11/21/2024

Navigating The 3 Inevitable Exits Every Family Business Leader Will Face

With all of the “New World” problems that were closing in on an “Old World” industry, Niccolo decided it was probably a good time for him to step back and let a younger generation take the company forward to find new solutions. At age 68, Niccolo knew this was a risk. But he decided it was a calculated one. So he divided the company ownership amongst his 3 children – Piero, Lodovico and their sister, Ilaria. Piero was the oldest son. Since he had been more involved in the vineyards, he received about a 20% greater interest in the business than the others.

And thus proceeded the next succession plan for the Antinori family. Their winery business, known as Marchesi Antinori, was founded in 1385 in Italy. At age 28, Piero Antinori, then a young and inexperienced manager, was handed control of the family’s wine dynasty in 1966.

This was no small responsibility for Piero. His father, had “always been a formidable presence and a classic over-achiever”, who “simply decided one day that he had enough and deeded the 600 year old firm” to the next generation.

The story of this incredible Family Business is one of 20 Family Businesses highlighted by William T. O’Hara in his book “Centuries of Success – Lessons From The World’s Most Enduring Family Businesses”.

Piero was the twenty-fifth generation to work in the company. Niccolo’s Succession Plan was not without bumps along the way. Because of different objectives, Piero ended up buying out Lodovico and Ilaria and carried the business on into the future. Along the way, Piero brought each of his 3 daughters into the business, dividing the responsibilities based on the leadership qualities and talents of each of his 3 daughters. (www.antinori.it/it).

Achieving the Ultimate Success

Achieving the ultimate success for Family Businesses which endure through time requires more than just basic planning. It requires what we refer to as “Fourth Quarter” Planning. This is the mindshift which Family Business Leaders have been asking us to deploy with them. It is a belief in the need to “begin with the end in mind” if you really intend to be and stay successful.

This is the deliberate, adaptable and customized process for working with Family Business Leaders and your families and colleagues to continue to profitably build your Family Business. This normally requires Family Business Leaders to deploy early on what is needed to achieve a successful future transition and eventual exit from your company.

While Niccolo’s succession plan might have appeared to be spur of the moment, in fact, as chronicled by William O’Hara, his planning had been years in the making. Niccolo’s gifts for innovation had been widely known, which laid the foundation for the next generation to carry on the business successfully.

Seeing And Starting With Your “Fourth Quarter First”

“Fourth Quarter” Planning is a combination of Strategic, Asset Protection, Business Continuity Leadership, Succession, Exit and Estate Planning. This addresses your planned foreseeable growth and future exit. Ideally your future Fourth Quarter will occur on your terms and timetable. However, sometimes unforeseen events (such as an unexpected death or disability or the loss of key employees) will frustrate the best laid plans. So, “Fourth Quarter” Planning comes with backup plans in case of an unexpected owner, partner or key employee death, disability, departure, dispute, divorce or business downturn.

Staying Successful For the Whole Game

Many Family Business Leaders have heard us say that our job is to “look into the future” with you. And then work together on what is needed to avoid foreseeable pitfalls and to achieve the outcome you want.

That is the essence of “Fourth Quarter” Planning. To look ahead. To see it coming. To avoid “Train Wrecks.” To deploy what is needed to keep the promises you have made to yourself, your family, your colleagues, your stakeholders, your customers and your communities.

What Does the “Ultimate Success” Look Like For You?

Every Family Business Leader needs to decide for himself or herself what the “Ultimate Success” looks like for him or her (and their family and colleagues).

This might include one or more of the following:

• Colleague Careers. We helped create careers for our colleagues who pitched in with their own blood, sweat and tears.
• Incredible Culture. We created an incredible Culture that attracted and retained trusted colleagues and loyal customers.
• Family Careers. We helped develop family member Careers in the Family Business for those who dedicated themselves to this.
• Inspirational Legacy. We will look back and be fully satisfied with the Legacy we built.
• Business Model Success. We overcame yesterday’s Business Model disruptions and pivoted to capture great new value and opportunities.
• Dynamic Successor. We developed great, dynamic Leaders and at least one great, dynamic Successor CEO.
• Leadership Team. We built a Leadership Team which can successfully take on tomorrow’s adventures.
• Community & Charities. We supported our Community and favorite Charities in a big way with time, talent and resources.
• Bloodline Opportunities. We created Family Bloodline Opportunities beyond the Company.
• Successful Transition. We handled a successful Internal Transfer of the Company to those who can lead it forward to continued great success.
• Successful Sale. We handled a successful External Sale of the Company on our price and terms.
• Peace & Financial Security. Peace of Mind, Family Peace, and Family Financial Security – accomplished with tremendous grace, style and perseverance.

