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Exit Planning The Business Side Of The Equation

Jul 05, 2010


When getting ready to exit your business, it is important to set a plan.  One of the most valuable insights into designing an exit is to remember that the skills that you used to build a successful business are not perfectly transferable and useful for designing your exit.  From this bit of wisdom comes the quick conclusion that you need to think differently in order to form and execute your business exit.  The following bullet points address the general business areas that you should be considering for your business exit.

 

Who will take over the business?

Do you know who you want to run your business after you?  This question is easier asked than answered.  You see most owners have not given due consideration to the pros and cons of each potential future owner for their business.  For example, an outside company can provide money and management skills to help run your enterprise into the future.  If you don’t need either of those, you may consider a management buyout.  Or, if you want a partial exit, keeping control of your business, you may choose an ESOP.  Or there may be a combination of these strategies to assist with your planning.  Let’s examine each of them. 

 

Know your Exit OptionsExternal Transfers versus Internal Transfers

Transfer to outsiders

If you envision selling your business to a competitor or to a financial or equity group, you need to look at your business the way that they would see it.  What are your value drivers?  Are you the primary asset or can the business run without you?  What resources are available to sustain your business in your absence?  Do you have protected and unique property that can be acquired in the transaction? 

 

If you can ask these questions and envision a future sale, than you can also ask the next series of questions to validate your notion of selling to an outsider.  Are you very concerned about the future of your managers and employees?  Remember that a sale of your business means to sale of control to an outsider.  Many owners get stuck here as they feel responsible for employees and family. 

 

Do you have family in the business who may not remain employed?  Are you concerned about your business legacy and its impact in the hands of an outside owner?  Are you aware of fees and taxes that you would pay in an outside deal?

 

Answering these questions will assist you in understanding whether you are candidate for an ‘external’ transfer.

 

Transfer to insiders

If a transfer of your business to an outsider does not feel like the best course of action, you can look to internal transfers to meet you goals.  Employee Stock Ownership Plans (ESOPs) and Management Buyouts are two ways in which you can convert your illiquid business into cash.  Each exit option has its pros and cons.  You should first reflect on the answers above and then determine whether or not your staff can lead your company in the future.  This approach will get you closer to the exit path that is appropriate for your business.

 

How will revenues and profitability be sustained – are you a bottleneck in your business?

Be honest with yourself as to how vital you are to your continued, profitable operations.  Many owners underestimate what they do and what they represent for their businesses.  Employees and managers will almost always defer to your expertise before making important decisions on their own.  They are usually not incentivized or empowered to do otherwise. 

 

Here is a good litmus test:  can you take a three (3) week vacation, without checking-in with your business, and have it run smoothly without you?  If the answer is ‘no’, begin to examine which parts of your role in the business are most transferable to someone else.  Then ask the question again to see if your business is more sustainable with your improved procedures.

 

What you will likely find is that exiting is as much about ‘letting go’ of control as it is about structuring a transaction.  You have developed a close working relationship with those around you.  Engage in some exercises that help you objectively evaluate your team’s ability to run the business without you.  Eventually you will no longer be running your business.  Take a pro-active approach to this contingency by making these evaluations today.

 

How is your management team aligned?

It is likely that your management team is not aligned with your exit goals.  You may have been relying on someone who cannot fill your shoes.  Or you may have one or more managers with strengths in certain areas, but fatal weaknesses in others.  Take the time to organize your managers and to put in place an incentive program that not only focuses them on profitability, but also focuses them on management and leadership within your business.  Remember that one day your guidance will not be available to your managers.  Tools such as financial incentives help to begin and/or facilitate the transition.

 

Aligning your management team

One tactical strategy that you can employ is to shift bonus dollars that are paid in ‘cash’ to ‘deferred & contingent’ payouts (similar to the way that vesting schedules may exist in your retirement plans).  Today’s economy has provided an opportunity to re-evaluate your manager’s compensation and to restructure the manner in which it is paid out to them.  Remember, these strategies are not about increasing your bottom line, but more focused on getting the buy-in from your managers on their interest in taking enhanced roles within your organization.

 

Financial statements and operations clean-up

If you have been remiss in ‘cleaning up’ your income statements, now is the time.  Begin to critically evaluate the personal expenses that you ‘run through’ your business, as well as your ‘excess compensation’, discretionary contributions, and your other perks.  Remember that each of these items impacts your cash flow.  Even though you may have employed these strategies to minimize your taxes, you want to be able to demonstrate to your future owner(s) your company’s true potential for generating free cash flow.

 

Organizing your advisory team

You have likely built a successful business by relying upon the expertise of others.  Now is the time to assemble your business (and personal) advisors to convey to them your intention to execute a successful exit in the future.  The insights that each of your advisors will provide to you will help you in addressing many of the following areas:

 

·       Taxes that you may owe for different transfers

·       Legal agreements that you may need to sign

·       Capital that you may need to attract

·       Cash flow projections that you may need to provide to successor owners

·       Insurances that you may need to purchase to protect your wealth

 

Remember that each of these different business issues is a specialty unto itself.  The sooner you can begin to gather and organize these various parts of your business exit, the faster you will be able to move forward with your plan.

 

Conclusion

No exit is easy.  The myth that business owners simply decide to exit one day and sell the next is simply just that – a myth.  Every owner struggles with finding the right exit path and developing the proper plan.  By thinking in new ways and gathering key pieces of information, you can align your resources and assemble your advisory team to assist you with a successful exit.

More from Frank Mancieri…

About the Author

www.frankmancierib2bcfo.com Professional CFO and Business Exit Consultant A financial professional for more than 30 years, with undergraduate and graduate degrees in business and accounting, Frank Mancieri provides companies with on-site chief financial officer and controller services on an as needed basis. Mr. Mancieri has strong communication skills, effectively working within all levels of a company, including boards of directors, customers, employees and vendors. He has worked effectively with owners and managers of closely held companies. He holds a Bachelor's Degree in Business Administration, specializing in accounting, and a Masters of Business Administration (MBA) in management, both from Bryant University in Smithfield, Rhode Island. He teaches part-time at Rhode Island College. Mr. Mancieri's areas of strength include: Cash flow analysis, evaluation and improvement. Evaluating systems and processes and initiating and implement necessary changes. Installation of reasonable controls to protect business assets, while allowing flexibility for innovation and change. Financial forecasting, budgeting, and reporting. Development of business plans. Financial analysis, including product-line analysis and those leading to turnaround management and business process re-engineering. Assisting business owners with acquisition and sale. Mr. Mancieri and his wife of 29 years, Sue, live in Woonsocket, Rhode Island and are the parents of two adult children. He is active in a number of business and civic organizations, including Pinnacle Equity Solutions, Exit Planning Exchange, where he serves on the Membership Committee; is an active member of The Financial Executives Networking Group, B2B Connexions, Greater Providence Chamber of Commerce, and EFNE Entrepreneur-Team; is active with Financial Executives International and Rhode Island Association of Accounting Professors. He also donates his time as a Board Member for a non-profit free health clinic in Providence, RI. www.frankmancierib2bcfo.com

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