Every year around the world, entrepreneurs sell or cut ties to their businesses, including in countries known as being optimal for entrepreneurship, like Germany, Japan, the United States, the United Kingdom, Switzerland and Canada.
But the majority of these entrepreneurs don’t have an exit strategy and therefore lack a full understanding of what’s involved in leaving their companies.
An entrepreneurial exit entails cutting ownership ties and managerial function in a company. Among the possible reasons are:
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The health and age of entrepreneurs.
The emergence of another lucrative and rewarding opportunity.
The inability to cope with market turbulence and to mitigate against market uncertainty.
The incapability to manage ongoing financial problems, as well as to deal with unavoidable financial problems that surface during crises, such as during the COVID-19 pandemic period.
Exit strategies
Entrepreneurs planning an exit from their business can follow different withdrawal strategies (for example, family succession, private sales to individuals, management buyout, management buy-in and initial public offerings). The most important consideration is making the wise decision and selecting the most appropriate withdrawal strategy.
Our study of 302 firms operating in the European Union revealed that withdrawal decisions made by entrepreneurs are influenced by their various social networks, including family and close friends and colleagues, collaborators and business partners.
These social networks’ relationships (or ties) can be classified as “strong” or “weak.” Strong ties are those nurtured with family members and friends. Weak ties are those established with business associates, acquaintances and other distant individuals, which often bridge distant and distinct social networks to connect the entrepreneur to information and resources that aren’t readily available and easily accessible through strong ties.
We discovered that if the size of the weak ties network is bigger than that of family and friends, entrepreneurs are more likely to choose a sale of the firm.
This new insight can be explained by the fact that professional networks with workplace colleagues and business partners are usually the source of multi-faceted industry and sector perspectives, elusive market or technology-related information and novel ideas that can be especially helpful in assessing the value of a company and the benefit of selling it.
This “opportunity capital” allows entrepreneurs to fully and thoroughly explore and exploit emerging opportunities, and understand how to best capitalize on opportunities.
At the same time, according to the results of our research, it’s not just the size of the entrepreneurs’ network, but also the relevance of those connections that’s a significant predictor of the selection of an exit strategy.
Family succession
Interestingly, when strong ties are more relevant to entrepreneurs than weak ties, they will be much more inclined to opt for family succession.
This seems to be particularly true for family business owners who are emotionally attached to their business and want to see their firm continuing its life under the hands of their relatives, creating a multi-generation family firm.
It should also be noted that entrepreneurs, especially those who are unprepared and lack experience in choosing and planning a business exit, may be under a lot of stress when having to make exit decisions and may find it hard to stay focused and difficult to feel confident about their decision-making.
That suggests trusted family and friends are an important source of emotional support. This emotional support can result in family and friends having a greater influence in an entrepreneur’s future planning and decision-making.
Social networks critical
So what is the most valuable takeaway here?
It’s clear from our analysis of more than 300 European small- and medium-sized enterprises that social networks play a critical role in helping an entrepreneur decide how to exit from a business, highlighting once again the many benefits of both personal and professional relationships.
It’s also clear that the accumulation and expansion of the “who-you-know” information and knowledge through social networking can help generate “what-you-know” information and knowledge, which can be useful during normal times as well as in times of crisis.
That means entrepreneurs need to pay a lot of attention to the creation and maintenance of their social networks because their importance may grow stronger during a time of crisis.
These social ties can potentially help entrepreneurs acquire needed information and insights, make better assessments of opportunities or threats regarding an exit strategy and receive feedback and emotional support.