Startups and Mature Businesses Require Different Strategies

Most business owners treat their businesses as a way to make a living or an alternative to a job. They rarely treat it as a way to build wealth. Well, they do think about that, but they do not act like it. Let me explain.

Most business owners will tell you that they expect their business to fund their retirement. They typically have 80 to 90% of their wealth tied up in their business except they have no idea what the business is actually worth. They may tell you that so-and-so sold his business for x times earnings, EBIDTA or some other popular measurement of success. That may be so, but they conveniently forget to tell you that this other business was built to sell, not to make a living. And that is what this post is about.

You see, a business goes through several stages over the owner's lifetime, much like any other baby does. If you treat it the same way all this time, it will not grow up and become mature and ready to sell.

A lot of businesses begin their life as startups. During the first few years, it will need a lot of feeding and nurturing. Then, when all the startup debt has been paid off, comes a period of growth. Swept away by its success, the owner plows every penny back into the business riding the momentum of unbridled growth. You can think of this as teenage years perhaps. At some point real teenagers grow up, become mature, get an education, start families. Many businesses do not. Owners of mature businesses often forget to let them grow up. There are several things they neglect to do. First, they forget to accumulate funds outside the business. Second, they forget to let go of the reins.

Almost every business owner will tell you that whatever you are trying to do is much more likely to succeed if you have a plan. Nevertheless, very few of them actually have an exit plan and that is not good because we know that all of them eventually will exit. What is worse is that an alarming number of them say they do not have to do anything in order to exit. They can do so immediately without any preparation whatsoever. They are likely to be in for a rude awakening.

Exit Planning - Four Fundamental Questions

Exit planning involves three distinct tasks:

1. Get the owner ready
2. Get the business ready
3. Get the buyer ready

Unless you are one of those business owner who does not think it is necessary to plan for your exit, it is easy enough to understand why you need to do a little prep work to get the owner ready and to get the business ready, but why do you need to get the buyer ready? Well, maybe you do, maybe you don't. It definitely pays to think about who will take over. Different kinds of buyers have different goals so if you can decide early on who is the most likely candidate, there is a lot you can do to make the business attractive to a particular type of buyer.

The kind of buyer most owners overlook the most are their employees. Granted, more businesses pass to employees than to any other buyer group, but it is usually a few managers or trusted employees who take over, often because the owner failed to sell it to a third-party and needs a Plan-B. Broad-based employee ownership is still quite rare but gaining in popularity. There are two kinds, well three if you count Employee Ownership Trusts (EOTs). There may only be a handful of those in the U.S.

First, there is the Employee Stock Ownership Plan (ESOP). It is basically a pension plan and very complex and expensive, well out of reach for the typical small business.

Second, there is the worker cooperative where all or most of the employees buy one share and run the business democratically - one person, one vote. 

Both ESOPs and worker cooperatives qualify for deferring Federal capital gains tax, but the rules are strict and hard to comply with.

Become Employee Owned

Business Development: A Guide to Small Business Strategy

Every business goes through a number of stages during its lifetime, or it should, but sometimes the owner keeps treating a mature business like it is still a baby. It never grows up and matures. It never accomplishes the goal of providing for the owner's retirement. That happens because the owner started it to make a living, not to build wealth and never got around to switching strategy to be able to sell it.