In last week’s article, we left the owners of a successful business, Michael and Sharon Drake, on the horns of a dilemma. They wanted to sell their company immediately, but if they did, they’d have only half the money they needed to continue their lifestyle. The alternative was to continue to run the business for five years and then exit with the money they needed. Neither path appealed to the Drakes.
Exit Planning Advisors frequently see this dilemma when they first meet with business owners, simply because owners who wait until they are ready to exit to plan their business exits generally own businesses that are not ready to be exited. As a result, those businesses cannot be sold for enough value to secure the lifestyle the owners demand.
Is there an alternative for these business owners? Let’s return to the Drakes.
Giselle, the Drakes’ Exit Planning Advisor, recruited the couple’s CPA and financial planner to calculate whether the business could produce enough money in five years for the Drakes to exit if it continued to grow at its current pace. Once the team concluded that it could, Giselle relayed this finding to the Drakes. Sharon spoke up first. “Giselle, we really don’t want to run the business for five more years. We’re ready to leave now.” Michael added, “Sharon’s right. It isn’t that we’re burned-out, but I can’t see myself continuing to work at this pace for another five years. Besides, there are so many things we want to do.”
“I’m so glad to hear that,” responded Giselle. “Too often, I meet owners who are burned-out by the time they start thinking about leaving. Would you consider the possibility of owning the company for five more years but reducing your involvement to part-time?” Giselle had the Drakes’ attention at the word “part-time.” She continued, “But if you step back from running the business full-time, your management team will have to step in. Tell me, can they run the business successfully without you constantly at the helm?”
The All-Important Question of Management
Without hesitation, the Drakes told Giselle that their existing managers were likely not willing and certainly not capable of running the company successfully without Michael’s continuous involvement. In this way, the Drakes’ business was similar to many owned by baby boomers.
An absence of past or current business growth, or a business that can’t operate without its owner at the helm are indications that a business lacks a capable management team. This fault, in the final analysis, is not the responsibility of existing managers; instead, it is owners who have failed to both recognize the problem and do something about it.
The Role of the Exit Planning Advisor
Addressing this absence of growth and thus solving the typical business owner’s dilemma is a prime opportunity for proactive advisors to help otherwise-successful owners. Exit Planning Advisors expose owners to alternative business and Exit Planning ideas and designs. This exposure is critical because owners, like all humans, are limited in experience and what they can learn. Even as advisors, Exit Planning is not a topic any of us learn in our own businesses or professional disciplines alone.
Let’s look at what Giselle told the Drakes.
“If neither of you are willing to remain active in the company for the five years necessary to accumulate the money you need to achieve your financial goal, we must still address this management issue. Without capable management on board, I doubt you can sell the business at all, unless Michael agrees to stay on with the new owners until they can find replacement management. In my experience, most buyers won’t make an offer even if Michael does promise to stay on. I suggest that you find, hire and motivate next-level managers now. In doing so, you can withdraw from active management over the next year or so, yet continue to own your business and all the income it spins off.”
Before the Drakes could object, Giselle added, “Motivating and retaining top management is fundamental to almost every Exit Plan we create. I can help assemble the advisors we’ll need to make sure you can leave your business when you want and for the money you need. We will then meet to review the team’s recommendations—all of which will require next-level management—and you will be able to choose the plan design that best suits the two of you.”
The BEI 2016 Business Owner Survey found that over half (57%) of owners want to exit within the next five years, and nearly 80% within the next 10. Some have capable managers in place, but have done nothing to motivate them to stay with and grow their businesses. Other business owners lack capable managers. In either case, if boomer owners aren’t already capable of reaching their financial goals, they are at risk.
An underperforming, unmotivated, and untethered management team is often a business’ most critical weakness, which is why Exit Planning Advisors address it in the early stages of Exit Planning.
A key feature of most Exit Plans is the design of incentive plans that (a) motivate specific management behaviors that directly lead to increased business value and cash flow, and (b) “handcuff” employees to a business via a vesting schedule that distributes rewards as employees stay on board through and beyond an owner’s exit.
Carefully designed incentive plans can give owners who want to exit before their businesses are ready to be exited the opportunity to, in a sense, personally exit—at least part-time and long before they exit completely—from their all-consuming involvement in their businesses.
As an advisor to business owners, you are likely working with owners whose desire for financial security is going to crash head-on into their desired exit dates. Proper training and The BEI Seven Step Exit Planning Process™ give you the tools to steer those owners away from the collision and into the post-exit lives they desire.