Exit Planning Tools for Business Owners

selling a business

Owner Obstacles to an Exit Plan

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Owner obstacles to the implementation of an exit plan are often unconscious, but they can be dramatic.  Their attachment to the business can be difficult to break. An advisor spends a lot of time and energy developing the vision for life after ownership in the hopes that it is far more attractive to them than their current role in the business.

Yet no matter how well developed that vision is, or how well defined the action steps are, it isn’t unusual to find owners who behave in a way that ultimately sabotages the plan. Sometimes their actions are even intentional, but more often they aren’t. The problems arise in two ways.

 

“Death from Inattention”

We always ask exit planning clients for two target dates. The first is when they want to be relieved of day-to-day operational responsibilities. The second is when they want to be completely free of any connection to the company.

We tell a client that once we have achieved the first objective, the second may become more flexible. Freed on the task-based duties of running the business, an owner often becomes more strategic. He may start planning for new growth and value creation. She might go back to her role when the business first started when she was the best salesperson or the designer of novel product offerings.

Owners returning to their core skill set are usually a benefit to the business. The problem arises when they enjoy the lack of responsibility so much that they just become owners in absentia.

There is no strategy. The company drifts along on the backs of the operations managers, but doesn’t have a direction beyond “more of what we did yesterday.” There are no new initiatives.

Companies are organic. They are either growing or shrinking. The lack of direction may take a while to have an impact, but eventually, performance will suffer. Getting owners to re-engage after time away can be exceedingly difficult, but if they don’t, the transition is unlikely to accomplish their objectives.

“Death from Over-Attention”

The second obstacle to successfully implementing a transition occurs when owners have surrendered their task-based duties. In this case, they are unable to define their contribution in the absence of being “busy.” They begin looking for ways to contribute, often where their contribution isn’t needed.

It’s not uncommon to begin demanding more accountability and greater detail than is necessary. He or she pours over reports looking for errors, anomalies, or declining results to prove added value.

Another technique used to prove contribution is “seagull management”. An owner may look for opportunities to make decisions but does it without consulting the managers who are in charge of the function. Because they have always known best, they still know best. What isn’t as obvious is that they are now working in a vacuum, with little knowledge of what went before. The results are usually not ideal.

A third way owners might evidence over attention is with a “break the rules” mentality. They offer exemptions from policy or circumnavigate systems because they can. Exercising authority shows who is in charge, even if there is little apparent responsibility.

Preventing the Owner Obstacles

We call these “good” obstacles because they typically occur only after some level of initial success in the exit planning process. They are a direct result of relieving owners of the more mundane duties of management, and freeing them up for more effective leadership. Each is preventable with some preparation.

Either issue can be forestalled by including the owner’s next level of responsibility in the planning process. If the owner resists retained responsibilities, then the future becomes plain. Plans can then include the transfer of higher functions to the management team. If the owner insists on maintaining a level of day-to-day control, the coaching process should include defined parameters about what reporting is essential, and how often it will be presented.

owner obstaclesIn either case, owner obstacles occur when the owner is crossing the no man’s land between total focus on the business and the time when it isn’t a recipient of their attention at all. Like any no man’s land, it is unfamiliar territory, and some pathfinding is necessary. That is the exit planning coach’s job.

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.

Entreprenuers Don’t Use Rearview Mirrors

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All business owners are goal oriented. From the day you founded or assumed control of your company, you set targets and achieved them. That is why you are successful. You know how to define a goal and make it happen.

If I asked you to tell me the best thing that you did in the business three years ago, you’d likely respond with, “I have no idea.” or “Why would I know that?” or “Who cares?” You are busy looking forward.

I’ve even had some owners get angry. They feel some obligation to know the answer, and that they are somehow failing a test if they don’t. The fact is, no entrepreneur has ever been able to give me a cogent answer about his or her accomplishments in the past.

If I ask, “What do you plan to do in the coming year?” you will share plans to increase sales, hire new employees, or enter into a new area of business. Whether or not you have a formal strategic planning process, you have a pretty good idea of the changes and improvements you want to implement in the future.

Looking Past the Rearview Mirrors

An entrepreneur’s vision of “What’s next?” is frequently the most neglected aspect of their exit planning. They may term their goals for exiting in measurable, concrete terms. “I want to retire in five years with ten million dollars in the bank,” is an archetypical example. Others will couch their vision in terms of people. “I want financial security for my family, and continuing employment for my staff.”

All too often, their vision for the future deemphasizes or completely neglects their own individual needs. When pressed to enunciate more personal goals, they’ll often respond with something like, “I guess I’ll just play a lot of golf.”

Playing a lot of golf isn’t a retirement plan.

In a recent survey from PwC, they reported that 75% of business owners have regrets a year after they leave the business. The Exit Planning Institute did a survey ten years ago with the same result. According to Riley Moines, author of The Ten Lessons: How You Too Can Squeeze All The “Juice” Out of Retirement, six months to a year is the typical initial “vacation” period when a retiree catches up on travel and recreational activities.

