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Prepare To Exit

Exiting a business with financial success takes knowledge and planning.

Change is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.

Goals and expectation of others in the exit plan

Nikki Roser

By Nikki Roser

Nikki Roser is the President & CEO of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. She is a CPA, holds an MBA, is passionate about building relationships with entrepreneurs and business owners, and leverages her experience to share financial and strategic advice. Partnering with clients and watching their business thrive and prosper is her greatest joy.

The details of your exit plan have an impact on many stakeholders. These interested parties include the business owner’s spouse, children, company employees, and possibly business partners. Each of these groups has specific needs and expectations to consider as you prepare your Exit Plan.

We highly recommend that you include your business’s stakeholders in the planning process. By allowing them to make their needs known and considered in the process, it is more likely that all parties will accept the ultimate plan.

Family expectations

The business owner’s relationship with his family and the business is complicated and, in some cases, overlapping. Your spouse may or may not have worked in the business. As for your children, some may be actively involved in the business, have an investment in the company, or no involvement in the business at all. Each child in each of these situations has expectations from the business owner as he or she prepares his exit plan.

An approach to determining the family’s expectation

To promote the understanding of everyone’s expectations, we recommend a family meeting to discuss everyone’s concerns early in the exit planning process. In many families, this type of conversation is uncomfortable because conflicts between expectations can easily arise.

Before the family meeting happens, we recommend that you sit down with each of your family members. In these individual meetings, you can explain your goals and expectations for exiting the business, provide an overview of the exit planning process, and emphasize the need to consider everyone’s concerns. These discussions should be open and honest. By previewing the purpose of the family meeting, your family members will have time to think about what they want from the Exit Plan.

To increase the meeting’s effectiveness, you can give your family members an agenda for the meeting with bullet-pointed items to discuss. Some of the items to discuss during the family meeting include:

  1. The current state of the business
  2. The need to develop an exit plan for the business owner
  3. The process to develop the exit plan
  4. Business owner’s needs and goals, both personal and financial, when exiting the business
  5. The expectations of each individual family member.

At the start of the family meeting, remind everyone present to respect each other’s ideas and feelings, and that the purpose of the meeting is to work toward mutually beneficial solutions that take everyone’s opinions into account.

If you anticipate a heated discussion, consider hiring an outside facilitator to chair the meeting.

Finally, take detailed notes during the meeting to compile each family member’s expectations.

Expectations of the spouse

The business owner’s relationship with his or her spouse changes significantly upon retirement. After spending the majority of your time working and little time at home with your spouse, you will suddenly have a lot of free time at home. This can be very stressful for both the retiring business owner and his or her spouse.

The spouse’s expectations for the business exit plan normally includes:

  1. Having enough income to provide a comfortable living in retirement.
  2. Knowing there are people to run the business until it can be sold if something suddenly happens to the business owner.
  3. A plan for retirement activities for both the business owner and the spouse.
  4. A plan to treat all your children fairly and not just those involved in the business.

The needs and expectations of the spouse become even more complex when the spouse is not the mother or father of the business owner’s children (a second marriage).

Expectations of children involved in the business

As the business owner, your relationship with your children become very complex when they also work for your company. The owner is no longer simply a mother or father, they are also a boss, mentor, and possibly co-owners of the business. This relationship gets even more complex when more than one of the owner’s children works for the business.

The exit planning expectations of children working in the family business frequently include:

  1. A recognition that they may have invested many years of their professional life into the business and built “sweat equity” in it.
  2. A plan to provide them with the necessary skill sets, experiences, and business contacts to provide for a smooth transition upon the owner’s exit.
  3. A plan to allow them to acquire the business over time at an affordable price.
  4. If there is more than one child involved in the business, who is going to become the CEO?

Over time, the business owner and their working children gradually adjust to their roles and balance the work and personal relationships. When the family begins discussing the business owner’s exit plans, this balance is thrown out the window and the uncertainty of the future will undoubtedly cause stress during this process, particularly for the children working in the business.

Expectations of children not involved in the business

The expectations of the children not working in the owner’s business are often the most difficult to address:

  1. They tend to be concerned that the non-owner spouse will not have enough income to live comfortably for the rest of their life.
  2. They tend to be concerned that if the business is sold to children working in the business at a discounted price, the business owner and their spouse will not have sufficient means to support themselves and the non-employee children will be required to provide for them.
  3. They believe their parents should treat all their children equally whether they are working in the business or not.
  4. Generally, their opinion is that the working children place too much value on the sweat equity they have contributed to the business and they have been paid a salary for their work. They give more of the credit to the parent owner for the company’s success.
  5. They are generally happy to see the working children buy the business over time, but they do not want to see the business given to the working children at their expense.

The open discussion of these expectations while the business owner can manage the process will generally eliminate deep-seeded resentments from developing later.

Employee concerns in the exit plan

Transitions in the ownership of a company create a period of instability for the employees. They often do not know what their future with the company will be, and competitors will recruit them to join their teams. This is especially true of non-owner management and salespeople. The loss of these key employees can negatively impact the value of the company and limit the number of potential buyers.

If you involve these important employees in the process, they are more likely to know what their future holds and to stick with the business owner or their heirs. For some companies, this process will not only look at ownership succession but also management succession. This is especially true when there are no children working for the company or they are not prepared to take over the management of the company. These key employees will be needed to train the next generation of management, so they must feel that they will be rewarded for their efforts.

If there are no children working in the company, management may have a desire to purchase the company and will want to discuss possible ways to do so.

The process previously discussed for the family meetings could also be used to get the input and expectations of the key employees in the exit planning process. Their participation in this process should reduce their insecurity about their future and will be more likely to stick with the company.

Expectations of business partners

Dealing with partners and minority shareholders can be legally perilous. When there are multiple owners in the company, buy-sell agreements are highly recommended. If these agreements are funded with key employee insurance, exit plans can go very smoothly. If you are a majority shareholder and want to exit the company, you obviously want to maximize the value of your investment. However, you have a fiduciary responsibility to treat the minority shareholders fairly.

Good legal advice is necessary to navigate an exit strategy when dealing with partners and minority shareholders.

While the interest of the business owner is the primary concern in developing an exit plan, the concerns of others still exist and may negatively impact the future of the company or family unity.

First Bank makes Great Things Happen every day for local businesses

Have questions about the exit planning process? Need to help figuring out how to plan for succession at your company? We can help. Give us a call or write to us over email today!

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