There are many reasons why an owner might want to walk away from a business; the choice is oftentimes the owner’s. Perhaps the owner wants to sell the business before retirement. Perhaps someone has approached the owner with a terrific offer. Perhaps investors are pressuring the owner for their money. Perhaps no one in the owner’s family wants to take over the business. Perhaps it is no longer fun; the entrepreneurial spirit is gone, and the owner’s passion has changed. It could be that either the owner or the team is not committed to making things work.“Knowing When to Throw in the Towel,” Fox Business, May 2, 2011, accessed February 6, 2012, smallbusiness.foxbusiness.com/entrepreneurs/2011/05/02/knowing -throw-towel. Perhaps the owner would like to cash out the equity built in the business.Timothy Faley, “Making Your Exit,” Inc., March 1, 2006, accessed February 6, 2012, www.inc.com/resources/startup/articles/20060301/tfaley.html; “Knowing When to Throw in the Towel,” Fox Business, May 2, 2011, accessed February 6, 2012, smallbusiness.foxbusiness.com/entrepreneurs/2011/05/02/knowing-throw-towel. There are many other reasons as well:
There will also be those times when walking away from a business may not be the owner’s choice.
The owner wants no one else to run the business and is unwilling to give up equity. Every small business founder faces the founder’s dilemmaThe choice between making money or controlling and running a business.—that is, the dilemma between making money and controlling the business.Dan Bigman, “On the Hunt,” Forbes 185, no. 2 (2009): 56–59. It is tough to do both because they tend to be incompatible goals. Founders often make decisions that conflict with maximizing wealth.Noam Wasserman, “The Founder’s Dilemma,” Harvard Business Review, February 2008, 1–8. If an owner wants to make a lot of money from a business, the owner will need to give up more equityThe amount of money invested in a firm. (the money put into the business) to attract investors, which requires relinquishing control as equity is given away; investors may alter the board membership of a business.Noam Wasserman, “The Founder’s Dilemma,” Harvard Business Review, February 2008, 1–8. To retain control of a business, the owner will have to keep more equity, relying on his or her own capital instead of taking money from investors. The result will be less capital to increase a company’s value, but he or she will be able to run the company.Noam Wasserman, “The Founder’s Dilemma,” Harvard Business Review, February 2008, 1–8.
In a recent study of 212 new ventures, it was found that in three years, 50 percent of the founders were no longer the CEO, only 20 percent were still “in the corner office,” and fewer than 25 percent led their company’s initial public offering (IPO). Four out of five found themselves being forced to step down at some point.Dan Bigman, “On the Hunt,” Forbes 185, no. 2 (2009): 56–59; Noam Wasserman, “The Founder’s Dilemma,” Harvard Business Review, February 2008, 1–8. Although specific to new ventures, this information has a clear message for all small business founders/owners: wanting to make a lot of money while still controlling and running the business are not compatible goals. One must decide which goal is most important, understanding that the choice of letting someone else run the business will likely result in being forced to step down…and perhaps out of the business altogether.
The decision to walk away from a business—whether that decision is voluntary or forced—is not an easy one to make. Consult with an appropriate mix of individuals; a partner or partners if applicable, your spouse, your family, an attorney, an accountant, and perhaps someone from SCORE. Each individual can offer a different perspective and different counsel. Ultimately, however, the decision is the owner’s.
One thing is for certain. Whether the escape is voluntary or forced, there should be an exit strategy.