One of my mentors, Mr. Bold, was a successful business owner of a local grocery store chain in Ulan Bator, Mongolia. A miraculous example of how capitalism and entrepreneurship can transform a life of a former nomad into a business owner running multiple brick-and-mortar stores, providing jobs for hundreds of workers, and serving a sizable market in the 1.4 million people city of Ulan Bator. For Mr. Bold, business growth was imminent as foreign direct investment poured into the country following discovery of vast mineral resources in the region leading to a rapid rise in middle-class income. However, one sunny day in a summer full of traditional festivals, he decided to put his business up for sale. Mr. Bold was looking to exit.
Even since, his decision left me lingering with a simple yet complex question. Why do business owners decide to exit their business? Through my years of studying finance in a top undergraduate program, working on the buy-side at a sizable sovereign fund and speaking with numerous CEOs and ex-CEOs while at Columbia, I propose a way to frame the answer in three simple terms; financial, social and physical.
Financial – the good
#1. Revenues are increasing at an optimistic pace while maintaining healthy competitive margins. New opportunities seem to come without asking, especially strategic buyers who presents you with an exit plan at a comfortable price. All of a sudden, you are presented with the choice of reaping the benefits of your grueling labor and undisturbed vacation to Paris seems like a reality. Business owners seem to capitalize on this opportunity and make a very happy exit.
#2. For the past decades, you have earned your living from a single source, your business. Lately, you have been reading finance articles about the benefits of diversification, spreading your eggs into different baskets, and you decide to sell your business to put the proceeds into a diversified portfolio such as Vanguard Value Index Fund composed of 324 stocks. Not a bad decision given that you can expect market returns (potentially more – value strategies have proven to outperform depending on the selection of fund) with minimal effort and without the headache of running day to day operations.
Financial – the bad
#3. Revenues are falling. The industry seems to be disrupted by unforeseen technological advances such as machine learning or algorithms of other forms. This might be a good time to salvage the value of your business to willing buyers and make an exit to take on your next venture. Increasing and intensive competition can squeeze profits and comfortable nights of sleep usually fade away. This seemed to be the case for folks operating retail stores near Wal-Mart.
#4. One lesson I have learned and consistently have seen in life is that things change. People change. The burning passion you have founded your business in 1994 might have eroded with time and now you are looking for a lifestyle change. This is typical of many sellers; I have met with an ex-CEO who lost interest in computers over time and developed a passion towards outdoor adventures in the past years. For her, exit was the unarguably the right next step from the business which forced to sit in front of computers nearly every day.
#5. People fight and disagree all the time. Ergo, partner disputes are surprisingly common in exits from my conversations with founders. If person A wants to take the company Northeast and person B wants to take it Southwest, it is better if one start planning their exit for obvious reasons I would not expand much further into.
#6. As long as the law of nature dictates the world we live in, we are bound to grow old and retire to (hopefully) our summer homes on the beach. Although leaving your legacy business to a different owner might be challenging, it is nice to lace up those golf spikes, soak in the afternoon sun and sip on old-fashioned scotches at a day of your choosing. Mentoring and spilling wisdom on the young ones once in a while will not hurt either.
#7. In my first month of work in the Central Bank of Mongolia as an economist, I had practically the same meal in the first month for mainly simplicity and accessibility reasons. But then after a while, I got tired. I burned out from eating the same meal every day. Business owners, just as equally human as we are, seek for a change after routinely and arduously managing their business for years and years. Eventually, they decide to sell their business.
In the case of Mr. Bold, he decided to sell because he was socially motivated to move to the United States so that his high school age kids would have higher chances of attending top academic institutions in the most powerful economy in the world learning universal language of English. While there may be many other reasons I have not included in this post, you can reasonably frame each cause to the bucket of either financial, social or physical. Just as there are many reasons to start a business, there are equally as many reasons as to exit a business which reinforces the prevalence of making exit plan a process that much more useful.
Learn more about making exit plan a process by clicking on the link here.
- Orgil Sedvanchig, Private Equity Intern at Exit Plan Capital