Exit Strategies for Business Partners
Oftentimes, a business partnership starts with two people carrying complementary skills. For example, one might be good on the technical or operational side of the business, while the other succeeds on the sales and development side of the business. This relationship often works for a number of years, but what happens if the business partners are at different stages of life and begin to have different objectives? One partner might have reached a point where they want to sell the business and retire, while the other desires to stay involved in the business for a number of years to grow it further. In such situations, having a clear Business exit strategy in place can help partners navigate the process and achieve their individual objectives.
While this could seem like an impossible issue to solve, there are still a few options to consider:
Option 1 – The partner wishing to remain in business could buy the shares from the partner that wants to sell. This this case the partner wants to transfer business ownership.
There are several steps involved if you choose to go down this route:
- Determine the value of the business and the price of the ownership interest
- Determine the terms that the payback will occur
- Determine the way the buyout will be structured: Cash from buyer, an installment loan from selling shareholder, bank loan, or a combination of the above.
Option 2 – The partner wishing to retire could sell their part of the business to a new partner whose interests are more aligned with the remaining partner.
This could be a great time to reassess where the business has grown to, determine your strengths and weaknesses, and find the right partner from an operational and strategic standpoint to help you maximize the potential value of the business. Money is one thing, but perhaps your business needs something beyond the capital. You need money AND strategic input or support.
Before we talk about the type of partner or investors, how we find the right one, and how a deal could be structured – we need to discuss what is the specific need of the business. It could be the need for capital, the need for strategy input, or both.
- Need for strategic or execution input – In addition to capital, a business might need input, guidance, and advice to get to the next level. Questions during this stage may include:
- How to get new clients faster and grow revenue?
- How to maximize reoccurring revenue?
- How to manage operational expenses to maximize gross profit margins?
- How to recruit, manage and train more effectively?
- How to build a management team so that the business is less dependent on the founder?
You have done a great job of getting the business established. However, in order to maximize cash flow and profits today, and the ultimate enterprise value in the future, you may need a partner.
One of the biggest challenges is entrepreneurs are very independent, confident, and self-reliant people. We have taken the risk of starting or buying an existing business and now we are considering taking in a partner. This is a very big decision. You are losing some of your autonomy so there needs to be a trade-off.
With a partner, you need to feel confident that you and the business will be better off in the long run. Remember it is not just capital you are looking for it is also someone to share ideas with and divide the day-to-day responsibilities, and ideally someone whose skills and interests complement yours and strengthen the company. Think long and hard about how ready you are in emotional terms to accept a partner.
After you decide you are ready to accept a partner the next step is to identify the qualities your partner should possess. Some of the questions you should ask are:
- How well do you know the partner?
- Do they have experience in this type of relationship?
- Do they bring the skills you need?
- Does their skill set compliment yours?
- Do you communicate well?
- Do you have the same long-term objectives?
- Do you have mutual respect?
Potential Partners For Your Business
There are several types of potential partners:
Individual Investors: Venture capitalists will want a fast return on their investment and will likely want a strong voice in the management of the business.
Private Venture Capitalist: An investment by a venture capital group is often seen as an endorsement of your company’s management and future prospects. A VC firm will also help open doors to new business, strategic alliances and corporate partnering, and can help you find high-quality directors and others to help your company grow. They have high expectations for growth and performance and are not reluctant to change the management of one of their portfolio companies if they believe it is necessary.
Private Equity Firms
Negotiate Your Terms
When you are negotiating the terms of an equity capital investment, the points you should consider are essentially the same as those outlined above in the checklist for a limited partnership agreement.
If you decide to seek debt capital, your lender will probably have a prepared list of requirements. These are primarily aimed at ensuring repayment. But these requirements may be negotiable. Items you should focus on include:
- Length of the loan term and the schedule for repayment
- Interest rate and other charges
- Provisions for maintaining working capital
- Restrictions on the payment of salaries or distribution of earnings during the life of the loan
- Restrictions on other borrowings during the life of the loan
- Description of assets used as collateral for the loan
Exit Strategies for Business Partners
When you have completed the steps outlined in the previous pages, you should have a general understanding of the following key elements:
- The expansion needs of your business
- Your willingness to take on partners
- Your preferred business structure
- Writing a general partnership or limited partnership agreement
- The appropriate form of investment for your business
- Your strategy for attracting investors and lenders
- Terms to negotiate with investors and lenders
Thinking about selling your business? Unsure about whether or not to sell your business and need guidance? Call the professional business brokers at Brentwood Growth for a complimentary consultation and business valuation: (908) 377-7807.