You should see the look on some folk’s faces when, during a business planning session, we ask them how they intend to exit the business.
It's a question we ask in every session we facilitate, so when it’s a start-up business or one that needs a renovation it’s kind of understandable that the owner's thoughts aren’t exactly on getting out at some point in the future.
What’s the point here?
Let’s face it - most of us don’t want to work for the rest of our lives. And besides, who knows what’s going to happen in the future. Life deals out some funny cards that we don’t see coming!
So, we ask the "exit question". Experience tells us that the people most surprised are those who aren't necessarily clear on why they started their business in the first place.
That’s why we also ask why people get into business for themselves - the "entry question" if you like.
Answers to this one range from, “I want to be in control and have a better work/life balance” to “I want to make more money and pay less tax”.
What about this for an answer though – “I want to create enterprise value and by doing so enjoy the sort of retirement Iifestyle that I choose”.
Does that sound better? We think so.
In other words...
Running your own business shouldn’t just be a job.
Or a means to keep your personal tax burden low.
We believe successful, sustainable businesses are those with a clear purpose, vision and strategy.
And that’s why succession planning is so important and why as an owner, or owners, you need to think about it from day one! As counter-intuitive as that may seem.
Here’s an example.
This is the story of a business owner we worked with lately.
His business runs a fleet of big road graders which are used to make roads for NSW Forestry, local council’s and the RMS. The owner of the business would like to retire in the not too distant future so I asked him what he was planning to do with the business.
He had no idea.
In the absence of a proper plan, it sounded like he was simply going to turn off the lights and have a fire-sale of the machinery.
With time on his side...
Had he given the issue his full attention when he really should have – when he was starting out (or at the very latest as the business started to grow) – he would have had more options on the table.
Without doubt, an attractive option would have been to sell the business to one or more of his employees.
He employs about 8 people and a couple of them have been with him for around twelve years. These two have indicated that they would like to buy in and eventually take over when the owner retires.
If a succession plan had been in place from day one, a way to do this could have been to gradually sell percentages of the business to these employees who are both much younger men.
With time on his side the process could, for example, have started with a gifting to each of say 3% of the pre-determined value of the business on the proviso that another 3% was matched and purchased by the employees at the same time.
This could then be repeated, perhaps with different percentage rates, over the years until the employees had built up enough equity to have leverage to help them buy the remainder of the business when the owner wanted to retire.
Why so attractive?
Some of the benefits of doing this include:
The customer relationships that the business has built would be commutable – like most business owners, this one is fiercely protective of his customer relationships and has always been concerned about what might happen to them when he eventually left the business. Selling to long standing employees who are part and parcel of those relationships would provide greater confidence customers would be looked after over the longer term and their engagement would remain at high levels;
It’s more likely that the employees buying the buisness will share the purpose, vision and strategy of the business – this is critical in a sound succession plan. When an owner departs a business, the last thing that’s needed is a massive swing away from the big picture factors that have made the business a success. There might be small adjustments but significantly moving away from the existing purpose, vision and strategy fundamentally changes the nature of the business. That puts customers and staff at risk. Existing employees stepping up and purchasing the business are less likely to make those sudden and significant changes, which is great for customer relationships and employee retention;
Better late than never…but not ideal.
At least the owner's having a conversation - better late than never.
But having read this far, you might well be thinking the horse has bolted for this particular business, its owner and prospective purchasers.
Sure, the above scenario would have been ideal and everyone involved has to accept that.
However it’s not the only course of action and other options are now open to help all involved work to a workable solution.
There are other strategies that take account of the fact succession planning has been left until very late in the day.
Considering the owner:
it was clear that key among those other alternatives is a vendor finance solution.
How's it going to work?
The owner needs to extract value from his business in some way and indicated he'd prefer not to carry the entire purchase price of the business as a debt owed by the two employees.
But he's definitely ok with holding onto a shareholding of a negotiated size, and drawing an income stream/dividend. At the same time, the two employees are open to borrowing funds to make their initial purchase and to increasing their stake over time.
To help make that happen, BusinessBlades agreed to facilitate the necessary meetings with bankers, and other stakeholders to ensure discussions were less like employer/employee meetings and more like appropriate business sale and purchase discussions.
Benefits remain largely intact.
This arrangement, while not ideal but necessary due to time issues, captures pretty much all of the benefits that would have been realized under a longer-term arrangement.
On the downside, it means the owner will need to stay more involved in the business for a period than he might ideally preferred if for no other reason than to protect his investment.
It also means the purchasing employees are under relatively more financial pressure than they might otherwise have been. That said, the parties are up for it and will proceed down that path.
As an alternative, we might also have tried to identify and introduce a third-party investor, however the specialized nature of the business would have made this difficult. And of course, it would also most likely water down the benefits described above.
Still not convinced?
If the situation described doesn’t convince you it’s best to address succession planning earlier than later in development of your business, we’d be surprised.
But if you need more, there are alarming statistics on just how many business owners haven’t got a formal, documented business plan in place.
You’ve probably seen a few of them so I won’t go into them now.
Our message in this post is that whatever the exit strategy for the owner(s) of your business may be, the main game is to keep your eye on the fact that you want your business to be a valuable asset – in other words by building enterprise value you will end up with a saleable commodity.
So, enjoy your time as a business owner but when you want to leave at least you’ll know where the exit is.
Can BusinessBlades help your business?
Let's be clear...there's a lot of effort in creating a workable succession plan.
And when there's more than one owner, a couple of things happen....the effort grows exponentially and seeds are sown for disagreement.
That's why having an independent party involved can be really beneficial. Things like facilitating internal discussion and debate on the available options, meetings with external parties (bankers, accountants and where necessary, insurers) can keep the process objective and on track.
It doesn't matter how great relationships are between owners...succession planning can really set things on edge.
Maybe that's why so many businesses avoid the issue??
Yes. We'd love to chat to you about your situation and needs so please give us a call or email us your details to find out how we can help you.
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