I learned from Dave Sullivan, the business consultant who
for years taught the Course for Presidents at Aileron, that in business one
should never start an enterprise without at the same time designing an exit
strategy. Dave Sullivan wants you to ask yourself: ‘How do I extract myself
when it does not pan out, when I find that I have more important things to do, when
it is time for me to retire, or when calamity strikes? More precisely, how do I
extract myself without doing harm to the business, its stakeholders and my
estate?’
The typical small business owner has a large part of his/her
net worth tied up in the business and is relying on the value of that
investment to fund his/her retirement.
The exit planning, we are dealing with in this white paper,
has to do with the exit from control over the management and operation of the business,
not necessarily from the ownership of the business. These two may, but not always
do, coincide.
As Dave Sullivan points out, exit planning should not wait
until you begin to feel ready for retirement. In fact, business owners would do
well to separate exit planning from retirement planning. Otherwise the
presumption is built in that the business owner will not, voluntarily or involuntarily,
exit from the business until retirement. The exit planning Dave Sullivan is
talking about is having a plan for what to do with the business when the owner
falls away or when the business no longer meets the owner’s goals, whether
these goals are of a business nature or a personal nature. This can happen at
any time in the owner’s life cycle and in the business life cycle.
Such exit plan should look at all alternatives for the
business, including liquidation, retaining ownership but leaving the day to day
operations to others, becoming a silent owner, selling, transitioning to the
next generation, turning it into an employee owned business, merging it with
another business, you name it.
Not all of these options may be valid at every stage of the
business development or under all circumstances. Therefore, the exit plan
should be written as a “what if” scenario:
·
What if I find that, in the foreseeable future, I
cannot achieve my return on assets goal?
·
What if the Lord takes me away?
·
What if my health fails me and I no longer have
the stamina to lead the show?
·
What if I come across another business
opportunity with higher earnings potential?
·
What if I want to go back to school or change
careers?
·
What if a family member needs my full time
attention and care?
·
What if I discover that others are better
equipped to run the show than I am?
·
What if I want to retire?
A carefully considered exit plan is an indispensable
business and personal planning tool. It will stimulate the business owner to
maximize the value of the business independent of his/her level of participation
in the business.
It is also an expression of good governance, as it protects
the value and continuity of the business for other stakeholders, particularly heirs,
employees, customers, suppliers and –if applicable – minority shareholders.
A good exit plan is a direct reflection of how the owner
sees his/her role in the business. If he/she is a veritable entrepreneur, the
plan will focus on scenarios that will call for an early exit or distancing
from management as other opportunities arise. If he/she is a business owner for
the purpose of having job security and making a decent living, the plan will
focus on retirement. If he/she wants to be the Chairman of the Board but not
the CEO, the plan will focus on separation of powers.
For small business owners wanting to create an exit plan
there is plenty of professional counsel available. The first source to go to is
The Exit Planning Institute (E.P.I) www.exit-planning-institute.org
. The institute is responsible for the certification of “Certified Exit
Planning Advisors”. Its web-site is a treasure trove of information on the
topic of business exit planning.
E.P.I. points to the damage owners can do to themselves,
their heirs and the business when failing to have a well designed and
implemented exit plan:
·
Undervalue your company leaving hard-earned
wealth on the table
·
Pay too much in capital gains and estate taxes
·
Lose control over the exit process
·
Fail to realize your personal, financial, or
business goals during the exit process.
A good exit plan is written with the input of professional
counsel. My experience with small business owners is that too many are living
dangerously without a good exit plan. They do so at their own peril but they
need to be aware that, in the process, they are also exposing all stakeholders
in the business, particularly their employees, suppliers and customers, to unnecessary
risk and harm.
As stated above, the content of the exit plan will, in large
part, be determined by the owner’s vision for the purpose of his business. In
the world of small, privately owned business, I have met all sorts of
entrepreneurs with all sorts of motives for being in business:
1.
Quite a few owners, when they are honest with
themselves, will see their business simply as a tool to earn a decent living
for themselves and their families. They would probably have great difficulty
working for others and are driven by the desire to be their own boss. When they
have had enough and can afford to retire they may simply wind down the
business, close the doors and be done with it.
2.
Many owners will see their business not merely
as a tool to provide income, but also as a tool to accumulate wealth for
themselves and later generations. They will work to maximize value in the
business and – when it is time to retire – sell it or transition it to the next
generation.
3.
Others see their business in the first place as
a societal tool offering useful products or services to the public and
employing a large number of people. They will not exit without making sure that
the business survives them and that continuity is guaranteed for the employees
and the consumers.
4.
Yet others, entrepreneurs included amongst them,
have a desire to create something immortal that will last for the ages and will
be a monument to their creativity. These are the brand builders who will only
let go if their legacy has been secured and their brand has become unassailable.
A good exit plan should be able to withstand the litmus test
of leaving no gap between what the owner wants to see happen with and in the
business upon his departure and what actually happens if, by an act of God, the
owner is unexpectedly removed from the business. Only owners who meet the
description of 1) above can live happily without an exit plan. Without them,
there is no business and that is exactly how these owners want it. All other
owners fail the litmus test, if the reality of the business after their
departure is different from the design. All of them should do some hard
introspection and ask themselves if they have properly planned for the business
to survive them, regardless of timing and circumstances. If the answer is ‘no’,
exit planning should be moved to the top of the agenda of strategic steps to
take for the business. Dying in the saddle is sad; dying in the saddle without
an exit plan for the business is criminal.
Human nature keeps many of us from planning for our exit,
whether it is our exit from life or our exit from business. ‘I am not ready for
it’ or ‘it is way too early for me to think about retirement’ is what I hear a
great deal of in my conversations with business owners. But these arguments
ignore the difference between (voluntary) retirement and (involuntary) exit
from the business. Exit planning is intrinsically different from retirement
planning. Exit planning is a business process with personal consequences,
retirement planning is a personal process with business consequences. Exit
planning should be done regardless of the owner’s intent or lack of intent to
relinquish control of the management and operation of the business. Retirement planning
should include a plan for the future: What will I retire to? What am I going to
do with my time, my energy and my expertise?
I have seen too many people being lost, miserable, without a
place to go to every day, issue the orders, and direct people and operations. Most
small business owners realize this and that is exactly why they drag their
heels, when it comes to retirement planning. My counsel to them is to first
plan for the next phase of their life before exiting the business by way of
retirement. Retirement will only be good for you as a business owner if you
retire ‘to’ something new, rather than ‘from’ something old. Retirement from
your business will be a happy, fulfilling, time only if you have first
determined what you want to do with the rest of your life and what you still
want to achieve. Then go for it!
