By Gary Smith
How is your exit plan working? If you say you don’t have one, you’re wrong. You always have an exit plan, just like you always have an estate plan. Something will happen to your business and to your estate. But here’s the key difference: having an exit plan is about taking control of your business’s future; it’s about being prepared for any eventuality.
Is your “plan” something you want to happen?
If you haven’t chosen an exit plan, one will be chosen for you. You will work until:
- you close the business,
- die, or
- become unable to work, whichever happens first.
The default exit plan for every business owner is to either die while working or lock the doors and leave. Your business is a job, and you almost always decide when you quit. However, this is rarely the best plan. It’s definitely not the best plan if you have employees who want to keep their jobs. This approach also means you’ve just worked for a paycheck instead of building value in your investment. Note: It takes the same time to do either of these things. The only difference is what you’re doing during that time.
P.S. You need to be sure your business deserves to live. It (or at least part of what it does) may need to die before you, but that’s another self-help book. If it doesn’t deserve to live, bankruptcy may become your exit plan.
What Happens When Something Happens to You?
Every business owner needs to think through “what if” considerations when transitioning ownership, management, and control of the business (yes, those are three different things which don’t necessarily go to the same people). This plan revolves around two primary points: who will be in charge and communicating who will be in charge.
First, your family needs to know what to do with the business. Who is “in charge,” meaning who has the ultimate authority? Do they keep it, sell it, or shut it down? If you have been developing someone or some group in the family as your successor(s), does your demise accelerate the transfer to them, or are there employees who should be finishing their training? Who do they talk to, and who do they trust? Where are passwords, keys, and combinations? Who talks to the bank about those personal guarantees and loans?
Next, the employees need to know who the boss is. The boss needs to know they are in charge and what they need to be doing the first few days, weeks, and months after something happens to you. They need to know how to reassure employees, customers, and vendors so that none of them leave. They also need to know who the owners will be and who they report to.
Working Until You Die – The Leave it to Beaver Approach
There are three times your family will have to take care of the business:
- You choose (or don’t choose) the default option of working until you die;
- You die unexpectedly; or
- You develop family members into successors who can run the business.
Again, the first of these outcomes is probably the worst and doesn’t require you to do anything.
You should always plan for the second outcome, and you MUST communicate the plan to your family and your employees. This is not just about life insurance; it’s about involving your loved ones and your team in the future of your business. A well-thought-out and known plan is the best way to provide security for your family, employees, customers, and vendors. You need this plan even if you don’t know what you want to do with the business eventually.
The third outcome will only apply if you have someone who wants to take over the business and is capable of taking over the business. Having your last name doesn’t make someone capable of taking over the business. Your employees, customers, and vendors must accept this person as being capable and believe this person will run the business at least as well as you did. You have to be willing to let this person do more in the business while you’re still around without employees (or others) being able to run to you for a different answer. Note: If you’re in your mid-80s and your son/successor is in his early 60s, you should have either let him run the business by now or found another successor. Yes – that’s an actual situation.
Give/Sell it to the People
If no one in the family is the right successor, you may have one or more key employees who should take over. This can mean the employees run the business while your family is still the owner, or the employees take ownership of the company so that you and your family “cash out.” The same questions and issues listed above for the family must be addressed.
Note: When you decide to transition ownership, management, and control of the business to family or key employees, give yourself enough time to change directions. You might be wrong (anything’s possible) about the people and need to do something else for the exit.
Sell, Sell, Sell
The best path for your exit may be to sell the business and cash out (completely or in part). To maximize your business’s value and allow you to exit, you need to develop that team of employees who run the business better than you can. If the company is dependent on you, you probably won’t be able to leave when you sell. Are you ready to be an employee with a boss again (or for the first time)? I don’t think so.
If you don’t have someone who can run the business, you may still be able to leave if you have a buyer in the industry (read “competitor”) who wants your product lines, customer base, and employees (and it’s cheaper to buy them from you than to poach them over time). I’m pretty sure (read “100% certain”) you won’t get the best price if this is the case.
Go Public
You’ve read the stories about the people who go public with their businesses and make millions and billions of dollars. Having an initial public offering may be a viable exit for your business. However, you will most likely read about your company in the news a lot if an IPO is for you, and many of those stories may include the words “go public” in them. Also, you will have most likely received numerous calls and e-mails from legitimate investors and funds (not the ones you’ve never heard about who e-mail you every day since you launched a website to start the company) who want to give you a lot of money before you do go public.
Final Thoughts
Exit planning is a critical component of business planning. Don’t leave your options to chance. Otherwise, your business (in whole or in parts) will either close, be transferred to your family, be transferred to your employees, or be sold to a third party (either privately or through an IPO). You control which of those things happen either by doing nothing or by working for a better result. Whatever you want to do is fine. Just be conscious about (and take responsibility for) your decision.
Venn Law Group can help you understand the answers and advise you about your options. We can also help you make any needed changes. Contact us today to learn more.
Gary W. Smith is an attorney at Venn Law Group with more than 20 years of experience providing legal counsel and innovative solutions to business owners and management teams. His areas of focus include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.
Gary W. Smith is an attorney at Venn Law Group with more than 20 years of experience providing legal counsel and innovative solutions to business owners and management teams. His areas of focus include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.