Have you planned for your departure from the business? Most family business owners don’t have a strategy for their exit whether voluntarily or unexpectedly. You may not think that’s a big mistake. After all your to-do list already seems endless. Besides, an exit strategy indicates finality and you aren’t even envisioning a time when you’re no longer involved.
So why take the time now to plan how the company will operate after you are no longer around? The simple answer: Without an exit strategy, you are jeopardizing the business, your family’s finances and ultimately your legacy.
Henry Ford planned ahead. He opted to retire at 56 when he purchased all the shares in Ford Motor Co. because he wanted to make it a 100-percent family owned business. He made his only son Edsel the CEO. After his son’s death in 1943, Henry Ford returned to the position as an interim solution before recommending his grandson, Henry Ford II, for the role.
Exit Strategy = Plan for Success
Let me share a more recent experience. I met with a business owner who had everything in place for his exit from the business even though he wasn’t planning to leave any time soon. Frankly, I was surprised, thrilled actually, and asked him why he did what so many do not.
He worked 20 years for a family owned business. When the owner couldn’t continue leading the company because of health issues, no one was properly trained to run the company. The family was forced to sell. The new owners quickly ran down the company that had taken 100 years to build. The original family was disappointed and embarrassed. Their business legacy was now in ruins and the company near bankruptcy.
That’s when this man decided to step up and buy the company at a very favorable valuation. So when he was planning for his ownership, he put creating an exit strategy at the top of his to-do list. He never wanted what happened to his previous employer to happen to him.
Succession Plan Considerations
This family business owner’s plan addressed both personal and business strategies. His exit strategy (also known as a succession plan) now included details such as:
- How much money he needed to support his post-retirement lifestyle
- How his son, who was working at the company to learn the ropes, would take over as the CEO
- A formal business valuation that could be updated when needed, which would make a sale or transition go more smoothly
- Names and contact information for banks he had contacted to assure financing would be available during a transition
- The inheritance implications for all his children no matter their involvement in the business
Recognizing the need to plan is the most critical step. Here are some of the details and actions to take to develop your best business exit strategy.
Start with your family. Your spouse as well as adult children need to be included early in the process. Ensure your family is protected financially whether you retire or are incapacitated and can’t run the business. Talk to your children—even those not involved in the business—about the impact of the exit strategy on them. Put numbers and values to everything. Just like Henry Ford did, Sam Walton, Hugh Hefner, Donald Trump and many others all carved out plans for their business’ survival by involving their children interested in running the business and making sure the others were taken care of too.
Plan your post-ownership life. Identify an age when you would like to retire. Ask yourself where you will be and what you will be doing. A financial planner can help identify how your business interests and non-business interests will work together to pay for that lifestyle. Discuss and document inheritance plans too.
Don’t forget unexpected interruptions. Retirement is not the only time when a company may need to be sold or new management needs to step up. Health problems, accidents or other unplanned life events can happen at moment’s notice. Continually take steps to ensure your company is set up strategically and financially so it could go on if you couldn’t come to work tomorrow.
Value the company. Don’t rely on casual discussions of multiples or napkin scribbles to determine how much you could get for the company. Have a formal business valuation done and update every few years. Doing so will give you an honest reflection of your company’s worth and can help make a sale go smoothly.
Outline plans for desired buyer. If your family will not retain ownership, who will? If you plan well, you can choose the type of buyer who meets your personal goals. A buy-sell agreement likely will be needed. If you want your employees to acquire the company, an Employee Stock Ownership Plan (ESOP) could be a great option and that takes time to plan and implement. If you want to receive the highest price then a strategic buyer may be the way to go. Strategic buyers typically are companies larger than yours that see value in blending your company with their existing operations.
Create an executive transition plan. Whether family members or existing staff are designated as the successor leaders, make sure they are being groomed to run the company. Henry Ford re-assumed the top role at Ford Motor Co. after his son’s death, giving his grandson a couple years to work for the company in a non-CEO role to learn the ropes. If you don’t have someone identified, find that person because you’ll need to start training them.
All the steps in setting up a good exit strategy can have unintended positive effects. An exit strategy makes good business sense. Not only does it address the “what’s next” phase but it can identify and address current shortfalls or areas of opportunity to improve the business. In addition, if the company receives an unsolicited purchase offer, you will be well prepared to respond and maximize the sale price
Don’t go it alone
You don’t need to sit at your desk and agonize over how to plan and implement an exit strategy. Your accountant or other business adviser can help. They won’t do all the work themselves but they can help you set up a course of action and put you in touch with other partners, such as an attorney, financial planner, insurance representative and investment banker, to ensure your plan is the best exit strategy for you.
Ready to get started or have some questions? Contact Ray Lampner today.