Exit Planning Tools for Business Owners

family business

The House of Gucci Succession Plan

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By now, you may have seen the movie House of Gucci. Lady Gaga and Al Pacino star in the true depiction of the Gucci family.

The Gucci brand started with two brothers who own the family business equally. Each brother had a son, and each son was to inherit the empire. One of the sons was a ne’er-do-well, who always attracted and found trouble. Despite nobody ever giving him a chance, the viewer could tell his successor ownership was doomed. The other son married the woman who was played by Lady Gaga. The story progresses through time as one of the fathers die and the other goes to jail while the wife rises to power and greed. To complicate the succession plan, lavish lifestyles, poor business decisions, children and divorce ensue.

The Gucci brand has always been iconic, and it remains so today. The movie describes the struggle between the two brothers and their ideas on how to grow the brand. One brother wants to expand into shopping malls across the world, while the other brother believes the idea of having a Gucci store in a mall is despicable. The two brothers who have these opposing views show how difficult it is running a family business with 50-50 ownership.

The two sons are the on-again/off-again heir apparent to the fortune, and eventually they will run or have a hand in running Gucci. The ne’er-do-well son struggles and is really off-base with his ideas, which are very inconsistent with the brand, and he lacks any sense of training or sense of how to run a business. Subplots in the movie describe how the other stakeholders attempt to circumvent his ownership and ultimately the rest of the family.

The other brother is smart, but he has a blind spot in that he has never had to struggle financially. He has never had to know what it was like to lack resources. His approach to management and growth are flawed because of the company culture and his paradigm. The influence of his wife and others around him also taint the management and success of a family run business. He lives lavishly, incurring personal expenses that he funds through the company.

Subterfuge and infighting ultimately become the demise of the family. The business survived but it was sold off for pennies on the dollar and was turned into a publicly traded company and as a result, the family no longer owns the business.

Clearly, the Gucci’s would have benefited from a team of exit planning advisors to help them navigate these waters! Indeed, there was no training of the sons, there was no alignment by the brothers, there was no dealing with the other stakeholders in the family. There was no financial planning, nor personal planning. Other than the brand quality, there was no development of cultural consistency or business attractiveness. There was a lack of management succession, planning and delineation of who does what. Sadly, there are many family run businesses that much less well known, but who lack the kind of exit planning that is needed to successfully pass along the business to the next generation.

House of Gucci illustrates how important it is for families to pay attention to succession and exit planning. I give this movie two thumbs up for the entertainment value of the movie, but two thumbs down on exit planning!

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

Exit Planning – Lifestyle and Legacy

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Lifestyle and Legacy are two very different types of owner transition objectives.

When we ask a client “What do you expect as a result of our exit planning?” the answer may be about the money, the time frame, or the impact on people. No matter how it is phrased, the response will break down into one of two major categories. It’s either about the owner’s future lifestyle, or the legacy that is left behind.

Lifestyle Objectives

Many clients want to exit to an enjoyable retirement. Usually, their primary concern is financial security. They want enough money to live comfortably, and to take care of their family. This is the reason many start their process by consulting with a financial planner, but lifestyle objectives can extend well beyond their bank account.

A separate but related objective is time. It may be the time to travel without being chained to a laptop. The time to explore new things outside the business might result in formal education or training. Undertaking a new wellness regimen requires time, as does exploring a new hobby.

Time might be used to engage in community service. An issue that is increasing in the Baby Boomer generation is the time to care for older family members.

Another lifestyle issue is the ability to relocate. Moving to a place for favored activities, a better climate or to be closer to children (and grandchildren) often requires separation from the activities of the business.

Legacy Objectives

Some owners run their businesses for other than purely financial reasons. In these cases, they may be more concerned with how the business continues than the proceeds to be realized from a sale.

Of course, a chief motivation for putting legacy at the top of the list is family succession. It might be a sense of obligation in a company that has already passed through multiple generations, or just a desire to provide future generations with the benefits of ownership.

The role of the business in the community is also a legacy concern. The company could be a key employer in a small town, or a primary sponsor of a school or Little League. The owner’s name on the door or the preservation of long-standing business relationships can often affect the desirability of a buyer in the seller’s eyes.