After that first year, the reason so many ex-owners are unhappy is because they didn’t have a clear vision for their life after the business. Their expectations simply did not take into account the reality of what would happen when they were no longer spending the majority of their time working.

Leaping into the Void

When I ask about their plans for next year, some owners are more specific than others. But none of them ever say, “I don’t know. We may make money, or we may lose money. We may grow, or we may shrink. Whatever happens, happens. It doesn’t matter.”

Why would anyone expect that an entrepreneur who has driven towards goals for their whole life will suddenly be happy without purpose, without identity, and without a plan? It isn’t surprising that so many owners are reluctant to discuss exit planning at all. Life without the daily challenges and decisions that come with running a business seems unattractive. Their vision of the future is unclear.

The success of an exit strategy depends less on the amount of money your transfer generates than it does on your personal satisfaction. Unless you can identify a vision for a “next act” that is more appealing than what you are doing now, business ownership will never be in your rearview mirrors.

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.

Avoiding the “Exit” Word

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Owners don’t like the “Exit” word. They tell us regularly to change it, or that talking about it is uncomfortable. It’s the elephant in the room.

I understand. Anyone selling life insurance or funeral pre-planning knows that you don’t start with “So, let’s discuss what happens when you DIE.” For business owners, leaving the business is like a little bit of death. That’s why black humor in the exit planning world goes like this. “There are seven ways to exit your business. Six of those are head first.”

Your company has been the central focus of your life for twenty or thirty years, and perhaps more. It is so ingrained in your persona, your self-identification, that it’s frightening to think of that part of your identity disappearing.

Who is Bob?

When Bob leaves home every day to run Bob’s Widgets, he assumes the superhero cape of the owner. He walks in the door of the business as the head honcho, el hefe, the final word, the boss. That cape never comes off. The employees might go out for a beer after work, but he never becomes just one of the guys (especially when the table check comes.) The employees are careful about what they say around him, and he self-censures his conversations with them.

Just as importantly, that cape is always present in his personal life. He is Bob, the owner of Bob’s Widgets, everywhere he goes. At the kids’ sporting activities he is asked to sponsor (“It would be good for your business!”) In his church, at the Chamber of Commerce, and at parties he is introduced as “Bob, the owner of Bob’s Widgets.”

He overhears the identification at family gatherings. “Oh, that’s Sally’s cousin Bob. He owns his own business.” When his friends discuss their jobs, a bad boss, pending layoffs, or a reorganization they say “Of course you don’t have to worry about these things, Bob. You own the company.” (Ah, if they only knew…)

The “Exit” Word

So the word “exit” has a finality that jars a lot of clients. Advisors use lots of alternatives, like transition, succession or continuation – all of which imply an ongoing process, albeit one that doesn’t include you. Why would an advisor use the term “Exit” at all if it could be avoided?

We face up to it because it’s the elephant in the room. I am an Exit Planner. My companyex sells Exit Planning tools to advisors. We conduct the annual National Exit Planners Survey™. Our ExitMap® suite of coaching tools uses that word on virtually every page.

We use it because a coach is a trusted advisor, and a trusted advisor always speaks the truth. Not some of the time. Not just when it is agreeable. Not when it can’t be avoided. All of the time. The coaching relationship should be comfortable, but not too comfortable. Introducing a bit of unease to reinforce a point is part of the job.

I use the “exit” word to describe the final outcome of an implemented business plan. It usually involves a transaction, with legal documentation of a sale or other transfer mechanism. It can also include detailed succession planning for family members or a management team. We often discuss continuation – what happens if the plan is accelerated by unfortunate circumstances. Retirement might have a place in the conversation, or it might be about designing a “second act” or pursuing your life’s passion.

But all those terms, whether synonyms or euphemisms, are encompassed in the  “exit” word, We might as well get that on the table from the outset. If you start the advisory process by ducking anything that a client finds uncomfortable, you aren’t serving your purpose as a coach.

Let’s be Honest

Let’s agree to call a business transition what it is. Whether an owner wants to sell the business to a third party, create a family legacy through his or her children, finance a leveraged buy-out to employees, or just close down in an orderly manner, the ultimate objective is to exit.

 

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.

Non-Qualified Plans

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When I talk to business owners about “non-qualified plans,” their first reaction is often “Hold on there. I don’t want to get in trouble!”

The term “Non-qualified” merely refers to the Employee Retirement Income Security Act of 1974, more commonly known as ERISA. As the title indicates, it is the basic set of regulations for retirement plans. If your company offers a 401K or SEP IRA, it has a Qualified Plan. If you have an Employee Stock Ownership Plan (ESOP), that is also an ERISA plan.

Under the terms of ERISA, a plan must be made available to all employees. In return, the company can deduct contributions as benefit expenses, and the employee can contribute pretax income to the plan.

A non-qualified plan doesn’t comply with ERISA requirements.  It is discriminatory in nature, meaning it is not offered equally to all employees. The employee cannot make contributions, and the employer usually can’t deduct the costs of funding the plan (which is built around future benefits,) as of current expenses.

