Why do I have to leave the business, though?
Exiting a business is sometimes a thought that never enters an entrepreneur’s mind, but I would argue that it should. Even if you have the sentiment that your business should be passed down through your family for generations, this in itself will create an exit event for you at some point in the future so it is wise to plan for it. Then of course we have the fact that most investors (all) would like to see a return on their investment at some point. The harvest event is when the majority of this return on investment will happen. And just like most of the things we have discussed so far, there are a number of different routes a shareholder can take when it comes to cashing out.
What are the ways I can harvest and leave a business?
Below are the different ways that a shareholder can harvest their ownership in a company. This list is taken from the excellent book we have been referencing throughout this entire series called Winning Angels by David Amis and Howard Stevenson.
Partial sale – A partial sale is exactly what you would imagine, and only a single investor’s share of ownership is sold. This could be sold to a new investor, existing investor, or employees of the company.
Initial public offering – Glitz and glamour surround this option, but the truth is that it can be risky, costly, and sometimes not the most profitable choice. Even though, the coveted IPO involves turning a private company public, which long term could result in very high returns if the company continues to grow.
Financial sale – This happens when a business decides to purchase your business because of your strong cash flows. Think Warren Buffet’s Berkshire Hathaway. There isn’t always a relation between the businesses that are added to their portfolio aside from strong cash flows.
Strategic sale – If a competitor buys your business, it would be considered a strategic sale. This could also be extended to companies that are not direct competitors, but instead could benefit from owning a certain company for synergistic reasons. For example, a vehicle manufacturer might buy out a specialty parts supplier.
Reorganize (Chapter 11) – You don’t want to be in this boat, as you’ll probably lose the majority of your investment. Personally, I still remember how I invested in Kodak stock years ago only to one day find out that they had filed Chapter 11. My stock was worthless – just like 35mm disposable cameras.
Bankruptcy (Chapter 7) – The most dreaded of all, it’s game over for the business. But thankfully, we have bankruptcy laws that allow an entrepreneur to get back on his or her feet to give running a business a second try. Remember to learn from failure, but never to give up.
There is one final twist, however. Harvesting a business doesn’t always mean leaving. If a shareholder decides to enact a “walking harvest” (I left this one out of the list above) everything stays the same as it was before, but revenue will begin to be distributed to shareholders each month. If shareholders have grown very fond of the business and are even involved with its day-to-day operations, this type of harvest might be the best choice. The result will be a return on investment, and the continuation of a special idea that became a meaningful project.
David Amis-Howard Stevenson (2001). Winning angels: the seven fundamentals of early-stage investing. Pearson Education.