By Kevin Kays
In my nearly ten years as a business coach with business advisory services company The Alternative Board, and as an exit planner with Exit Map, I have talked to hundreds of business owners. I can count on the fingers of one hand the number that had a well thought out succession or exit plan.
As a business owner, you’ve spent a large portion of your life creating perhaps the biggest asset you own: your business. You’ve spent countless hours, blood, sweat, and tears to build it. Yet most business owners have no idea what will happen when they’re ready to get out of their business and move on with life.
There are several ways for a business owner to exit their business:
- Sell it to (or leave it to) family members
- Sell it to an outsider
- Create a succession plan
- Close it and walk away
Each of these has its own complications. Do the family members have the necessary skills and desire to run the business? Will an outside buyer take care of the employees and customers? Is there someone inside the company who is willing and able to take it over? What happens to employees and customers if you just shut down?
As a seller, you need to get a third-party valuation of your business. It will be different depending on the type of transaction. The valuation is structured differently depending on the situation; for example, a family sale will be valued differently from an outside sale or succession.
If you’re hoping to have a family member take over the business, you need to determine if the family member or members have the necessary skills and aptitude to run the business. If not, how can you as the business leader help to develop them? What if they’re not interested?
I’ve worked with several founders who wanted nothing more than to have their child take over the business, anticipating that day for years, but they never even confirmed that the next generation actually wanted to run the business. One day the owner realized that while they were ready to hand off the reins, the chosen successor didn’t want them. The lesson: make sure
the person you want to take it over is on board with the decision, along with the key employees who make things run.
If you’re selling it to an outsider, different considerations come into play. The strategic buyer is looking for an acquisition that will strengthen their existing holdings. A financial or economic buyer, on the other hand, is looking for acquisitions that show significant opportunities for growth and leverage that can generate quick returns on their investment.
Selling to an outside entity also requires you to think about what happens when you close the deal. When you sell, in most cases that’s it. No more say in how the business is run unless your sale specifies an earnout period as part of the package. Even then, you will have less control. Key employees may leave; large customer relationships may go away. These are factors that will influence the value of the business and may cause repercussions if you had an earnout or had to retain some equity for a period after the close of the sale.
Creating a succession plan whereby you can transfer the business to employees is another way of exiting the business. It also requires a valuation. There are different ways to structure this type of sale. In many cases, key employees or an ESOP may wish to buy the company. These options take time and advanced planning because the employee group may not have the capital to buy the operation. It takes time to put the financing together, often from the SBA or other alternative sources of capital. Like with a family sale, as the selling owner you need to make sure that whoever will stay to run the operation has the necessary skill set to run it successfully.
“Baby Boomers own over 60 percent of U.S. employers with between five and 500 employees. The very youngest of them is 55 years old.”says John Dini, author of Your Exit Map: Navigating the Boomer Bust. John Dini’s observation leads us to the sad fact that too often there is no plan in place and no buyer for the business – the only real option is liquidation of the business and the assets.
The worst example of this I saw was an individual who over the decades had built a successful business and assumed two of his key managers would buy him out. Some years later he called and told me he’d decided to retire and asked if I knew of any potential buyers. It turned out that the key employees no longer had an interest in buying the company. It had also been managed poorly and had lost all its major customers except one, reducing the top line by about 70 percent. Ultimately, the only thing he had to show was the cash he got from auctioning off some obsolete equipment and selling the real estate.
Regardless of where you are in the life cycle of your business, ignoring the exit puts your financial health and the stability of your business in peril.
Kevin Kays is the owner and CEO of The Alternative Board-Denver North. He provides business coaching for entrepreneurs and business leaders who are interested in growing their businesses while maintaining fulfilling personal lives. He does this with a combination of private coaching and facilitating advisory boards of non-competing business owners who meet periodically to serve as an informal board of directors for each other. He also provides exit planning for business owners as an affiliate of Exit Map.