Most non-qualified plans are designed as Deferred Compensation, thus the common acronym NQDC. The concept is to offer key employees a carrot for long-term retention. It can be enhanced retirement funding, insurance, or one of many forms of synthetic equity in the business.

Non-qualified Plan Types

We can start with the simplest example of NQDC. If an employee remains with the company until retirement, he or she will receive an additional year’s salary upon retiring. This benefit is not sequestered in a secure account anywhere, it’s just a promise by the company. It’s known as an “unfunded” benefit. There is no annual statement, just a guaranty (typically in writing,) by the business.

Non-qualified plansOften, an NQDC is funded by an insurance policy with a death benefit and an increasing cash value. It is owned by the company, which pays the premiums. At retirement, the employee receives the paid-up policy. This approach has the added benefit of lending confidence to the process, as the employee can see the funding and growth of the future benefit.

Synthetic equity may be stock options, phantom stock, or Stock Appreciation Rights (SARs.) In most forms, it is the right to future compensation based on any increased value of the business. For example, if the business is valued at $2,000,000 today, the employee may be given a contractual right to 10% of the difference in value at the time of retirement. If the company is worth $3,000,000 then, the employee would receive $100,000. ($3,000,000 minus $2,000,000 times 10%.)

Valuation, Vesting, and Forfeiture

Non-qualified plans based on equity should have a formula for valuing the benefit. It may be any financial measure such as revenue, pre-tax profit, or EBITDA. The objective is to make it clear to both parties how the benefit will be measured.

Vesting is an opportunity to be creative. The benefit can vest gradually, or all at once at a specific point in the future. An employee may be able to collect once fully vested or, in the case of synthetic equity, may have the right to “let it ride” for future growth if other conditions are met.

Regardless of how attractive a benefit may be, no employment relationship lasts forever. Pay special attention to how you construct acceleration and forfeiture clauses. Of course, no one wants to pay out to an employee who has been terminated for cause, but the employee deserves some protection against being let go just because a promised benefit has gotten too expensive.

Similarly, provisions for accelerated valuation in the case of a change in ownership are common. You also may want to consider rolling the NQDC into a stay bonus agreement if you sell the business. If there are options on actual stock involved, you will need to determine the handling of them if they could pass into the hands of someone other than the employee. That would be triggered by bankruptcy, divorce, or death.

Benefits of Non-Qualified Plans

As I described in my book Hunting in a Farmer’s World, incentives for employees should match their level of responsibility. Production workers have incentives based on their production. Managers have incentives based on their ability to manage.

Your very best people, the ones you want to stay with you through their entire careers, should be able to participate in the long-term results of their efforts for the company. Non-qualified plans are a way to single them out and emphasize your interest in sharing what you are building together.

As always. check with your tax advisor. Setting a plan up incorrectly could result in unwanted or phantom taxation for the company or the employee.

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.

Are Remote Employees Value Killers?

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Remote workers, computers, businessesRemote employees can have a dramatic impact on the value of your business. If your exit strategy is to sell to a third party, take some time to think about the areas where offsite workers could have an impact.

Curb Appeal

One of the first things any good business broker will look at is your curb appeal. Your business needs to look good, just like a house that’s for sale. (OK, maybe right now a house doesn’t even need to look good, but you know what I mean.)

When I brokered Main Street businesses, I was always surprised at how much we had to tell owners. Clean up the piles of files in the office. Clean and sweep the parking area. Remove the pile of broken pallets next to the dumpster.

What message does your office space send?  Is it better to downsize, and just describe the employees who are no longer on the premises? Or would a buyer prefer to see a room full of empty desks, so that he knows he could bring them back if he so desired? (But he would also be calculating the wasted rent in his mental cash flow.)

Equating Dollar Value

What are your productivity measurements or KPIs for remote workers? Can you prove that they are worth what you are paying them? How? What level of confidence can a new owner have that he is acquiring a productive team? A recent survey in the U.K showed that almost 30% of remote employees were working a side gig on company time.

How is their remote presentation? Unless they are in a job that is strictly production-based, most will interact with customers, vendors or other employees. Do you have standards for their workspace and their appearance on video?

Can you give a buyer confidence in their compensation structure? New ownership can be a great time to ask for a raise. What assurances are there that it won’t happen? As I wrote a few weeks ago, how do you integrate them into your culture?

Confidentiality and Human Resources

Confidentiality about the transaction is more difficult. Does the buyer interview remote employees one by one? You can be sure they are talking to each other, whether on Teams or Slack or just texting each others’ cell phones.

On the other hand, a group video call raises new issues. A buyer could come out of it with a poor impression because one individual is obnoxious or inattentive. Someone might press for inappropriate information. (“Will all of us keep our jobs?”)

Remote Employees Increase  Risk

I am not campaigning against remote employees. They are a fact of life, now and likely for the foreseeable future. I’m just pointing out that handling their management, controlling the information flow to them, and anticipating their potential impact have all become part of exit planning.

The best surprise is no surprise. Part of your planning process when listing your company for sale should be how you will handle these questions.

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.