I had dinner with a group of friends this week, one of whom is a CEO looking to plan an exit from the consulting firm he built over the last 25 years. Since this group occasionally discusses business issues, we talked about the options and issues our friend will face going forward. The discussion brought out some points that are worth sharing with other CEO/entrepreneurs looking to exit their businesses in the next few years. I’ve already written frequently about starting earlier than CEOs think necessary, a common misstep perhaps because they don’t think about it until they decide it’s time to do it, virtually always too late to optimize the outcome. In this case the “when to start” issue was front and center.
But that aside, this conversation had two unique assets that added value and created different challenges.
- First, proprietary software tools that were developed over the years, their intellectual property (IP) and that made this firm’s services more effective and more valuable than many of their peers. An asset that is often as difficult to value as it was to create, the effective application of this special sauce is overseen by its founder, our would-be selling CEO.
- Second, the industry image of this firm – the driver behind its growth, the leader of its sales and marketing effort, the recognized voice when its results are delivered, and the face every client thinks of when this firm comes to mind – is the guy who is looking to exit.
So, what could go wrong? Several otherwise viable exit options become almost unworkable. For example:
- Selling to the in-house team who know the business – the skilled team of technicians who use those proprietary tools – won’t work. They are good at using them but none of the team has the skill set to step into the CEO’s shoes, so internal buyout alone is off the table.
- Selling the firm to an outsider or hiring an outsider to become the new CEO leaves the leader’s quarter century of relationship building in limbo, a very critical asset to the firm’s marketing and closing success. Transferring those relationships can take years to make happen, during which the departing CEO could be tied in, as in “not departing.”
- Selling the firm to a larger competitor in the same field could happen, but they may not value the IP as highly as if the firm were kept intact, with its image and reputation unchanged in the minds of its clients. Possible result: potentially much smaller selling price, or locking in the selling CEO for a few years to oversee the realization of the anticipated value.
So now what? The group had a variety of ideas and suggestions for how to proceed, but virtually all recognized the need to start now and accept the likelihood that the selling CEO will be around a bit longer than he wanted to. If that’s only a preference, it’s probably acceptable. Were it a necessity, the result could be very painful. We know, because we’ve been helping private company CEOs for over 30 years.
We are Your CFO for Rent.