Trapped without a Successor
Over the years, we have heard every excuse imaginable for why a business owner has not developed a succession plan. Clearly, there are some very real emotional and personal issues that are involved when a business owner steps aside. But even in cases where an entrepreneur has crossed the “emotional chasm” and desperately would like to hand the reins to a successor, not all are able to do so. Why is it so difficult for even the most committed business owners to groom a successor?
Prioritizing the Lifestyle
Our experience is that, in the lower middle market, many businesses are just not big enough or profitable enough to accommodate a key lieutenant who could someday run the company. It’s a common trap for entrepreneurs to become reliant on the cash flow from their businesses to support their basic lifestyle needs, incapable of funding the investment in a potential successor.
There are only a few ways out of this potentially endless cycle. The owner can initiate austerity measures in his personal life. He can borrow money in the hopes that adding a senior executive will grow the business and produce enough cash to service the debt and support his lifestyle. Or he can sell some or all of his business.
Often, the idea of reducing personal expenditures is not even a remote possibility. Since it is the solution most in the entrepreneur’s control, if he or she were going to do it, it usually would already have occurred. Similarly, borrowing money is rarely a legitimate option because, in these situations, the company’s size, profitability or balance sheet typically cannot support it. And selling a portion of the company and dealing with the dynamics of a partnership is so unappetizing that it would not be worth discussing.
Limited Exit Options
These are the reasons an entrepreneur can become trapped. Without the cash to invest, the business stalls (or potentially declines) and the owner has to wait until the proceeds from a sale will support him and his family through a shortened retirement. Moreover, when he sells, he will need either to attract interest from strategic investors (which is not always easy for small companies to do) or find another buyer who can step in and run the business, someone who can essentially offer a pre-packaged succession plan.
In situations where a business owner has not developed a succession plan and there may be limited interest from strategic buyers, Bootstrap Capital is an excellent solution. Our owner-operator model can provide liquidity to retiring business owners and deliver the leadership to keep the business from missing a beat.