Honey bees are truly fascinating. They offer various lessons in organisational theory. The queen bee may be considered the head of the colony and yet, interestingly, she may have little or no “say” in how she is replaced. If she dies or goes missing, the hive create a new queen. Actually they create a number of potential queen larvae and the first one to mature kills all the others. However, the hive may also decide that the queen is too old or is failing and needs to be replaced and so they create a new queen. Or conditions may be so favourable that they decide to split the hive and they create a new queen and the old queen has to find a new home. In each case, it is the hive that “decides” on the fate of the queen, not the queen.
It makes you wonder, doesn’t it, what would business be like if the workers decided when it was time to replace the leader? Of course, creating a new leader in business is not as simple as feeding a larva royal jelly…
Just like the queen bee, though, there are four ways that a business owner can exit a business. These four exit routes we will call the four Ds (rhymes with Bees).
Firstly, just like the queen bee you could Die in Service. It may not be the option of choice but if the time comes you won’t care much about what happens next (probably). And therein lies the problem – what happens to the business afterwards?
It can be left to your family to sort out and if they don’t have the desire or capability to deal with your business then it’s going to be difficult for them and your loyal employees. You may have made provision for this situation with an insurance policy, shareholder’s agreement and interim management provision, but it’s not ideal for the morale of your employees. Of course, even with the best laid plans, it might happen anyway, so it’s always best to be prepared with insurance, documentation and contingency plans in place. However, by choice, I assume this isn’t the exit most people are looking to achieve.
The second option is Dissolution. That is, at some point you decide to retire and you decide to close the business. All the hard work you’ve put in to building it up will have been for nothing as your legacy disappears. What’s more, if you have employees they would lose their livelihood. While this may be preferable to death in service, I would suggest, as it involves a conscious choice, it still seems a pretty sad way to exit.
The third is Disbursement – that is lobby someone to buy it from you. It could be your management team, a supplier, customer or competitor or just someone who fancies running your business. This could be the biggest pay day you’ll ever have. It could also be the most disappointing pay day you’ll ever have if you don’t put the necessary preparation in to making your business attractive to a buyer.
There are a number of factors that go into making the sale of your business as lucrative as possible. Firstly, and perhaps obviously, the stronger your business is financially, the more it will be worth. That means good margins (for your industry), strong cashflow and evidence of growth and growth potential. It also means having good financial management systems in place: a budget (that is used), a cashflow forecast, a capital plan, an inventory plan, a marketing plan, a salary plan, etc.
Secondly it means that the business is not reliant on the owner for its leadership. In other words, there is a management team in place. Businesses that rely upon their owner to be there to manage the day-to-day operations typically command a sale price of 3-40 times lower than ones with a management team in place.
Talking of over-reliance, if the business is reliant on one, or a limited number, of key employees, customers or suppliers, it will also put a dent in the sale valuation.
These are all things that you have control over. As are a strong recurring income and high customer satisfaction ratings. But they do take time to develop, largely because you can’t do it all at once. In addition, once you have developed strengths in these areas you will get a higher valuation if you have historical data over a number of years to prove it. So a lucrative exit can take 5 years to achieve.
However, having brokered a sale, lucrative or otherwise, that’s not the end of the story. You could be asked to stay on with buy out clauses, particularly if you are still heavily involved in the business. That period can be depressing. It can be even more depressing when you fail to achieve the buy-out targets and so you never receive the final payments.
And the negatives may not end there. Once you finally do exit the business, it can be pretty disheartening to watch your business flounder and fail in the hands of a new owner or management team that just didn’t understand how to make the business work. It happens more often than you’d imagine.
Which brings us to the fourth option, which I’m calling Distribution. This could involve Disbursement, although it doesn’t necessarily have to do so.
By this I mean you distribute the equity of the business amongst all your employees. This way they all benefit from the years of hard work they’ve put in to helping you grow your business.
If you decide to make this a purchase, you will get your pay day, but you could also decide to gift them the larger part of your stake-holding. Why would you do this? Well under certain circumstances, you could end up with a more valuable stake even though you own less of the business.
Imagine having tens or hundreds of people driving the business forward because they all benefit from its success as opposed to you having to do all the driving and trying to drag everyone along with you as well.
You may think I am painting a gloomy picture of what business is like, but dragging your employees with you is sadly more accurate than you might imagine. According to a Gallup survey in 2016, around 70-83% (depending upon the country in which you operate) of the working population are not fully engaged in their work. That means they are like an anchor holding you back as you try to power your ship forward.
Now imagine what would happen if the anchor was suddenly released. It can happen. You just have to look at the financial performance of employee owned companies like John Lewis Partnership, Springfield Remanufacturing, Gripple to name a few. They have out-performed their competitors and the market as a whole over long periods of time – they are not a flash in the pan. So distributing a majority of your shares to your employees could earn you back far more in the long run.
Unlike the queen bee, you can choose when and how to leave your business and the best time to start planning your exit is now.