Environment, Social, or Governance (ESG) concerns have become increasingly important to some sellers. They want to make certain that the importance they place on these issues is shared by future ownership.

Finally, the future growth and success of the business can be considered a legacy issue. An owner could have concern for the opportunities such growth provides to loyal employees, or whether innovations and proprietary processes will be expanded beyond their current limits.

Lifestyle and Legacy

Every owner’s objectives will have some combination of lifestyle and legacy concerns. They don’t necessarily conflict, but they involve differing perspectives.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Stakeholders in Exit Planning

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When preparing for the transfer of a business, there are many stakeholders who can impact your plan. Some have direct authority or decision-making capability over the transaction, but others may have substantial influence. In general, it’s best to presume that anyone who has a relationship with the owner or the business will have some impact on his or her decisions.

Internal Stakeholders

Of primary importance are partners and shareholders. Even when an owner has a voting majority, minority partners may have an official or unofficial veto. “Official” comes in the form of supermajority rights. Unofficial may be in the form of a threat to terminate employment, which in some cases may make the business unsaleable. If the minority holders are the intended recipients of the equity, they will function as both key components of the company’s value, and negotiators of the price to be paid for that value.

Employees are the other major internal stakeholders. Could they be a flight risk in the owner’s absence? Are they in danger of losing special status or privilege under new management? What is the plan for informing and updating them before and after a deal is struck?

Family

With most business owners, their equity in the business is 50% or more of their personal net worth. That makes future ownership, sale price and coordination with the estate plan items of great interest to spouses and children. In today’s serial family relationships, that can also involve step-siblings, former spouses, and their new partners’ families.

If there are children in the business, their future is inextricably tied to the company. If some children are in the business and some outside of it, the entitlements and expectations grow even more complicated.

Business Relationships

Customers may be transactional, as in retail, or strategic partners whose own business depends on what the company supplies. In such cases, or when customers are government entities, they may have contractual rights to approve a change in ownership.

In any case, the valuation of the business is going to depend at least partially on the retention of customers.

Suppliers have similar interests. We recently saw a distribution arrangement canceled simply because the supplier was insulted by not being informed about the company’s merger negotiations. The fact that they were conducted under a confidentiality agreement didn’t appease the supplier.

Creditors and lenders who hold personal guarantees are bound to be concerned about ownership changes. Be proactive in letting them know how their security interests will be preserved.

Public Stakeholders

StakeholderGovernment entities, especially any with regulatory responsibility over the industry, should also be approached proactively. Waiting for them to recognize a change may seem like “discretion as the better part of valor,” but untimely intervention could derail a transaction.

If the company is an important employer, a candidate for relocation, or a fixture in the community, some outreach to elected officials may be advisable.

Finally, consider the media. Plenty of business owners have complained about interviews that were slanted, reported inaccurately, or “just plain wrong.” If the transaction is newsworthy (and even if it isn’t,) prepare a professional announcement and a list of where it should be distributed. Refer to it, word for word if necessary, whenever someone calls for comment.

Thinking in advance about the impact of an exit plan on the various stakeholders can save advisors and their clients a lot of headaches when a deal is signed.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Delegation and Depth – Company Readiness for Exit

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Delegation and depth are critical when presenting your business as a buying opportunity. For many business owners, exit planning means getting the company ready for sale to a third party. There are a number of approaches to enhancing preparedness for a third-party sale.

Assessing Readiness

Some planning software products begin with a comprehensive survey of the owner’s impressions of readiness. Note that we say “impressions.” A Likert scale questionnaire that asks a client to rate their understanding of a statement and its possible implications with questions like “How confident are you that you know the value of your business?” and a ranking from “no understanding” to “extremely well” often creates more questions than answers.

If an owner chooses “Fairly well,” for instance, does that mean he knows the value, or that he is fairly confident that he thinks he knows the value, or that he is really confident that he knows an approximate value? Nonetheless, some advisors will begin to build a plan around such subjective answers.

In fact, many systems take these subjective answers and use them to produce a score and a subsequent evaluation with a dollar figure for the presumed worth of the business. Regardless of the accuracy of the owner’s responses, they have created a line in the sand regarding value.

Keeping “Score”

The next step is often to assess different areas of operations. Depending on the expertise of the advisor, this may focus on operating efficiencies, sales processes, marketing approaches, financial record keeping or product and customer mix. Then the advisor runs a second evaluation, presuming that these areas have a higher score.

