Plotting your exit strategy

By Jonathan Sweet

Less than a quarter of small businesses make it to a second generation of ownership. Less than 10% survive beyond that.

Why? In many cases, it’s because the owner or owners have made plans to make sure their business survives. According to a recent study from Wilmington Trust, 58% of businesses have no succession plan. Small businesses have an even worse track record.

While we’ve covered this topic frequently in the past, recently watching a friend’s family’s business struggle with the unexpected death of the owner reminded me that it is certainly worth revisiting.

Even if you’re not planning on retiring anytime soon, it’s important to have a plan in place and to be thinking about what happens if you or a business partner unexpectedly dies or is incapacitated.

“Business owners love what they do, so it can be difficult for them to imagine a day when they need to give it up,” said Matt Panarese, president of Wilmington Trust’s Mid-Atlantic region and leader of the firm’s National Business Owner Practice Group. “The reality is that planning effectively and running a business are not mutually exclusive. Owners don’t need to walk away from the business they’ve spent their lives building to start thinking long-term. In fact, early planning can provide more flexibility and allow owners to continue to work in whatever capacity they choose—before and after a transition.”

There are a number of options companies can pursue as they put together their exit strategy from transitioning to a family member to selling to employees to finding an outside owner. Each of those options present different opportunities and challenges. 

1. Family transition

It’s probably the most common succession – moving the family business from parents to a child or children. But it’s also the situation where many companies have no plan in place. According to the PwC’s 2017 Family Business Survey, only 23% of family businesses say they have a robust, documented succession plan in place.

When planning a family transition, several items need to be considered:

•  Who will run the business? If there are multiple children, this may not be an easy decision. What if some children work in the business and others don’t? Do those uninvolved children receive an ownership stake?

•  Integrate the succession plan with an estate plan. Work with your lawyer, CPA, etc. to understand the full tax implications of the process.

•  Be impartial: Is the family member the best person to run the business? Do they have the necessary experience? Or is the answer that the best solution may be an employee that isn’t a relative?

2. Employee ownership

If a family member isn’t the right solution, are there key employees that might be interested? The first step is to identify those key employees and see if they are interested. Like a family succession, selling to an employee is a multi-year process that takes plenty of planning.

Another employee option is an Employee Stock Ownership Plan or ESOP. An ESOP is a program that provides a company’s employees with ownership through stock ownership. This is often done at no upfront cost to the employees and is usually designed as a contribution to the employees. ESOPs work best when a company has a large group of employees between whom ownership can be shared. There are a number of regulations governing ESOPs, so be sure to do your research before going down this road.

3. Finding an outside buyer

If no one in the company is interested in taking ownership, it might be time to look for an outside buyer. While it’s important to have audited financials and strong value beyond the owner in all cases, that’s even more important with an outside owner. For many, that can be a tough sell as companies can be closely identified with the principal or principals.

In all these cases, it’s important to figure out how and when the transition will take place. Is it all in one fell swoop, with the owner completely exiting the business or over a period of years? I’ve seen both work (and both fail) in the boating business.

It really comes down to personalities. Is the departing owner willing or able to stay involved without being in charge? Some owners find it easier to wash their hands of the business and move on. Are the new owners comfortable with having the old boss around?

Finally, it’s important to have an emergency plan in place that addresses who will take over if the owner dies suddenly. Know who will run the day-to-day operations and has the authority to make financial decisions until the permanent succession plan can roll out.  

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