Entrepreneurs often have deep emotional connections to their businesses, viewing them as their brainchild. It's akin to raising a child, with the early stages mirroring infancy. But as the business grows, the entrepreneur faces a crucial juncture known as the entrepreneurial exit. This transition is akin to letting go of one's child, a process laden with intense emotions. Whether the business thrives or fails, the exit is emotionally charged.
Exit strategies vary, from family succession to going public, and encompass personal and economic factors. Personal commitment often leads entrepreneurs to overestimate their business's value. Choosing an exit strategy requires careful consideration of the firm's capabilities, goals, and potential shifts in social relationships.
Family business succession: passing the torch
Selecting a family member as a successor hinges on trust, shared history, and ownership. Reasons for this choice include their contributions to the company, substantial shareholding, and familiarity with the business. Transfer options range from gradual transitions to trusts, all with tax implications. Succession planning is essential, enabling a smooth shift when the entrepreneur is ready to relinquish ownership and control.
Transitioning can be challenging, as entrepreneurs may feel a commitment to remain at the helm, fearing a loss of identity. Emotional, normative, calculative, and imperative commitments add complexity. Choosing a successor is often a delicate task.
Business acquisition: valuing and selling
Valuation becomes paramount when potential buyers express interest, including direct competitors, market entrants, or experienced managers. A business broker or investment banker may be enlisted for a large-scale sale. Creating a selling memorandum is crucial, portraying the business positively while maintaining accuracy and trust.
Business acquisition offers economies of scale and scope within a larger organization, reducing costs and enhancing efficiency. A well-prepared company, positioned at the right growth stage, with strong business cycles and intellectual property protection, is appealing to buyers.
Initial public offering (IPO): a rare leap
IPOs are infrequent, typically chosen by companies funded by investors experienced in taking businesses public. Preparing for an IPO involves substantial effort and costs, including financial analysis and fees to investment bankers. Lock-out periods further constrain the entrepreneur's flexibility. However, it provides valuable funding and safeguards the value of venture capitalists' shares.
While IPOs are prestigious, they require ongoing financial reporting and scrutiny, diverting time from running the company. Investment bankers levy significant transaction costs. Post-lockout, stock value can be unpredictable.
Entrepreneurial exits mark profound transitions. Emotional ties, valuation, and the chosen strategy play pivotal roles. Deciding between family succession, business acquisition, or IPO necessitates a thorough understanding of the business's worth and the entrepreneur's objectives.
Adapted from: Baron, R., & Shane, S. (2007). Entrepreneurship: A process perspective. Nelson Education.