The onset of the pandemic has forced unexpected change into the business models of nearly every industry across the country. What was once thought to be a quick dip and recovery has been strung out and grueling for many business owners. Revenues for manufacturing, retail, travel, and tourism are the hardest hit by the economic effects of coronavirus, but many other industries are also affected by closures and economic uncertainty.
With no V-shaped recovery on the horizon, keen market watchers expect the number of companies to file for bankruptcy in 2020 to rival the previous record set in 2009, following the Great Recession of 2008.
This may create the perfect storm for business owners to weigh the question: When is it time to sell or shut down?
An economic slump just maybe one convenient talking point for exiting or shutting down a company, but other businesses may be experiencing atypical demand as a result of consumer behavior in quarantine. Both are good scenarios for business owners to ask whether it’s time to fight on or face up.
Contemplate the Grow-or-Sell Mandate
There is a psychological inflection point where business owners are likely to have serious thoughts about either raising more money to grow or selling the business.
While growing a business, founders are as busy raising new rounds of funding for expansion as they are running the existing operations. When the enthusiasm for fundraising abates, a founder’s mind may move onto the next thing or even retirement. Harvard Business School professor Noam Wasserman calls this weighing of control and value creation the “rich versus king” dilemma. It’s a real psychological trigger to consider an exit.
Weigh the Stress-vs.-Hope Continuum
Business owners spend a great deal of time projecting hope while silently stressing. Hope keeps the ship upright. Stress keeps it moving forward. At some point, however, stress may overcome hope, causing the ship to list.
In a Gallup poll from May 2020, the stress level of small business owners soared. The percentage of male small business owners who said they experienced daily stress jumped to 51% during the pandemic versus 45% before. For female small business owners, that feeling of daily stress surged to 62% versus 38% before.
When stress persists and affects the behavior, health, and rationality of the owner, it is another psychological and strategic reason to look to sell.
Manage the Innovate-or-Die Motivation
There is a price to be paid for not innovating. Today’s Airbnb could be the next Toys "R" Us. Markets change over time and companies that stay out front are rewarded, while those that don’t risk losing market share and revenue.
According to McKinsey Global Innovation Survey, four out of five executives think their existing business models are at risk of being disrupted through new tech in the near future. The pace of technology advances across many industries is both thrilling and a threat. There is a real cost to the constant change in a company or business model, but there is a higher price to be paid for not innovating.
When a founder or owner loses the passion for innovation in a quickly-changing industry, that laissez-faire will begin to make its way into the well-being of the business. Innovation fatigue is another good sign that it’s time to let go.
Don’t Let Perfect Be the Enemy of Good
American financier J.P. Morgan reportedly said, “I made a fortune getting out too soon.” Owners who are contemplating selling a business but holding out for the best offer may want to heed this advice.
It’s important to be realistic about valuation, especially at a time when the acquiring parties are scrutinizing their own financial strength. Owners should assess the most likely sale price now and the greater stretch number, then calculate the time-value between the two figures. A dollar plus interest now may be a safer bet than a 25% chance of $2 in a year.
Recognize Limitations on Expertise
Bob Dylan crooned, “Please get out of the new [road] if you can't lend your hand, for the times they are a-changin'.” Another scenario that is an increasing factor in exits is executive competence in changing industries. Running a media business yesterday demanded a leader with expertise in publishing. That same company today is being displaced by media companies run by data gurus and digital-minded executives.
As ego-driven founders know, this is often the hardest of all conclusions to come to, but it's also the most important inflection point for continued growth.
Thread the Needle With a Strategic Partnership
A company’s problems may be institutional, such as having a great sales force but the wrong product, or the converse. It could be that the company has the right product but in a location that makes it expensive to bring goods to market.
Finding a strategic partner for an exit could be the answer. In a survey of 1,300 CEOs in 2018, KPMG found that 33% favor strategic alliances over the next three years, compared with 16% who favor M&As.
Partnering with a company that is a perfect complement to a company’s weaknesses is another way to share risk and improve the company’s growth trajectory. It’s not an exit, but it might be a smart compromise.
There are many triggers that business owners should consider the longevity of their companies and their own health. These external and internal signs are worth noting, especially in today’s uncertain environment. An experienced advisor can play a critical role in making the best decision and seeing it through.