“Only 20 percent of all businesses put up for sale actually transfer to a new owner.” — U.S. Chamber of Commerce My apologies to Charles Dickens, but the play on his title exemplifies what can happen with and without proper planning; having the right team in place — or not; having open communication with […]
“Only 20 percent of all businesses put up for sale actually transfer to a new owner.” — U.S. Chamber of Commerce
My apologies to Charles Dickens, but the play on his title exemplifies what can happen with and without proper planning; having the right team in place — or not; having open communication with all the exit-plan constituencies; and having an enterprise-wide, dynamic strategic plan — or not. And if you don’t have these items in place, do you have, or not have, the will to take these steps? The answers are in what follows as a “Tale of Two Exits.”
Exit number one is a small, solely owned business with revenue in the $3 million to $5 million range. The owner was beginning to think of what the next stage in his life would look like and approached a consultant who was advertising as an exit-planning advisor. The owner was seriously concerned that he would not be able to retire and still leave a legacy and jobs for his loyal employees. He had no management team, but employed highly capable folks. He had personal financial wherewithal, but it was not quite enough to provide him the retirement lifestyle he felt he had earned with his 30 years of risk taking and hard work. He knew he needed a plan.
Over a period of three years, the owner, using exit-planning experts and business consultants, opened himself and his business to all the help he was seeking. A management team was built, he quantified his value gap between what he wanted in retirement and what he had accumulated, and communication flourished.
An organization-wide strategic plan was implemented and monitored on a monthly basis. It was determined that no one on his team had the skills and abilities to be a business owner, so he was able to narrow his options on how he would exit his business successfully and focus on making the one true option work in the most positive manner.
This owner was able to sell to a local third-party individual, maintain a temporary employment contract, and transfer the business very smoothly and successfully. The now former owner is happy as a clam, the legacy continues, and jobs have been saved for the local community.
Exit two is a medium-sized family business with revenue of $50 million to $60 million, but with very narrow profit margins. The two controlling shareholders are in their 60s and have done no planning. They make all decisions in a private conference room with the door closed. Again, the CFO approached a business-consulting firm, with whom the company had previously done business, to gain some insight into what exit options were available.
When the consultant met with the two owners, their primary goal of doing an “exit plan” was to calm the nerves of employees and managers and to keep them loyal.
The owners had not achieved personal financial independence, and as the engagement progressed, it became evident that they would need to improve profitability and operational efficiencies for the three key folks in the next generation to be able to afford to buy them out.
It was determined through psychological and job-fit assessment tools that there was a leader in the next generation. He was a family member and had gone outside the company for five years to learn the industry and had a very successful experience.
There were, however, fatal flaws in the senior owners. They refused to communicate with the next generation and would not accept them as being “seasoned” enough to be potential buyers. They also continued existing non-profitable business practices and would not listen to those inside the business who could do it better.
Trusted advisers attempted to convince the owners that the business had no direction or vision and needed to go through the strategic-planning process so they would know what they were trying to build and how they were going to make it happen. Again, pride and inertia won the day.
This company has deteriorated from a $15 million market value to $8 million. The next-generation leaders are jumping ship and probably the only exit plan available now is a sale to an outsider who will pay for inventory and customer lists. Jobs will be lost and the legacy of the business forgotten.
All business owners have a choice. They can prepare for the inevitable exit — or not. One of the most informative books I’ve ever read on the subject is “Taking Over — Insider Tips from a Third-Generation CEO,” by Mitchell Kaneff. Read the book and make your choice.
Bruce G. Grieshaber is a senior consultant for Grenell Consulting Group, specializing solely on exit planning. Contact him at bruce@grenell.com