Exiting your business

Whenever I read of a prenuptial agreement, I react viscerally. Not that I am particularly romantic, nevertheless there is a sense of foreboding. Putting in place an agreement should the relationship fall apart, even before the marriage, seems unsettling to say the least. In the Indian context, where marriages are still largely arranged and families actively contribute to heal rifts (and in some instances serve as the source), there is no major downside to a pre-nuptial lack of preparation. However, in the case of entrepreneurial businesses, even those that plan well before starting up, often give little thought to how it might end.

As an entrepreneur, you conceived a business idea and shaped it to meet a large market need. With love and, at times, feelings bordering on hate or insanity you have nursed, nurtured and grown it to a stage where you now have a reasonably stable business. Along the way, you have brought on board employees, partners and other owners who have ridden the enterprise’s roller-coaster ride with you. You are just getting accustomed to the growing pains (which only seem to change and never cease) and look ahead to what’s next. Of course, even if you are not there yet personally, your employees, investors and likely, your spouse are pushing you to figure out what’s next.

I use the term ‘exiting your business’ for this phase of your business. It may involve an actual exit, such as selling your company or even shutting it down or a major change in shareholding (which I deem a virtual exit) such as going public or a significant dilution of equity, ideally with some financial upside for the present shareholders. If you are not hyperventilating by the end of the previous sentence, you are ready to consider what the best manner to exit your business is.

Are there alternatives to exiting your business? Indeed, there are. You could choose — as many of the companies described in Bo Burlingham’s book Small Giants have — to stay privately held and of finite size. This has its share of challenges including the growth path for your senior team members, monetisation of people’s equity and succession planning. As Bo Burlingham puts it “(You will face) the same choice that all successful entrepreneurs are faced with sooner or later, although most don’t realise that there even is a choice until it’s too late.” So how do you ensure that your exit is smooth?

Know thyself

As with starting a business, exiting a business begins with understanding yourself. The good news is that you are no longer the person who started your business. Therefore, what you want today is likely to have changed. Even if you feel it hasn’t, it’s well worth being certain.

Begin by asking yourself: “What is it I want?” Do you want to grow the business to many times the size it is? Do you merely want to cut back on the hours you are working? Do you want to hand the company over to someone else and not be the person with whom the buck stops? Are you capable of letting go? Would you drive your spouse and family batty if you were no longer an entrepreneur here? These questions are all valid regardless of whether you intend to go public, sell the company, shut it down or raise another round of capital.

A recent example of not being clear is when Bill Gates stepped aside to let Steve Ballmer, his college buddy and confidant of decades, take over the number 1 spot at Microsoft. An article in The Wall Street Journal reports that there were shouting matches and even a dramatic walkout by Gates after an argument. According to the paper, these run-ins “paralysed business strategy decisions that the company still wrestles with today.” Eventually, as another commentator observed, “Mr Gates had an epiphany about his own role and stepped back.”

Before you make plans to exit your business, it is important to recognise that most exits are beginnings rather than endings. For instance, if it involves selling your company and you are no longer going to be involved, you’d have to figure out what you would want to do; more importantly, you would have to be clear about what would happen to your employees with you out of the picture. If the buyer wants you to stay, what will your role be and how happy are you going to be in it? How long should you stay? If you are taking the company public or taking in equity, how will having a formal board of directors impact your business or you? And if you are going to shut down your company, what is the fair thing to do by your employees? Most importantly, when do you walk away from any transaction? In other words, what are you not prepared to give up? Ideally, you run through this exercise annually rather than the night after you receive a call about a possible merger or acquisition.

Exit is a project

In the early days of your business, you probably prided yourself on the speed with which you made decisions. And as an entrepreneur, you still have a disdain for all things that seem to slow you down. If so, be warned that exiting your company is a Project with a capital P! It requires serious chunks of your time and 100 per cent of your mindshare at such times. You should run it as you’d run any major project — it may turn out to be the most critical one in your professional career.

In crunch times, most of us revert, almost atavistically, to our native comfort zone. Leaders who come from a sales background view this as a sales deal, technical folk as a test of their technological capability — in other words as a specific challenge from outside that needs to be dealt with aggressively. Usually, the biggest and most non-trivial challenges of an exit lie inside the company.

The communications and people aspects of an exit — from company intent, “Why are we raising money?” or “Are we in trouble?” to the personal, “Will I keep my job? Should I be buying those vested options?” to a possibly critical “Do I want to bother my boss with this minor issue in the midst of all this?” are critical. Your team may not only have a lot of questions but may also be quite distracted, which is not good for the business or the exit. Therefore, having a clear plan, that includes entry and exit criteria (such as when will this project be killed, if at all), objective targets (“What do I consider a fair share price?”), milestones (“By when do we intend to conclude this, either way?”), roles and responsibilities (“Who does what and how?”) and continual tracking (weekly meetings, daily or alternate day calls) is vital.

Regardless of how hard you think the exit project will be, it will be harder still! So get professional help. It is useful to have the buffer of a professional intermediary, who’ll be objective and ensure that the process does not get derailed and keeps you honest. And be prepared to pay them — they’ll earn every dime if you pick them well.

Business as usual

All of us have been in situations when, even as a key customer meeting is running late, we get a page saying that a top technical guy has resigned and our alarm reminds us of a promise made to the little one not to miss her school play again. As we race madly from the meeting, the fuel indicator glows red and the accountant calls to say that the wire transfer has not come in and tomorrow’s payroll is at risk. Now imagine doing all of this while your spouse is not in town, you have a head cold and a twisted ankle. Trying to manage an exit even as you run your business is all of the above and then getting pulled over for speeding by a surly cop.

It is easy to lose sight of the fact that you have a business to run, especially if you find the exit project exciting and exhilarating. But it is important to keep in mind that by the time the day of the IPO or the selling agreement arrives , you had better still have a viable, vibrant business. And this will not happen by itself. When you are sitting across the table from your institutional investors or prospective buyers, it is this healthy business, running as a well-oiled machine, which is going to allow you to be a cool yet formidable negotiator. It is useful to keep in mind that the exit project is just that — one of several in your business and not necessarily one that will be successful.

So keep your eye on the ball and remember your core objective — sustaining and running your business as though you intend to do it for the rest of your professional life!

This article was published in the Business Line print edition in June 2008.

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