Deploying Some Very Powerful, Yet Simple, Concepts

“Fourth Quarter First” thinking is actually a very simple mindset. Yet, in practice, it is often overlooked. Too many business owners are on a journey, but have no clear destination in mind (or they are missing the steps needed to get there).

Together we simply focus on both the journey and the destinations you want for yourself, your family, your colleagues and your Company. We then address what is needed to actually get there. We “begin with the end in mind” (i.e. “Fourth Quarter First”). And we live by the flexibility principle that “All plans are firm … until changed.”

The 3 Inevitable Exits

With this in mind, it is important for every Family Business Leader to realize that you will face 3 inevitable exits:

• Exit From Active Duty.
• Exit From Ownership.
• Exit From This Life.

The only question is whether these three exits will be accomplished “on your terms” or on someone else’s terms.

The 3 Key Questions

We begin the “Fourth Quarter” Planning process by asking 3 Key Questions:

• Discover. What will be the probable, almost certain, future outcome of our present course, if left unchanged?
• Decide. What’s missing – the presence of which will make a substantial difference in producing a better future outcome?
• Deploy. What do we need to do next to move ahead with speed, clarity and focus to deploy what’s missing?

The Family Business Leaders who we are introduced to have been successful long before we showed up. The answers to the question above of “What Does The Ultimate Success Look Like For You?” helps us to understand what you value most. The answers to these 3 Key Questions helps us to decide what is necessary to move ahead with speed, clarity and purpose to deploy what’s needed for you to stay successful throughout the whole game.

The “Fourth Quarter” Planning Playbooks

Our “Fourth Quarter” Planning process is built around an overall Playbook – which enables us to select, tailor and deploy very specific Plays which have proven successful when timely and properly deployed.

This is usually during the “Fourth Quarter” of your time in action, rather than being left for the “2 Minute Warning” or “Overtime”.

First Exit – Exit From Active Duty

This Exit will only be successful if you have developed a leadership team behind you. Simply throwing the keys on the desk and saying good luck rarely works.

This is an incredible world with incredible opportunities. The key to your successful exit from active duty is developing – and retaining – a leadership team which is eager to figure out how to seek out and take advantage of those opportunities, in the context of the Family Business which you are transitioning into their hands.

Some of the Key Plays which we like to use include the following:

Main Play: The Profit Strategy Team

You have developed and deployed a Profit Strategy Team (aka Advisory Board) of dynamic leaders, who have been fully briefed on the internationally acclaimed Business Model Canvas profit system. The team is empowered to continuously find the full profit impact of Business Model trends, patterns, disruptive forces and innovations and to implement rapid Business Model improvements.

Main Play: The Leadership Recognition and Reward Program

You have deployed a recognition and reward program with your Leadership Team which earns their loyal performance, addresses their personal and career (leadership and ownership) aspirations, incents them to stay with you and helps to protect them and their families.

Main Play: The Leadership Development Program

You have developed key members of your Leadership Team who could immediately (or who already) hold your Company’s top three executive positions today, who align with your culture, who can operate successfully without you and who have completed the shift to a pioneer leadership mindset.

Main Play: The Emergency Succession Plan

You have developed and designated a specific successor to step in immediately if you should die or be disabled unexpectedly. You have created pre-written approvals, a stay bonus program, and notifications to impacted persons which very clearly demonstrate the strength of your Company without you.

Second Exit – Exit From Ownership

Your exit from Ownership in your family business does not necessarily need to occur at the same time as you exit from Active Duties.

If you are going to transfer ownership to family members or to key employee colleagues, this might occur over a period of time during your life – or may occur upon your death.

You might decide to transfer ownership to an Employee Stock Ownership Plan or you might decide to transfer ownership to an outside third party buyer (e.g. an investor, someone else in your same industry or a private equity group).

Depending on how you define your “Ultimate Success” and your answers to the “3 Key Questions”, here are some of the Main Plays that might be deployed:

Main Play: The “Rubber Meets The Road” Report 

You have a realistic view of the true, “transferable”, fair market value of your Company, based on normalized, forecastable EBITDA and reliable market-based pricing multiples, and this (after tax) value (when combined with your other wealth and insurance) will provide the cash resources you and your family need or want for the long term.

Main Play: The “House-In-Order” Checkup

Your business, financial, accounting and legal controls position you to always operate effectively, tested by always being able to meet a potential buyer’s rigorous due diligence review. You have minimized necessary contractual consents needed to sell the Company. Your business structure is designed to fit your specific Business Model and is also based on what you want to ultimately transfer or keep.

