Now is the Time to Plan Your Exit Strategy

By: Henry Hutcheson

From: IGC Retailer, January/February, 2013

 
Now is the Time to Plan Your Exit Strategy
Two brothers and the wife of one of the brothers are running the family business together, and all are ready to get out. The next generation is coming along, so once they get there, how will the three members of the current generation know when and how to leave the business?

Clearly, the first hurdle is financial. Does the business generate enough profit or have enough assets so that it can fund retirement? This depends on how much wealth you think you need for the rest of your life. If the business is generating no profit, has no assets that can be sold or downsized and you’re taking $60,000 in salary, you will be hard pressed to sell the business to anyone at a price you can retire on.

Once you’ve passed that hurdle, ask yourself and the other owners, “Do we want to see the business continue into the next generation?” This is different than, “Am I OK with the next generation owning the business?” There needs to be a true desire on behalf of the current generation to see the business passed to the next generation. We are assuming, of course, that the next generation is ready, willing and able to take over the business. The time this question needs to be asked is when there is a financial need to extract some value out of the company in order to fund retirement.

Now, let’s say my personal financial dreams are quite different from my spouse’s or brother’s. What to do? This is where good communication and a good financial planner are essential. With a husband-and-wife team, it’s vital to go together to a fee-only certified financial planner. These are professionals who have experience doing the math on your current personal wealth, business assets, income and spending wants and needs through life so you can be confident that you will have enough money after you exit the garden center business. Going together is important so that you work from the same set of information to discuss what type of retirement you desire.

The fly in the ointment can be the third partner. His financial objectives can be different from yours. This is where negotiation, compromise and respectful communication are essential.

More to Consider than Money
There are non-financial objectives as well. The biggest one is how not being the person in charge of the garden center anymore will affect you. There is an enormous amount of self-esteem and activity that comes with running a company - even more so when it’s a company you’ve built. Many business owners sell, only to find that financial independence doesn’t really satisfy the psychological need to be a part of something. Rich Connors, Founder of Primary Resources, is an expert in helping business owners work through selling their business. According to Connors, “There are four aspects that must be considered when considering selling your business: your life goals, your future living, the company legacy and exit readiness.”

Along these same lines, you want to be sure that all the stakeholders in the business are pleased with the transition or sale. How will the transition of the garden center affect your employees, especially the long-term ones? How will it impact the community? How will it impact your broader family?

When there is more than one owner, exiting can be tricky. If both want to leave, who should leave first? Usually, this is solved by circumstances: one of the owners wants or needs to leave now, and can. From a desired sequence perspective, all but the true leader should exit first. This allows the rest of the organization to stabilize before the exit of the leader.

Smoothing Sibling Rivalries
Another tricky aspect of transition, often encountered in family businesses, is when there are two or more siblings in the business, and the leader is simply ready to get out. In this situation, it’s common for one of the other siblings to “have a shot” at running the company. But this typically doesn’t work out well. A better method is to allow the next generation, if they are ready, to assume control while the other siblings continue on. This minimizes the number of transitions and the disruption each causes and gives great support to the next generation leadership, enabling long-term success. Plus, “getting a shot” is not a rational attitude when many people’s wealth and livelihoods are at stake.

With this said, there have been many family businesses where the siblings or spouses are both at such a high skill and leadership level that one could leave and the other could easily take over.

One factor that sometimes comes into play is when there are multiple siblings, each with multiple kids. This is when family businesses get tripped up. Each parent is going to want their child to do well and succeed. And any parent would assist their child in finding a job by referring them to a friend or acquaintance who is hiring. When it’s your business and you’re doing the hiring, rescue yourself from the process. However, this isn’t practical day in and day out. This is why older and larger family businesses need to become professionalized. While a “family bonus” at the end of the year may have been acceptable in the past, if each of the siblings is trying to give their kids the plum assignments, increase their pay, pushing for their promotion and going light on their performance reviews, a train wreck is waiting to happen when it comes time to figure out which current generation members can leave the garden center.

Five Ways to Approach Your Exit
Consider the following five approaches to exit strategies, from Jeffrey Sonnenfeld and P.L. Spence in the Family Business Review, as you think about your exit plan:

1. The Monarch. How does the king transition power to the next generation? They die. This certainly is the most risky method of family business transition. Certainly, this is not a method that is thoughtfully and proactively selected as a business leadership transference strategy. Rather, it stems from the current leader’s unwillingness to relinquish control, even though there will be negative consequences for such action. If the next generation is not capable of assuming leadership, elevate someone internally who is, bring someone in from the outside or sell.

2. The General. At a predesignated date not of their choosing, generals are asked to retire. However, they may not be personally ready, or still believe that they have value to add - or, worse, believe that no one can do it but them. This is common in family businesses. Mom or dad travel, then come back and elicit responses from their old guard that the next generation is not cutting it, thus setting the stage for them to come back to the rescue.

3. The Ambassador. This exit style is commonly associated with highly functioning family businesses. Say dad was progressively taking a day off a week until he was only coming by on Mondays for coffee. What would also happen is that when there were big contracts out for bid, a major issue at work or simply opportunities or issues that were based on past relationships, dad would arrive in a suit and tie ready to lend credibility and grease the path if necessary.

4. The Governor. This style is effective in larger organizations. It also works when the current generation truly does want to get out of the business and move on, or to break company homeostasis, forcing the next generation to step up. Set a firm departure date in the future, then begin working toward making everything happen by that date.

5. The Inventor. This style is where the leader gives up lead of the garden center but still contributes in the particular area he can offer expertise.

Which style of CEO exit is your family business headed toward?

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