Reality is that every business will shut down or be sold

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Published: March 21,2010

Tags: Business, exit strategy, Martin Willoughby

What is your exit strategy?  This is a frequent question I hear when working with investors in a business.  Whether your business is investor-backed or not, this is a pertinent question.  Since none of us are immortal, all entrepreneurs need to consider what will ultimately happen to their business. I find that many people simple don’t want to think about their exit or succession strategy.   This is probably related to why I notice a general reluctance to write up a Last Will & Testament.   It is as if this type of planning will bring some bad luck or other misfortune.  

The reality is that every business will one day either shut down or be sold.  Some select few businesses may “go public” in an IPO, but that is usually not the exit for most business owners. Best selling author and business guru Stephen Covey encourages us to “begin with the end in mind.”  This is useful advice for entrepreneurs as they consider what their long range plans are for their business.  

I spoke with Mark McCreery to get some insights from a veteran entrepreneur about important considerations in selling a business.  McCreery has founded 24 companies since beginning his entrepreneurial career in 1988.  His first two companies were a retail store in Banner Hall in Jackson called Sebastian’s and a related business, SOCO International Inc., which was an importer from Korea.  Mark went on to own and operate AmeriMail Direct from 1996 until he sold the business in 2005. Today, McCreery owns FriedGreenCapital, an investment and consulting company. He continues to be involved in numerous businesses and is an entrepreneur in residence with the Mississippi Technology Alliance. 

In considering whether it is time to sell a business, McCreery said that he asks businesses owners two key questions about their business.  “Do you still have the passion?”  “Are you still taking risks in your business and being innovative?”  If the answer is no to either of these, then it is probably time to start thinking about getting out.  

McCreery also pointed out that he views businesses in terms of stepping stones.  As a business grows it must continue to reinvent itself and increase efficiencies and productivity.  At these inflection points, there is usually a new commitment of time and financial risk required to take the company to the next level.  These inflection points are a good time to consider if it is the right time to sell.

Other common reasons people consider selling include the time commitment required to run the business, change in life circumstance (e.g. death, divorce, children), a partner who wants out of the business and the desire to pursue other opportunities.  Regardless of the reason, an overarching point is that the best time to sell is when you don’t have to.   Desperation, whether driven by cash needs or other factors, will be apparent to buyers who will either drive the price down or back out.  

When you go to exit your business, you want to maximize the value and benefit from all of the hard work that you put into it.  For a variety of reasons, almost 75 percent of owners are not able to realize any ultimate value for their business.  There are a number of principles you can apply in furthering your chances to realize such value.  One key principle that McCreery applies in all of his businesses is to build a solid accounting and legal foundation.  Sloppy books and turning a blind eye to business risks is a sure way to destroy value in your company.  Another important point is to create good systems and processes that don’t make the company overly dependent on key people. In addition, assembling a good management team that can lead through transition is another way to maximize your company’s value. 

Whether your company is big or small, planning for your ultimate exit is a prudent practice.  Having the discipline to operate your venture with an exit in mind will not only prepare you to maximize your return on investment; it will also help in developing and operating a better business today. 

 

Martin Willoughby is a business lawyer in Jackson. He can be reached at mew@msbusinesslaw.com.

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