Business Research

How to Exit Gracefully

By Barbara Elmore

The man who opened several truck stops and then started a pay phone business to complement them probably didn't know he'd sell the latter company for millions of dollars. Likewise, the entrepreneur in the sunglasses business mostly likely didn't think about what he'd do after his original $5,000 loan turned into a business with $70 million in revenue.

Both of these entrepreneurs had a vision, worked hard, and reaped the benefits.

But then what? What happened to them when they decided to sell out?

That question was the point of research conducted by Bill Petty, professor of finance and W.W. Caruth Chair for Entrepreneurship, who studied both companies. He wanted to discover what happened when the founders prepared to sell. How did they know it was time? What steps did they follow? What happened when the deal was done?

Petty and partners John Martin, also a professor of finance at Baylor, and John Kensinger of the University of North Texas, interviewed about 30 entrepreneurs as part of their research for the former Financial Executive Institute, now Financial Executive International. The association of about 14,000 chief financial officers sought the research because many of their members faced the issue of "cashing out" and the problems associated with it.

The issue of selling for millions of dollars a company you built from scratch appears deceptively simple. You worked hard, you profited, you reaped the benefits during the sale, and now you spend your money. Right?

Not unless you've taken the time to get to know yourself, researchers say.

In addition to the sunglasses and pay phone businesses, Petty, Martin and Kensinger interviewed venture capitalists, owners and entrepreneurs from companies across the country. Some were not the founding owners. Instead, they entered the businesses as part of the management team, eventually became CEO, got ownership equity, and cashed out. "We talked to companies that sold out, that did IPOs, and that sold their companies to employees in a stock ownership plan," said Petty.

What he and his counterparts discovered was lots of planning and work on the front end and in the middle, but very little on the exiting end. "They dream about and plan and strategize about starting a company and growing it, but rarely think about the exit," he said. "They think about building and growing and growing and growing, then something happens." That something could be health, marital or family problems that make them feel like they have to sell. "The purpose of the sale is multi-fold, as is the purpose of the exit," he said.

When these leaders sell their companies or take them public, they are trying to unlock the value of the business, said Petty. The value to the builder of the business has a lot to do with non-financial matters, he notes. These include what the CEO really enjoys doing and whether the industry is maturing. "A big issue is, the company is a part of you and you are a part of the company," he said. "There's a lot of seller's regret or remorse."

He discovered that although company owners can hire accountants and lawyers to handle the technical side of the business, they needed to handle the personal side themselves. "They had to really understand their personal side," he said. "They needed to talk to people who had been through it before."

Petty listed these exit strategies that he and his fellow researchers learned after interviewing entrepreneurs who left their businesses:

  • Cash is important. Most of the entrepreneurs encouraged others in the same situation to negotiate for cash rather than stock. "One of the people got some cash and a lot of stock. Two weeks later, the stock was worth half of what it had been because of problems in the industry," said Petty.
  • Avoid seller's regret by understanding who you are and what's important to you.
  • Run the firm from the beginning as if you plan to harvest. Don't mix up personal and business items, said Petty, or the buyer won't know one from the other. "Run it clean, as if you do plan to harvest."
  • CEOs should expect culture clashes if they stay on after the sale. Petty's team found that of those entrepreneurs who stayed on, 80 percent of them saw culture clashes develop. This happens when the founders run into philosophical differences with the new owners.
  • Buying a company does not prepare you to sell your own company. "There's an emotion involved when you're selling that's not involved when you are buying," he said. "You see it differently -- not always rationally."
  • Entrepreneurs know how much they will accept for their companies, but they may not know the value of the business. Independent valuations may be higher or lower than what the founder believes it is worth. One investment group told Petty that it preferred dealing with an entrepreneur who had already talked to prospective buyers and had a good idea of what his company was really worth.
  • During negotiations, don't lose focus on your business. Once a company founder decides to exit, he often focuses on that. If the sale does not go through, he is back to where he was plus his company has lost momentum.
  • IPOs are not for everyone. A lot of entrepreneurs like the idea of taking their company public and think an IPO is the "end of all ends," said Petty. Then they discover that being in a publicly traded company is expensive, time-consuming and distracting -- in short, not as much fun.
  • Picking the right time to exit is difficult. "It really is hard to recognize whether it's time to exit or time to grow the company," noted Petty. "If they stay and the industry goes into decline, they will regret it. If they don't stay and the industry grows, they will miss the growth opportunity and regret it."

An overall strategy for exiting your business is to have two tracks, said Petty. "You've been on one track for 15 or 20 years. You need another to get onto or you very likely will have seller's remorse. So many relationships people have are through their business. Life changes and you really do have to understand how it will change."

Bill Petty,
Professor of Finance and W.W. Caruth Chair for Entrepreneurship
Bill Petty
Baylor University