Should you sell up now while the going is good or wait until retirement? Paul Taberner, Investment Director at Enterprise Ventures, suggests another option
You’ve worked hard to build a successful and profitable business and taken plenty of risks along the way – now you’re no longer in your 30s and have a family to support. You want to keep growing the company and you’re certainly not ready to give up the reins.
However you don’t want to jeopardise what you have and are reluctant to put your house on the line again to borrow funds for expansion. Should you sell up now – or hold on until retirement?
It’s the classic mid-life dilemma for entrepreneurs. Fortunately there is another option, and that is to consider a two-stage exit process. By selling a minority stake to an investor now, you can cash in on the value of the business but retain control of it until you are ready to make a full exit in the future and when the market conditions are right.
In fact by trying to maintain full ownership of their company until retirement, as many do, entrepreneurs could be unwittingly holding back its growth and putting their long-term financial security at risk. Here are three reasons to consider selling a stake in your business:
Diversify your investments
Many owner managers see their business as a pension which they can sell to finance a comfortable retirement. Indeed, it is probably your most valuable asset. However, from a personal point of view, tying up your wealth in one company, even if it is your own, is not always a sensible investment strategy.
The ‘sell on retirement’ approach also gives you a limited window of opportunity to make a sale and relies on having the right market conditions at the time. We only need to look back to the last recession, when many owners were forced to delay retirement or sell at the bottom of the market, to see what can happen.
Selling a minority shareholding allows you to release cash from the business which you can then bank or invest in other assets to diversify your portfolio.
Boost your business growth
Entrepreneurs are risk takers by nature but older entrepreneurs tend to become more risk averse, and understandably so. They have more at stake. They have spent years building a business and don’t want to jeopardise it.
Expansion inevitably involves some degree of risk and, if you need to raise finance, the bank is also likely to insist on a personal guarantee.
This is often a deciding factor for those opting for a partial exit. As one owner-manager explained: “I didn’t want to have to tell the family that I was putting the house on the line once again to borrow money for the business.”
Finding an equity partner can be an ideal solution. As venture capitalists, we have found that, once entrepreneurs have the opportunity to ‘derisk’ and secure their financial position, they often gain a renewed appetite for growth. They also have a partner with deeper pockets and a wider network to share the risk and invest in expansion.
Our experience has shown that bringing in an investment partner can re-invigorate established firms. For one husband and wife team, selling a stake in their medical supplies business has enabled them to put some cash aside and given them the confidence and the funding to expand overseas through a combination of start-up ventures, online sales and the acquisition of a small European firm.
For business coach John Leach, whose company Winning Pitch supports high-growth SMEs and helps deliver the government’s GrowthAccelerator programme, the investment has helped to him to move the business up a gear and deepen its profile in the SME market.
Create added value
Venture capitalists and other investors bring with them not just finance but knowledge and experience. The added value that they create will help to prepare your business for a future sale and maximise its value.
“It’s not just about cash, it’s about partnerships and networks,” says John Leach. However he recognises that selling a stake in the business requires a change of mindset, given that many entrepreneurs like to retain full ownership.
“I went through the dilemma myself but you have to sit back and see what is in the interests of the business,” says Leach. “I realised I couldn’t grow my business to where I wanted without additional expertise and finance. This need to hang on to equity is a big problem. We need to get over it if we are to create more mid-market UK companies.”
So provided you have a successful company and are willing to sell a share, how do you find investors? Look out for venture capital or private equity firms which invest in small companies, or ask your adviser. Investors’ strategies differ and you will need to find those that are interested in firms of your size in your sector and willing to fund partial exits.
You will also want to find an investor that you feel you can work with and one that is culturally aligned with your business. Your investor will be a long-term partner who will allow you to secure your personal financial position, support your business growth plans and create a more prosperous future – so take time to make sure they share your vision.