Main Play: The Income Tax Reduction Strategy

Your personal and your Company federal and state income and capital gain taxes will be minimized during all Four Quarters of your time in action (and upon the future transfer of your Company) because your Business Model, your business contracts which implement it, and your corporate structure, have all been designed with the proper tax strategy actions to help achieve this.

Main Play:  The Inside Route Exit Plan 

You have one or more key persons, partners, family members, or an ESOP who could and would purchase the Company now, on the price, terms and feasible financing you’ve agreed to with them, and they have the ability to successfully own and operate the Company into the future.

Main Play:  The Outside Route Exit Plan 

Due to your known Business Model’s unique design, your Company culture, your leadership team, your proven performance, your realistic future outlook and a professional M&A market test, a financial or strategic outside buyer would pay top dollar for your Company right now on terms you’d agree to.

Third Exit – Exit From This Life

The timing of this Exit, of course, is generally not predictable. We may hope for a long Fourth Quarter, followed by the freedom to take on some other chapters in our lives.

Of course, it is best to lay in certain Main Plays early on to always be ready.

These can include the following:

Main Play:  The Business Owner Estate Plan  

You have directed who receives your estate and who is in charge when you can’t be. And you have provided your family with enough cash flow (from your business, investments and insurance), with careful timing, distribution and spendthrift controls, so your family’s lifestyle can continue upon your disability or death.

Main Play:  The Family Ownership Matrix 

You carefully cover how you will transfer your Company ownership to your family during your life and after your death. This includes who will receive controlling shares, and whether a “sweat equity” share of your Company will be allocated to an adult child or children active in the business and whether and how an equalizing share of (and vote in) Company ownership, personal investments or life insurance will be allocated for children not active in the business.

Main Play:  The Family Peacekeeper Protocol  

You require the agreement by present and future family members to certain business continuity terms. You have a family employment policy and a market-driven compensation and dividend process. You have appointed a Family Council to work with your Board and CEO/President. You have created a financial reserve from your estate (or from your life  insurance) to help support your Company’s bank credit or bonding needs.

Main Play:  The Family Buy-Sell Agreement  

To be given or to inherit Company shares, your family must sign the Family Buy-Sell Agreement. This has proper insurance funding and has been designed to thoughtfully control buy back or retention of next generation ownership in case of a family member’s death, disability, dispute, divorce, desire to sell or bankruptcy.

Main Play:  The Estate Tax Reduction Strategy  

You have achieved control over potential government impact by reducing your projected estate taxes (or by pre-funding with life insurance) and assuring your Company does not need to be sold, liquidated or compromised in order to help your family pay your estate taxes.

“All Plans Are Firm … Until Changed”

It turns out that from the beginning there had been an “uneasy alliance” between Piero and Lodovico in sharing the Marchesi Antinori business. In addition to the “usual brotherly competition”, both brothers were also at different points in their lives. Piero was older, married and, with 3 children, had family obligations. Lodovico was more of a “free spirit” who sought the adventure of travel and new experiences. So, in 1983, Piero, with the support of his father Niccolo, agreed to sell 49% of the business to the British Beer – Brewing Company, Whitbred. This provided him with the funds to buy out Lodovico and his sister Ilaria’s shares.

On his new path, Lodovico eventually started to promote and sell Antinori wine in the United States. Niccolo, the good Dad that he was, saw this as an opportunity for family harmony and set up Lodovico in an import business in Milan. In 1985, Lodovico’s first vintage received “glowing praise”. 

Piero was very complimentary of his Father’s strategy:  “It was better to give to one son, one business and to the other one a different business and he had the possibility of doing that. I would probably follow the advice of my father.”  (Source:  “Centuries of Success”).

Lessons And Legacies

For each of the 20 companies which William O’Hara chronicled in “Centuries of Success”, he found that each of them offered certain Lessons and Legacies. Here is what he had to say about the Antinori family:  

• “Scaling back production can often enhance a company and its reputation, rather than harm it”.
• “Let a new generation tackle new problems.”
• “Recognize that dividing a family business to create two enterprises can avoid conflict.”
• “Realize that a liaison with a large corporation can be a useful, and, if need be, a temporary  tool.”
• “Have the good sense not to make everything new, but build on the good decisions that were made before your time.”

Next Step?

A decision on what Plays should be deployed is best begun by investing 24 minutes to sketch your Action Plan by answering the questions on our “Quick Start Action Plan”.  This is available for Family Business Leaders (and your Trust Advisors) at our website www.FourthQuarterFirst.com.  This forms the basis for an initial meeting to begin to develop your Game Plan.