BEI’s 2019 Survey of Business Owners asked owners when they wanted to sell or transfer ownership of their companies. Fifty-six percent responded that they wanted to transfer ownership within the next ten years. The interesting twist is that when asked when they want to stop working in their businesses, eighty-one percent responded, "Within the next ten years."
Taken together, these two facts indicate that within the next ten years, twenty-five percent of all owners wish to stop working without selling or transferring ownership. In other words, one quarter of the owners surveyed would like to “retire” from working but continue to own their businesses and receive income from said business. That combination is startling. It means, for example, that suggesting Exit p\Planning to this quartile of owners may fall on deaf ears if they equate “exiting” with “selling.”
Question: Is Exit Planning necessary for this twenty-five percent?
Answer: Yes! Owners who do not wish to exit still must engage advisors in planning for their future and that of their businesses.
We’ve found that the planning process for owners in the twenty-five percent (and actions that result from it) do not differ significantly from the Exit Planning process the remaining seventy-five percent follow. Why? Because the fundamental requirement in transferring or not transferring ownership is the same: Create transferable value. Both scenarios require a company to continue without the owner and without reduction of its cash flow.
Yet there are several differences in the planning approach. Before we discuss the appropriate approach, let's first explore why twenty-five percent of owners desire to continue ownership without working in their businesses.
The Twenty-Five Percent
What can we logically assume about owners in this group? First, these owners enjoy being owners. If they did not, they would seek to sell and cut all ties. Secondly, it is likely that some of these owners don’t want to work but believe that they must retain ownership to receive income. Perhaps they realize that they can't sell or transfer their ownership and maintain their current income stream.
The differences between planning for owners who wish to exit completely and planning for those who wish to retain ownership may seem significant until we look deeper.
How Do Advisors Help Owners in the Twenty-Five Percent?
To assist this group, our focus should not be on helping owners transfer ownership. Instead, we should focus on developing business processes and value drivers to create transferable value necessary for their companies to continue without the owner’s involvement.
Even though owners in this twenty-five percent may not be focused on business growth (because they are not relying on a liquidity event to provide them financial security), they must create a business that continues to generate income without their presence.
The goal of the twenty-five percent may differ from that of the majority of owners, but all owners must install successful value drivers, especially a motivated management team that will remain after owners step away from their businesses.
As advisors, we simply adjust our emphasis and the specific tools we use for the twenty-five percent. Retaining—not selling—ownership means:
- Instead of keeping cash flow in the business to spur growth, excess cash flow is distributed to the owner and invested outside of the business. That’s why BEI Members pull tax-advantaged tools from their toolboxes such as defined benefit plans to benefit the owner.
- That advisor can suggest ownership-based plans such as stock purchase, stock bonus and stock option plans designed to both benefit, motivate and retain key employees and provide owners more cash than would otherwise be used for cash-based incentive plans such as Phantom Stock and Stock Appreciation Rights Plans, and incentive-based non-qualified deferred compensation plans.
- Placing more emphasis on minimizing business risk, retaining management and ensuring the continuation of cash distribution. Growing business value is not as critical for owners who intend to retain ownership in their companies.
- Key employees can react to the news that an owner is selling or stepping back from day-to-day operations but retaining ownership by leaving, taking customers, employees and/or vendors and setting up a competing business. As advisors, we must minimize this risk regardless of our clients’ ultimate objectives but understand that the risk is greater and continuous to owners who intend to keep ownership indefinitely.
It is not at all startling that our attempts to urge owners to Exit Plan—especially the twenty-five percent who do not want to sell their businesses—may fall on deaf ears. Conversely, owners are far more likely to welcome our offer to help them reach the goal of leaving their business but retaining ownership, especially if ours are the first ideas they’ve heard about plan design. These owners will be most interested in hearing more about how planning can enable them to back away from the business but maintain ownership.
- You must ask owners if they have an interest in leaving their business but maintaining ownership because twenty-five percent of owners fall into this category.
- Whether owners leave through sale or retirement, relationships with customers, vendors and employees necessarily shift to key employees.
- Installing robust value drivers—especially a motivated management team that will stay after an owner leaves— is critical for those who wish to sell and those who seek to retain their business income stream and step away.
- Owners in the twenty-five percent will rebuff the typical Exit Planning proposition but welcome efforts to help them retain ownership and income after they step away from business operations.