Entrepreneurs will someday leave the company they founded for various reasons. They may sell the business, shut it down, or they may die in the saddle. The question has always been why, when and how the entrepreneur should exit. If business exits are inevitable, it is important that as business owners and stakeholders of Nigerian businesses we consider ways to maximize the impact on the economy.
Within the last decade, we have witnessed a number of exit through public listing (IPO) from mid-sized companies particularly in the financial sector but not many companies can meet the criteria for being listed on the stock market and following the global financial crises, IPOs have lost their appeal to the masses.
In the last few months of advocating exits for small and mid-businesses at Compexafrica, while we have focused on selling and buying companies, we have become aware of a number of opinions out there when it comes to exits:
Only distressed companies’ sell, wrong! Can I possibly sell my business? Probably. Why should anyone sell a profitable business? Various reasons; i) you are a serial entrepreneur, ii.) Market forces iii.) The time is right. iv) You don’t have what it takes to take it to the next level. v) Strategic reason, etc
We admire acquisition deals when they happen; Facebook acquires Whatsapp for $19 Billion and Interswitch bought Vanso for =N=15 billion. These are two examples of successful businesses coming together to form a bigger company yet we continue running businesses with no exit plan. The result of this is some serial entrepreneurs are struck running their first business, some companies don’t get to reach their full potential.
High rate of business death amongst SME’s
Nigeria has over 17 million SMEs contributing about 49% of the GDP thus making SMEs the driving force of the modern economy. In the current social economic realities, there has been more effort around developing entrepreneurship across all sectors. However, the focus is still on starting a business but the entrepreneurial process is more than just the creation of a new venture and does not end with creation, but rather with the entrepreneurial exit. The impact of exit is most times viewed as beneficial only to the entrepreneur but a broad view can prove this is beneficial to the economy as a whole.
Importance of exit on the economy
Entrepreneurial exit triggers a process of ‘entrepreneurial recycling’ in the economy; Companies would constantly be looking to each other as potential buyers and sellers for expansion or strategic reason creating this excitement that new buyouts can happen anytime. This creates an opportunity for some micro businesses that could have died to live longer and possibly become midsize businesses.
Right now, when people think of entrepreneurship in Nigeria, they think starting a business from scratch, the effect is Nigeria has a lot of business that should/could complement each other to serve the customers better and create more wealth for the business owner(s) but without an exit culture there is little or no synergy. Additionally, lack of access to capital continues to be on the list of top 5 problems facing small business. Having a culture of business exit where entrepreneurs can sell their business and new entrance can buy a business to scale up would encourage more investments in SMEs from investors interested in big cash outs.
I was talking to an investor at DEMO Africa about investment in Nigeria and he stated that investment in SMEs is risky and the risk outweighs the reward. Time to recoup capital and actual returns can be over 5 years and most SMEs don’t last that long and worst there is no prospect of big cash out via exits. More exits have the potential to excite more Nigerian’s to actually invest in Nigeria.
Importance of business exits for young entrepreneurs
Developing a business landscape with policies that encourage exits is one of the biggest incentive for more youths to engage in entrepreneurship knowing that one day they can cash out big from their decent business. It minimises the risk for them. Secondly, when entrepreneurs and business owners exit, they channel a portion of their newly acquired wealth, time and experience into other, often multiple, entrepreneurial activities with clear economic benefits.
Importance of exits on the industry
Business exits attracts more investors and entrepreneurs and boost the competitive balance in an industry. In finance technology recently, Interswitch purchased Vanso for 15 Billion naira and while that made headlines, for tech investors and entrepreneurs in Nigeria it provided validation that modest companies could be sold to a bigger company or become bigger. We also saw the number of technology entrepreneur and investors working within the finance technology space increase. Companies benefit from exits, with new management and drive that can turn a micro business to a midsize business.
Asides all these benefits, globally the existence of entrepreneurial exits challenge business owners to run their business with best practice standard. They comply with tax, regulatory policies and set up business processes for operations and this has in some cases improved the bottom line.
The economic recession has stirred an entrepreneurial revolution. We need to develop enabling cultures that can sustain this revolution and exit is one of them. We need to start thinking of businesses that outlive business owners and entrepreneurs need to think of a succession plan for their business in advance. Be a business exit advocate!