Every business, whether a thriving conglomerate or a modest start-up, has a lifecycle. This cycle has phases of growth, plateaus, and sometimes, decline. Exiting the business world is inevitable, and while it may seem daunting, it’s essential to understand how to accomplish it smartly. Let’s shed light on two of the most traversed exit pathways: Liquidation and Selling.

I had a marketing and analytics company. My business partner and I built it to sell as that would be our “old age pension plan.” We had a service business without tangible assets – there was nothing to liquidate. Tangible assets include inventory, a building, rolling stock, manufacturing equipment or machinery, or office furniture. There are two types of tangible assets: inventory and fixed assets. We would choose between liquidating and selling if we had a manufacturing company.

 

As we delve deeper, we’ll explore the intricacies, the merits, and the potential pitfalls of each.

Liquidation: Beyond the Basics

At its core, liquidation is wrapping up business operations and selling off assets to convert them into cash. But why do businesses choose this? Some reasons include:

• Shifting Market Dynamics: Rapid technological advancements or new regulations might make a business model obsolete.
• Unsustainable Overheads: Operating costs might become unmanageable, leaving liquidation as the best option.
• Personal Reasons: The owner might have health issues or other personal concerns that necessitate a quick exit.

The Silver Lining: Pros of Liquidation

Immediate financial relief is one of the primary advantages of liquidation to generate funds rapidly. Liquidation is beneficial for settling any outstanding obligations.

• No Strings Attached: Once you’ve liquidated, there’s no looking back. All ties to vendors, clients, or other stakeholders are severed.
• Ease of Process: With a detailed, accurate inventory of assets and the right buyers, liquidation can be more straightforward than navigating the complex waters of selling.

The Flip Side: Cons of Liquidation

A business can compromise returns when rushed sales or auctions might not fetch the optimal market price for assets. Compromising could result in a loss, especially when assets have a significant market value.

• Perception Matters: A business in the liquidation process might look like a failure, potentially affecting future entrepreneurial ventures.
• The Emotional Toll: Businesses aren’t just about numbers. They hold memories and aspirations. Witnessing its dissolution can be emotionally challenging. I know business owners who identified so strongly with their companies that they purchased it back as the emotional toll was so high.

Selling: Passing the Baton

The act of selling involves transferring the business mantle to another entity. This transfer isn’t merely about assets, client relationships, brand reputation, and ongoing projects. We researched and discovered the type of sale we wanted early in the process.

 

Types of sales can vary:

• Outright Sale: Here, there’s a total handover. After the finalization of the sale, the previous owner has no operational ties to the business. We had Fortune 500 corporate clients with whom we built relationships. We were critical to the business, so we decided against this type of sale.
• Strategic Mergers: This involves combining with another business to form a more formidable market entity. We investigated a merger; however, the interested companies wanted us to stay and run the business. Our company would become a department in the larger company.
• Acquisition: Typically, a giant firm absorbs a smaller one, seeking to leverage the latter’s market presence, technology, or other assets. An acquisition suited us. We sold to a new venture company that wanted us as their platform company to create massive growth opportunities in different verticals. We only needed to stay long enough to transfer our knowledge and clients. An acquisition was the best option.

The Bright Side: Pros of Selling

Maximizing returns in a well-negotiated sale can offer substantial financial benefits, making the years of hard work worth it.

• Legacy Preservation: The business continues flourishing, maintaining the brand’s legacy and the founder’s vision. Our children had no interest in our company, but our vision was rock solid, and we wanted that to be our legacy.
• Employee Security: Often, the company retains staff, ensuring job continuity and preserving the company culture. We identified vital personnel (keymen) with company knowledge to continue without us.

Not Always Smooth Sailing: Cons of Selling

There can be lengthy timeframes, from finding the right buyer to finalizing the sale; the process can be protracted, sometimes taking years.

• Intricate Processes: Valuations, due diligence, contractual negotiations – selling a business involves several complicated steps. Owners have unrealistic expectations and think their companies are always worth more than the valuations. Additionally, some contracts have a clause stating that contract renegotiation must occur if the company changes owners.
• Price Disparities: There’s always a risk of the business being undervalued, especially if there’s a rush to sell or if market conditions are unfavorable. Buyers want to get the best price and offer way less than the actual worth.

Pivotal Factors Influencing the Decision

When you stand at the crossroads of liquidation and selling, your path will profoundly affect the culmination of your entrepreneurial journey. Essentially, the decision between liquidation and selling isn’t merely transactional—it’s deeply strategic. It requires a blend of introspection, market understanding, and foresight. By weighing these detailed aspects and seeking counsel from business advisors or industry peers, entrepreneurs can decide to align with their business goals and personal aspirations.

 

To navigate this decision wisely, consider the following nuanced facets:

Economic Health of the Business

• Financial Statements. Periodically reviewing your profit & loss statements, balance sheets, and cash flow can give you a pulse on the financial health of your business. Businesses with consistent profitability, healthy cash flow, and manageable liabilities are more attractive to prospective buyers.
• Growth Projections. A business with consistent growth or solid growth projections based on verifiable market trends is likelier to find a buyer willing to pay a premium. We used the Inc. 5000 Fastest Growing Companies in America list to gauge our growth. We made the list six times in eight years, which meant our growth was strong.

Industry Trends

• Market Research. Regularly investing in market research can provide insights into emerging trends, technological advancements, and shifts in consumer behavior. If the industry outlook appears promising, selling might be a more strategic move.
• Competitor Movements. Keep an eye on your competitors. If they’re being acquired or merging, this could signal a trend in the industry that might influence your decision. In 2016, when we sold, marketing companies were hot. Our competitors were getting offers from ad agencies integrating social media into their business. Also, VCs were scooping up all types of companies because they had excess cash.

Reason for Exit

• Personal Fulfillment. Sometimes, business owners feel they’ve achieved what they set out to do and seek new challenges. In such cases, selling to someone who can take the business to new heights might be ideal. We did not have the capital to grow the company. Our buyers had the capital to hire the people and build the needed systems. The company has seen over 30x growth in the last seven years.
• External Pressures. Factors like regulatory changes, drastic shifts in the market, or personal reasons might make liquidation more appealing, especially if these changes threaten the viability of the business. Regulatory changes did impact our company. Corporations asked us to provide employees instead of contractors because they did not want to incur liability if anything happened on-site. Small business owners saw increased auditing, and insurance rates were drastically escalating.
• Succession Planning. If there’s no heir or next generation interested in taking over, selling could be a way to ensure the business continues to thrive, albeit under different leadership.

Urgency

·         Immediate Financial Needs. If there’s an immediate need for funds, be it for personal reasons or to meet business liabilities, liquidation can be a quicker solution. While it might not maximize the potential value, it can address pressing financial concerns.

·         Market Timings. Sometimes, waiting for the perfect buyer can maximize the sale value. However, if the industry is going through a downturn or if economic indicators predict a recession, it might be prudent to expedite the sale.

 

Choosing the right exit strategy is paramount. While liquidation offers a quick, albeit sometimes less lucrative exit, selling promises better financial returns and legacy preservation. However, it comes with its challenges.

It’s not a decision to take lightly. As we’ve seen, multiple variables come into play, from market dynamics to personal motivations. Therefore, business owners should be equipped with all necessary information, perhaps even seeking professional advice, to make the best choice for their unique circumstances.