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The FORUM, February 2006
The FORUM is the electronic newsletter designed to keep top executives informed on the key issues that they face in running a business. This newsletter is brought to you by Peter Clancey, VP Corporate Marketing & Franchise Development of EXECUTIVE FORUMS of La Jolla. |
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Do You Really Need an Exit Plan? by Don Matso and Larry Comp The "Big Picture" Over the next few years, a significant percentage of us will transition the ownership of our businesses. These transitions will be precipitated by many factors such as the retirement, death or disability of the owner; a seemingly attractive unsolicited offer from a 3rd party, or a decision to turn the business over to a family member(s). The Problem Unfortunately, in the vast majority of transitions, the owner fails to realize his/ her financial or personal objectives. This is troubling, in that many of these owners have "put their guts into their businesses" and could have realized significantly better outcomes if they had just taken some time to prepare for the inevitable. To Plan or Not to Plan Transitioning to either succession or sale is one of the most significant events a business owner will face during his or her career. Yet, the vast majority of owners fail to plan and, as such, plan to fail. Previous business owners give all sorts of reasons why they didn't take the time to plan, such as: (1) they were too busy with day-to-day matters; (2) they expected a family member to step in at the right time; (3) they didn't acknowledge the inevitability of a need to transition early enough: (4) they didn't anticipate losing a key member(s) of the management team. Bottom line: they didn't get around to it! While we maintain that planning for the inevitable is a must, we do not advocate that each business owner develop a highly structured exit strategy focusing on only one type of business transition. Life is far too complicated to accurately predict their personal needs, the needs of their family, and the state of financial markets at some (unknown) point of time in the future. Though a written document is not necessary, certain steps should be taken to ensure that their needs, as well as the needs of their family are met. What To Do Now 1. Understand all your potential options As the owner of your business, "cashing in does not mean you have to sell out," in fact, a sale as an initial transition may prove to be your least desirable option. Seek out and speak with an impartial specialist who can provide you with the advantages and disadvantages of various transition alternatives. 2. Build the True Value of Your Business Regardless of when you transition to either succession or a sale, it is vitally important to recognize and optimize the enterprises' true value. Today's investors look for far more than the "numbers." They will be interested in intangibles such as the strength of the management team, employee stability/ capabilities, and your organizational culture. Understanding and focusing on your businesses' true value is vital to preparing for a successful transition. A school supply business was generating slightly over a $1M in annual profits. A larger competitor approached the business owner with a proposition to buy his business. While the proposition was tempting, the owner wasn't sure he was ready to sell. After seeking guidance from a recommended specialist, the owner set out on a course to drive the value of the business to maximize his future options. The specialist recommended specific actions to protect and enhance the value of the business and, over time, monitored a series of operational improvements that significantly improved the company's performance and value. A few years later when his industry was consolidating, he was approached by a large national public company and the owner and his business were prepared — he consummated a sale and realized over $14M in cash. 3. Carve out some time to position yourself for various contingencies. The optimal time to transition, of course, is when all of the stars "line up properly" — the value of your company, the financial market, etc. Since it is impractical to predict exactly when such a transition will take place, prepare for this eventuality — it may be here before you know it. Don Matso, dsm@valeregroup.com, is Founder of The Valēre Group, Inc. and Larry B. Comp, lcomp@humanomics.com, is a Principal with Humanomics, Inc. Larry has been a resource speaker for Forum groups in the Los Angeles area. |
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