Exit Planning: A Case of Inconsistent Goals
 
Meet Ben. He’s a business owner like many of you with dreams of one day passing the family business on to his son. After that, he wanted to retire happily, after spending the past 30 years carefully and skillfully building the business.


When the time came, however, Ben discovered his two dreams were inconsistent.  First, Ben realized that if he sold his business to his son he would not get much money up front.  His son did not have any cash to buy Ben out, and no bank would lend Ben’s son anything close to what Ben needed to retire comfortably.  As a result, Ben’s son would have to pay him over the course of 10 years and use the company’s earnings.  This meant Ben would still have to depend on the company to support him in retirement.  Although Ben trusted his son to run the company, he wasn’t comfortable with the market risk the company faced, particularly now that Ben was 63 and needed a dependable source of retirement income. 


Ben realized that if he wanted to sell now, receive cash at the closing, and achieve financial security, he would need to sell to an outside third party with cash to invest. Ben's situation illustrates why the exit planning process is so important and setting consistent objectives early in process is so critical.


Here are three principal issues you’ll need to face:
 
1.            Leaving the business on your own timetable. How much longer do you want to remain active in your business?


2.            Creating financial security for yourself and your family. Think of financial security as a dependable stream of after-tax income, adjusted for inflation. How much money do you need (not want) to support your lifestyle? Do you want to be cashed out when you leave the business or are you willing to receive the purchase price over many years?


3.            Who should get the business? In other words, who your potential successors? A child? A key employee? A co-owner? Or, perhaps an outside party who can pay top dollar for the company?
 
Listening to Successors
 
Exit planning becomes extremely complicated when a variety of successor’s issues are introduced. Bringing successors into the process is important, nonetheless. Although you may own 100 percent of the stock in your company, the following groups are potential successors and are often the most important stakeholders or in a private company:
 
•            Shareholders (the owners)
•            Spouse (or significant other)
•            Children
•            In-laws (spouses of children)
•            Key employees
 
In addition to these important stakeholders, companies have a number of less important stakeholders, including:


•           Non-essential employees
•            Customers/clients
•            Vendors/suppliers
•           The local community
 
Because your goals may differ greatly from (or even conflict with) those of your successors and other stakeholders, you must understand and address them. 

Remember that none of your decision-making authority is diluted by the involvement of other stakeholders. That said, if the views of these successors or stakeholders are not integrated into the exit planning process you may find that all of your plans were based on false assumptions.  It turned out that when Ben began to talk to his son about these issues, the son admitted that he didn’t want to buy the company from Ben. 
 
The lesson learned is that a formal exit planning process can help ensure that your goals are consistent and provide your successors with a mechanism to express their goals.  This will help you make powerful, effective and informed decisions about your exit options.
 
 
By The Exit Planning Institute © 2007