Exit Strategy Options For Small-To-Medium Sized Businesses

As the old saying goes, “you don’t know, what you don’t know.” When you are managing the day-to-day business there is often little time to think about an exit strategy or perhaps you never even considered an exit strategy. However, as your business matures and you are either approaching retirement, or are a serial entrepreneur ready to pursue something new, small-to-medium sized business (or “SMB”) owners should start to consider how to capitalize on the great company they’ve built.

First, let’s be clear on what an exit strategy is. An exit strategy is building up a company’s revenue and valuation and selling it to another company or investor to capitalize on the gains. The owner then leaves the company, releases control and accepts a cash out for the valuable company they built.

Many small-to-medium business owners assumes their kids will step up and continue the family business. If you are a third or fourth generation family business, god bless you, that is a rare accomplishment! The reality is, most SMB’s will simply shut down the business and cease to exist because they could not find a suitable buyer or no one to pass it down to in the family because kids often have their own plans and purpose in life.

With strategic guidance you can cash-in on the great business you’ve built through a number of potential investors. Here are a few exit strategies to consider:

  1. Sell to your competitor
  2. Private equity acquisition
  3. Partial liquidity sale to a non-controlling family office
  4. Sell to an individual “Searcher”

Selling to your competitor is an ideal exit strategy


Selling to your competitor is likely the easiest and quickest way to exit your company. More than likely you know who the CEO of your competitor is and hopefully it’s a mutually respectful relationship rather than a toxic rivalry. If you already have this personal relationship then you can reasonably manage the negotiation yourself without a business broker. This is an ideal strategy for your competitor to acquire growth via a book of business to expand into a new vertical or existing vertical with an expanded territory.


Why a private equity acquisition is ideal for SMB rollup opportunities


Private equity (PE) firms generally take a controlling interest in their portfolio companies. However, you may be able to negotiate a minority ownership and remain on the board while earning equity; this would be a good scenario if you still have the energy to be involved and offer value on a part-time basis. If you’re ready to completely check out and focus on your previously sacrificed hobbies, then by all means, sell the whole company.

PE firms often look for rollup growth opportunities within a certain investment sector. If your business is within a fragmented sector where several regional companies can be combined to create a larger and more valuable enterprise, then you are an ideal acquisition target for private equity investors.

A few industry examples for ideal consumer rollup strategies are regional retailers, consumer brands who are in different sub sectors for a conglomerate rollup, or ingredient brands (e.g. Gore-Tex or BOA) who offer substantial value for a large consumer category (i.e. Nike acquired the “air” ingredient technology in 1977, which has now become synonymous with their sneakers).

Using the regional retailer example, let’s review the fireworks retail industry. These specialty retailers are very fragmented and are usually confined to a single state located off of highways servicing interstate travelers. While each state has differing laws relating to what types of fireworks can be legally sold – and a couple states outlaw firework sales entirely – there is a multi state and multichannel opportunity for a roll up strategy to achieve better economies of scale and create a (semi) national brand.

How do I know this?

I’ve consulted with a private equity firm who is considering this type of roll up strategy. It’s a fascinating opportunity but of course, also has risks. The most obvious risk is the majority of firework sales are generated during the 4th of July holiday.  More due diligence is being conducted to determine if this investment proceeds. 

Therefore, if your SMB is in a fragmented market, and the business is generating the minimal required EBITDA results within your industry, seek out private equity firms that invest in your sector and start the dialogue with them.


Family Office Investors are a little known secret, and many of them keep it that way


With very few exceptions, a family office is generally much smaller than private equity firms as far as AUM (assets under management). These investors are high net worth individuals who have made millions of dollars during their careers, or are the heirs of a wealthy family dynasty, and have created an investment fund within their family to seek private investments opportunities.

Family office investors generally take a minority position in a company and rarely have the bandwidth or desire to operate the business. This is an option if you want to “take chips off the table” (e.g. cash out a portion of your equity) but continue to manage the day-to-day operations. When the timing is right, you can revisit selling the company either to your competition or private equity as described above although you will have to split the proceeds with your family office investor relative to each party’s equity ownership.

Generally, a family office mindset is “don’t call me, I’ll call you” and take great care to remain anonymous to minimize unsolicited emails and phone calls. These family investors employ business development executives and have well-connected referral networks to create a pipeline of deal flow to find opportunities that fit their investment thesis. It is also common that several family offices will co-invest together and amortize due diligence costs. While they may have a website, family offices don’t exactly advertise, so discovering them with a google search will be difficult.

So how do you find a relevant family office investor?


First and foremost, word of mouth. Talk to high net worth individuals in your community to gain a couple leads and you will find them eventually.  Secondly, connect with universities, or your alma mater, and find out who the largest donors are to their endowments; these contributors are high net worth individuals and will be a good resource to discover family offices. 

Another option is to attend events that host family office executives such as the Opal Group.  Once you get to know these folks and establish a relationship and therefore, trust, they will be happy to help you. If one family office doesn’t invest in your sector they will likely know of another family office who does and will be willing to make a relevant investor introduction.

Searchers are thesis and purpose driven executives looking for a great investment opportunity


Lastly, for smaller businesses that are below the threshold of private equity firms or family offices (i.e. less than $2M in revenue or below $500k in EBITDA) there is a social media platform called Searchfunder, which is similar to LinkedIn but hyper-focused on investors in the lower to middle market. Although a relatively small network, this is a good place to market your business to single investors who desire to acquire and become the CEO of your well established business. Oftentimes these searchers will have a financial sponsor, likely a micro private equity firm, who will co-invest with them.

Searchers can be former small business CEO’s, former corporate executives or recent MBA graduates who want to lead a SMB but don’t want to start it from the ground up. Business owners and entrepreneurs who have developed a great business often love the creativity of starting something new but want to move on to their next brilliant idea. Therefore, Searchers provide a good fit because they desire to scale an existing business and are not interested in creating a start up from zero.

Get your company into fighting weight to increase the probability of a cash-out exit


In order to improve the probability of your business exit strategy, it’s important to understand the investment thesis of these potential investors and start to build these relationships. You must understand what metrics (e.g. KPI or key performance indicators) these investors care about most and develop a business plan that achieves these metrics. Most importantly, investors will need to know what your EBITDA is and will use this profitability metric to determine the valuation multiple of your company and thus, how much money you will walk away with on your way to the Florida Keys (assuming you enjoy the beach during retirement).

Selling your company to an investor is a job in and of itself and there are many investment banker firms who can manage this for you and well worth the expense in my opinion. The point is, you must be aware of your options and prepare ahead of time so you don’t leave money on the table.

How can SMB’s prepare for an exit strategy?


In short, outsource it to Growth Mindset Advisors.

If you are the president or owner of a small-to-medium business (SMB) and any of these pain points sound eerily familiar to you, I encourage you to reach out and let’s discuss how I can help optimize your business growth. If I’m not the right fit, I can likely refer you to someone who is.