most entrepreneurs have a larger business network than business owners, and they spend time more with other entrepreneurs. They've got their eye on the prize - a huge payout such as an IPO or acquisition.
Entrepreneurs will sometimes stay on as the CEO of their company as it grows, but often they'll get tired of the day-to-day grunt work and will pursue another entrepreneurial challenge after a few years. They'll try and sell their company (or part of it) or just stay on as a board member with significant upside money potential. They are visionaries and builders and have an itch that only gets scratched by starting something new.
A business owner, on the other hand, is less concerned about creating the future as they are about minimizing mistakes and mitigating risk. They are successful to the point of having a lifestyle company that pays them well. Families count on them to deliver. Their business network is not as big as the entrepreneur, since many of them are so busy working in their business, they choose not to make time for networking. Business owners often don't have a clear exit strategy with a date in mind. Many entrepreneurs will eventually become business owners.
Business owners have a number of choices when it comes to transitioning from their companies.
1. Leave a legacy. Sell or gift the business to their kids.
2. Donate the company assets to a favorite charity.
3. Shut down. Yep, an option is to simply close the doors and go away. Not usually a very lucrative exit. Often when business owners haven't planned their exit well, the only money left is in the assets such as inventory or buildings.
4. Use a business broker. Most of these folks provide a service for a fee to help you sell your business. Be careful here, and get good advice before embarking upon this option. Some of them will charge you big up-front fees for their consulting services, and that's where they make their money.
5. Bring in professional management. This is a way to move more slowly away from the business, and maintain a board position, or just come in every so often to tinker. Let the professional manager build company value and worry about selling later. Get one that's done that. This doesn't have to cost a lot, because a part-time CEO or COO can bring the expertise and leadership and doesn't have to guess. One that has the power and experience to do that.
6. Sell to a private equity firm. This is for larger businesses, typically in the range of $10M plus revenues. If you've got a great history of excellent cash flows they'll shop your business with their network of investors.
7. Bring in a new partner/investor that has the cash to add growth and company value while providing the expertise needed to add company value.
8. Sell to a strategic buyer. Over the years, business owners have created relationships with vendors, suppliers and competitors. This is often a first choice to look into since it may yield the biggest payout. A strategic buyer views your business as a way to generate additional revenues and profits by adding a customer base or product set they didn't have before.
9. Sell to a financial buyer. These people will look only at EBITDA multiples, Discounted Cash Flow (DCF) to determine the value/purchase price. Its a financial play only for the buyer. "The Big Check" will be a "Smaller Check" than with a strategic buyer.
10. ESOP. Employees buy the stock in the company and become the owners.
11. IPO. Initial Public Offering. You sell shares to the public and get listed on NASDAQ, London Stock Exchange, or the like. This is a choice that most business owners won't be able to use because the general range is to raise $100M or above. In 2Q 2011, IPOs raised $12B. Its for companies that experience hyper-growth, and these days those are internet/social media and related software companies (LinkedIn, Groupon, Zynga) alternative fuels/green energy, oil& gas, medical technologies, consumer goods (Prada, Samsonite).
12. Horizontally. You have no transition or exit plans, you die, and the courts take over the relinquishment of assets to pay the liabilities. What's left of the company goes to whoever, unless you've got the buy-sell agreement setup to take care of this situation. Not a lucrative exit.
Notice Venture Capital (VC) is not on the list. That's for entrepreneurs. Its not an exit, but an interim step to get there. This list is often similar for an entrepreneur, just that the mind set is different. The business owner will likely be very good at their craft and since they aren't as well connected as the entrepreneur, they often won't know what it takes to build company value.
Regardless of the exit choice, a business owner must focus on building company value, instead of just making payroll every time. That's not easy. Its not an area of expertise most business owners are familiar with, nor do they have the time or desire to go get the education and experience to do it themselves.
As Steven Covey says "begin with the end in mind." In this case, the business owner should know what their post-exit life needs to be. How much will you need? When will you need it? What will your lifestyle look like - sit on the beach, play golf, start another company, spend time visiting family, travel the world, buy that car you always wanted, etc. These choices are best worked with a personal financial advisor. Once you know what your end game looks like, and when you want that to happen, there's usually a huge gap from where you are today.
If you think your company is worth $5M today, and you want to net $10M in six months, forget it. Your company is probably worth less than half of what you think today. Almost every business owner believes their company is worth many times what the market will pay.
Most business owners that believe their company is worth some number, are using a gut feel, emotional approach to the valuation. Also, it takes time ...a lot of time... to build company value from $5M to $10M. That's an area where outside expertise is needed. Most business owners can get "The Big Check" of their dreams for the business that they've poured all their blood, sweat and tears into for years. As long as the goal is realistic, and the time frame is realistic.
Start working on your exit at least 2-5 years before you want to get out. Then you'll have the best chance at getting the highest possible amount for your biz. If you have to do a fire sale, you won't get very much. But if you use proven value creation methods you can have the best possible chance for the biggest check.
Transitioning away from your business is one of the biggest decisions and life changing events a business owner ever goes through in his/her entire life. Don't guess at this. Hire outside help that's been there and done that. Its too important, and you don't want people helping you that are still practicing at it. Get one that builds company value every day, and has worked for years helping business owners transition for a maximum payout.