All this is intended to lead to one question. “Would you rather sell your business for $7,000,000 or for $12,000,000?” I know very few owners who would have the temerity to choose the first option, whether they have personal enthusiasm for embarking on a reorganization of their business or not.

The methodology is legitimate. There is ample evidence that improved operations and greater profitability lead to a higher selling price. It may, however, create a scenario where the owner is boxed into the strategy that works best for the advisor, regardless of whether it matches the client’s objectives (“Get out as soon as possible,” for example) or the company’s capabilities.

Delegation and Depth

The first issue, an owner’s objectives, should be addressed by deeper discovery. That is what we preach and teach with our ExitMap® tools. The second, company readiness, is more a matter of delegation and depth.

delegation and depthNo business can embark on a comprehensive improvement process without a management team to implement it. That’s why we address Owner Centricity™ as the only area of company readiness that matters in the discovery phase of every engagement. If the client is already overwhelmed with personal responsibilities, new initiatives will just add more to an already over-full agenda. That’s a recipe for failure.

We map out the management team starting with the owner’s responsibilities. Then we add those employees who are next in line for those duties, along with a 1, 2 or 3 score. One indicates that the employee is fully ready to assume the day-to-day activities of the job. A two means that the employee is generally familiar with the area, but not ready to assume primary responsibility. A three indicates that there is no knowledge or capability for this area. A 3 is also used when there just isn’t anyone available to train.

Company Readiness

Diagramming the management team in such a depth chart permits a far more comprehensive look at which improvements are possible now, and which will require additional training or recruiting. It also gives the advisor a better understanding of the areas the owner will have to delegate to make the business more saleable.

In operational analysis, the capabilities of the management team are the principal determinant of the company’s readiness to grow.

The owner’s willingness to discuss such delegation is by far the best indicator of his or her preparedness for any value enhancement efforts. 

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Family Succession Planning: Who Gets the Office?

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Sometimes the most sensitive question in family succession planning is “Who gets the office?”

Dad’s (or Mom’s) office is usually perceived as the center of authority by the employees and other family members. That is where you got called on the carpet, where you were informed of promotions, or where you took an insolvable problem.

When a parent/CEO is handing off operating responsibility, there is often a lag, sometimes measured in years, between stepping back from the daily decisions and completely separating from the premises. There is great value in having that experience available for coaching, mentoring, or just to lend perspective on new problems, but where should they sit?

Family succession planning

Timing

The question of the appropriate timing for an owner to surrender his or her seat of power can be sensitive. The retiree often worries about becoming irrelevant. The fear of appearing irrelevant is just as strong. The boss’s office is a symbol. Often the owner who is stepping down would rather have no office at all rather than a smaller, less prestigious location.

I’ve seen owners elect to use the conference room as their “temporary” post. That can create other issues of its own. Are scheduled meetings now subject to last-minute relocation if the boss (who will always be the boss, regardless of title transfers) commandeers it for his own use? Equally distracting is when the conference room is scheduled as before. Then the boss arrives planning to do some work and winds up wandering through the offices looking for a place to camp out.

Perception

The situation is exacerbated when multiple children are assuming ownership. Who gets the office? Parents often have a vision of equality among their children. Ricky will handle sales, Peter does the accounting, and Ellie takes care of inventory and purchasing. The three will make business decisions jointly.

Regardless of voting rights, or any amount of explanation to the employees, one of the children will be perceived as functioning at a higher level of authority by assuming possession of the boss’s office. As in George Orwell’s Animal Farm, all are equal, but some are more equal than others.

Family Succession Planning

Settling who gets the boss’s office is an important part of any transfer. Too often it is treated lightly, only to be more seriously addressed after the issues are recognized. The symbolism of moving offices is strong, and sends a message to everyone. In some cases, remodeling to change the whole office configuration may be the best solution. New drywall is a cheaper fix than lingering resentment among shareholders or confusion in the ranks.

It’s often the little things in family succession planning that matter. One owner who was continuing in his office after his son was named President asked what he could do to make their shared space better reflect the change.

“Well Dad, “ the son responded, “maybe you could take down those pictures of our fishing trip when I was 11 years old.”

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.