The first step in any successful endeavor is defining what a win will look like once the project is complete. When an artist begins a painting, he typically has a vision in his mind of what the painting will look like when it is finished. When a football team takes the field, they know the definition of success—a victory. When a world-class chef prepares his finest dish, he knows success—excellent taste and first-class presentation. Business owners define success in many different terms. For many, success equals profits. For others, success means creating employment opportunities and contributing to society. Still others define success as creating financial independence for themselves and their families.
Defining a win must be done in the context of time: short-term, intermediate-term, and long-term. One great painting does not necessarily make a great painter. One year of profitability certainly does not insure a business will be successful long-term.
Visioning your exit plan requires a long-term focus. You may be successful generating profits year by year, but if your company is not positioned to accomplish your long-term objective, will it really be a success? There are many different combinations of exit strategies, but typically they fall into one of three broad categories:
- Business is passed to the heirs during lifetime or at death
- Business is sold or merged during lifetime
- Business is sold or merged at death
The first two strategies need to be planned well in advance and the third is a default that typically occurs as a result of poor planning. What is your exit strategy? Do you have a plan in place? Does your plan allow for changing circumstances?
Make a decision today to begin your exit planning. Since none of us are capable of predicting the future, tomorrow may be too late.
As you begin the process of introspection and planning for your future exit from the business, make decisions based on current facts and the most probable scenarios. Let’s take a brief look at exit planning for the owner who wants to pass his business to the next generation. Some of the key questions that need to be processed are as follows:
- Do your children currently work in the business?
- If so, do they show signs of effectiveness?
- If they aren't in the business, have they expressed an interest?
- Do you have a strong desire to see your children carry on your business legacy?
If the answer to any of these questions is yes, it's time to create a business succession plan that gives them the option to enter the business or continue in the business. Make sure you don't force the issue if your children don't have the aptitude or interest.
Case in point
A long-time client, whom we'll call Jeff, illustrates this point clearly. Jeff built a very successful manufacturing business with substantial revenue. He had a deep desire for his son, Frank, to join him in the business and continue the tradition. Jeff was in his mid-sixties when he finally convinced Frank to join the company. Frank entered the company as a vice-president of operations and quickly developed a strong affinity for the business. After two years on the job, Frank loved the company and was a great salesman but he demonstrated no aptitude as a senior level manager. Jeff received several nice offers on his company but elected not to sell because of his desire for his son to carry on his legacy. Three more years passed and it became painfully clear Frank was not going to make it. Frank had become increasingly unhappy and left for another job that was sales oriented. Jeff was seventy and facing the prospect of no successor generation and an increasingly competitive business climate. He eventually sold his company for 40% less than his offer of three years prior.
Jeff’s case illustrates the point you cannot let your exit strategy decisions be strictly predicated on personal desires. There must be consideration given to the aptitude of the players involved.
Assuming your children exhibit the skills necessary to take over leadership of the company, execute plans today to make the transition as smooth as possible. Hire a capable financial planner to assist you in developing a business succession plan and estate plan. You need to address such issues as:
- Will you give or sell your shares to your children?
- How can you treat both active and inactive children equally?
- Is your estate prepared to pay estate taxes?
- Do you have a current will?
- Is your business succession plan in writing?
If your personal desire calls for eventually merging or selling your company, you need to start formulating a plan today. Many business owners are lulled into thinking they can wait until much later in life to plan for the disposition of their business. Unfortunately as the years march by, they miss out on many opportunities for enhancing the value of their business and positioning it for maximum selling price.
As you embark on the exit strategy planning process, focus on probability and flexibility. What is the most probable scenario — will your children succeed in your business or will they not? Will you most likely sell your company or not? Keep all of your exit plans flexible. Allow for changing circumstances and modifications to all of your plans.
About the author
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners.