The path that an owner follows in leading their organization through a successful transition to another owner is a personal process. Owners will not exit/stop working in their business until they are truly ready to do so and when an owner understands what they are trying to achieve as well as their readiness to achieve it, they are making great progress towards a successful exit. This newsletter is written to assist owners with interpreting their goals and readiness for an exit and then understanding which exit options may be most appropriate for their situation.
An Owner’s Readiness for an Exit Drives the Best Options
All business exit planning begins and ends with what an owner wants most combined with how well-prepared they are to execute. For example, an owner may want his key person to take over the business in the future. Well if there is a risk that the business will not survive in the hands of the key employee, then that owner will certainly want to first know how dependent they are on the business’s future success and income, i.e. that owners’ financial readiness for an exit. In this case, if the owner has sufficient assets and streams of income outside of the business, he or she may not need to worry about the future success of the business (at least from a personal, financial perspective). More often, however, owners are not ‘ready’ for this transition because they are, in fact, dependent upon the future success of the business to fund their lifestyle.
By contrast, an owner who is ready to leave the business today may decide that they do not want to take the time to transition to the managers over a series of years. This ‘high mental readiness’, i.e., the desire to move on from the business right away, may lead that owner down the path of selling to an outside party and/or an investment group (such as a private equity group). In this case, the owner’s ‘mental readiness’ will drive them towards a sale transaction as the best option to meet their current needs and desires.
The Different Exit Options
In the world of private business transfers, there are five (5) primary ways that a business can transition. Along the path of ‘external’ buyers, there are competitors and investment groups that can purchase the business, the first two (2) options. By contrast, along the lines of ‘insiders’ who can purchase the business, there are family members, managers, and co-owners. ‘Internal transfers’ can consist of a management buyout, an employee stock ownership plan, and/or gifting to others, such as family members. As in the examples above, an owner’s readiness for an exit will determine which exit options are best to help them meet their goals.
The Pros and Cons of Each Option
Each exit option has different pros and cons. For example, a sale to a competitor may yield you the highest price. However, it may take the longest to consummate, have the most challenging process for engagement as well as end with you losing control of your business as well as, perhaps having key people laid off after the sale. By contrast, a sale to your management team may provide the greatest flexibility for structuring a deal to meet your specific needs. However, the payments from the management team will most likely be drawn from the future, continued success of the business and, therefore, will remain at risk of you receiving them to fill your Value Gap.
Knowing Which Option is Best for You Today
Each owner is different, and each exit plan should be customized to fit that owner’s needs. With that being said, the option that is best for you today is most likely the one that you want to see happen and the one that you are most ready to execute.
The overall point of this newsletter is that most of this ‘exit and readiness analysis’ comes down to personal readiness for a transaction, not how well your company is performing. This may run counter to many of the myths or strategies that you may have come to hear about over the years. However, if you think through what the business means to you and what you mean to the business then you are likely to agree that nothing will happen with the business’s future until you determine what you want to happen and that you are prepared to make it happen.
Financial and Mental Readiness
Along the lines of this being mostly a personal assessment, our analysis turns on the critical factors of an owners’ ‘mental readiness’ and ‘financial readiness’ as the starting points for determining an owner’s overall readiness to consider the exit options available to meet their needs.
Concluding Thoughts
We hope that this newsletter helps you see that business exit planning, for most owners, is a personal process. And, because it is a personal process, we believe that owners are best served in first determining their individual goals and then their ‘financial and mental readiness’ for their exit. We hope that you also see it the same way.