Why business exits are important for Nigeria’s economy

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All entrepreneurs will someday leave the company they founded. They may sell the business, shut it down, or die in the saddle.

But given a choice, why, when and how should entrepreneurs exit? If business exits are inevitable, it is important that as business owners and stakeholders of Nigerian businesses we consider ways to maximise the impact on the economy.

Within the last decade, we have witnessed several exits in the form of public listings from mid-sized companies, particularly in the financial sector.

But not many companies are able to meet the criteria for being listed on the stock market, and, following the global financial crisis, IPOs have lost their mass-market appeal.

At CompexAfrica we focus on selling and buying companies, and while doing this we have become aware of several opinions and questions people have when it comes to exits.

One: “Only distressed companies sell.” Wrong!

Two: “Can I possibly sell my business?” Probably.

Three: “Why should anyone sell a profitable business?” Various reasons. You may be a serial entrepreneur. Market forces might be indicating you should sell. You may not have what it takes to take it to the next level, or there may be other strategic reasons.

We admire acquisition deals when they happen: Facebook acquires WhatsApp for US$19bn and Interswitch buys VANSO for ₦15bn ($476m). These are two examples of successful businesses coming together to form a bigger company, yet we continue running businesses with no exit plan. The results of this are that some serial entrepreneurs are stuck running their first businesses; some companies don’t get to reach their full potential; and there is a high rate of business death amongst SMEs.

Nigeria has over 17 million SMEs contributing about 49% of the GDP – thus making SMEs a driving force of the modern economy. With the current socio-economic realities, there has been more effort made to develop entrepreneurship across all sectors. The focus is still on starting a business, however, and 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 that this is beneficial to the economy.

Importance of exits for the economy

Entrepreneurial exit triggers a process of ‘entrepreneurial recycling’ in the economy: companies constantly looking to each other as potential buyers and sellers for expansion, or strategic reasons 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 mid-sized businesses.

Right now, when people think of entrepreneurship in Nigeria they think of starting a business from scratch. The effect of this is that Nigeria has a lot of businesses that should or could complement each other in order to serve the customers better and create more wealth for the business owners. But without an exit culture there is little or no synergy.

Additionally, a lack of access to capital continues to be on the list of the top five problems facing small businesses. Having a culture of business exit – where entrepreneurs can sell their businesses and new entrants can buy a business to scale up – would encourage more investments in SMEs from investors interested in cashing out.

I was talking to an investor at DEMO Africa about investment in Nigeria and he said that investment in SMEs is risky – and that the risk outweighs the reward.

The time it takes to recoup capital and actual returns can be over five years and most SMEs don’t last that long. Worst of all is that there is no prospect of a big cash out via exits. More exits have the potential to excite more Nigerians to invest in Nigeria.

Importance of business exits for young entrepreneurs

Developing a business landscape with policies that encourage exits is one of the biggest incentives for more youths to engage in entrepreneurship. Knowing that one day they could potentially cash out big from their decent business will motivate them. 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 for the industry

Business exits also attract more investors and entrepreneurs and boost the competitive balance in an industry. The recent Interswitch purchase of VANSO provided validation for tech investors and entrepreneurs: it was possible for modest companies to be sold to a bigger company or become bigger.

We also saw the number of technology entrepreneurs 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 mid-sized business.

Besides all these benefits, globally the existence of entrepreneurial exits challenges business owners to run their businesses using best-practice standards. 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 exits is one of them. We need to start thinking of businesses that outlive business owners. Entrepreneurs need to think of a succession plan for their business in advance.

Ifeoma Nwakwesi Uddoh is the chief operating officer of Sasware, a company that invests in startups, and has invested in CompexAfrica. She tweets as @ifyhopee.