Why most business founders should stop thinking about selling out

by IdeaTransfer on May 22, 2011

The numbers favor internal ownership transfer over outside buyers.

There are six million employer firms in the private business sector.  Estimates say at least 50% of founders expect to sell their companies in the next ten years.  Who is going to buy all six million companies?

But there are tens of millions of candidates for the role of internal successor.  Instead of competing for a shrinking number of external buyers, business founders should focus on the millions of potential successors among family members, MBAs, college grads—plus all the once-eager young minds now stuck in big business career tracks they believed would be fulfilling.

The money favors internal ownership transfer over outside buyers.

When business owners decide to sell they get a valuation and immediately discover they need to invest in the business to assure the price they want.  In a buyer’s market the investment is going to be substantial, so they build over several years to get the multiple where they want it.  A buyer buys—is this the entrepreneur pot of gold?  Not when they realize that the buyer just bought the improved company with money the seller put in the pot!

With an internal ownership transfer the increasing value of the firm is tied to the value of the successor’s commitment.  And tied to the value of the knowledge, relationships, and leadership that the founder transfers to the successor.  The success that relationship builds rewards both parties.  They only need to create and stick to a financial plan that monetizes the transfer of ownership at the right time and in the right manner for both founder and successor.

The economy favors internal ownership transfer over outside buyers.

What really happens when outside buyers take over a company?  They don’t buy out of love.  They want a high return on their investment as quickly as possible.  What works faster—boosting revenue or cutting costs?  So a firm built with love over decades will now be reinvented over months with efficiency.  Who wins?  The investors, yes.  But maybe not the employees or the suppliers or the distributors or the customers—and probably not the economy.

On the other hand, successors are motivated to shape the company to capture new markets.  Not the love of an entrepreneur but the love of an innovator and adaptor.  That’s good for the economy.  Good for employees.  Good for customers.  And it’s perfectly in line with the entrepreneurial values that make America unique and inspiring.

 

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