Two Leaders With Conflicting Objectives and Agendas: Working With Art To Fix His “Exit Plan”


by Nick Niemann

Niemann, Nicholas
nniemann@mcgrathnorth.com
(402) 341-3070

We weren’t surprised by our meeting with Art. We had seen it many times before. Art had founded and built a very successful retail business. He had operations across the region which were consistently producing significant year-to-year profitable net cash flow. Pete, his second-in-command, had been working with him for the past twenty years. Art had decided recently that he was ready to transition from the company, and he wanted to get this done soon.

However, as we began to visit, it became obvious Art and Pete had some serious roadblocks in their path that would take some time to overcome. Art and Pete clearly had very different views about the future which Art was finding at this late date were becoming more and more difficult to resolve.

Like every business owner, Art had an “exit plan.” Like most, his wasn’t very well thought out, written down or communicated. He had one of the 10 “exit plans” that doesn’t work. He had an “Ostrich” Exit Plan. He had put his head in the sand and had not proactively addressed the issues he knew would need to be dealt with.

Research shows there are 12 principal reasons business owner transitions, successions and exits fail. Each of these reasons impacts the company’s longevity and ongoing annual profitability as well as an owner’s transition and future exit results. This article addresses the 1st of these 12 reasons:

Reason #1 – Unclear and Conflicting Owner Objectives: Your personal, financial, transition and exit objectives are not determined or conflict with each other (or with the objectives of your partners, key employees, spouse or other family members).

This was something Art and Pete had not yet addressed. Art had assumed Pete would purchase the business from him at a full fair price. Pete thought much of the ownership should be bonused to him based on his two decades of dedicated services. However, they had never really discussed this in any detail, much less ever decided on how the company would be priced or paid for.

Pete also believed the company’s business model had become the victim of Art’s recent short-term thinking. If he was to be Art’s successor, Pete wanted to know the company would be primed to endure for a long time. In addition, Pete had recently been approached by a competitor to take a key position and ownership with his company, which Pete was giving strong consideration to.

The first step in a famous rabbit stew recipe is “Catch rabbit.” Likewise, as you and your advisors address the Transition and Exit Planning process, don’t overlook the obvious. Every business owner must begin this process by reviewing his or her primary personal, financial, transition and exit objectives. Once established, your objectives become the final destination towards which your Transition Growth Plan needs to advance.

The Transition and Exit Planning process (whether you intend to ultimately sell your business to an outside party, to transfer it internally to a family member, employee or ESOP, to keep it and go public, to franchise it or to remain as an inactive owner) cannot proceed until your objectives are thoroughly understood and internally consistent.

Your Transition Growth Plan (also known as a Succession Plan or Exit Plan) is dependent on coordinating the following six prime objectives. These represent different forks in the road. While a solid Transition Growth Plan includes fall back plans, you and your advisors need to begin by having a keen understanding of these prime transition and exit objectives:

  1. Who – Who do I want to transfer my business and duties to?
  2. What – What part of the business do I want to transfer or keep?
  3. Where – Where do I want to reside after my exit?
  4. When – When do I want to exit from active duty and/or ownership?
  5.  Why – Why do I want to exit?
  6. How Much – How much net cash-in-pocket do I need or want upon my exit?

This process needs to address the interaction of business dynamics, family dynamics and financial dynamics. It needs to be thorough, specific and forthright. A successful transition and exit will often involve input from your family, your management and a number of advisors. If you, your management or your advisors don’t understand the mission, they won’t be working in a coordinated effort. If the team quarterback isn’t clear if the play is a run to the left or a pass to the right, or if the play has not been well-designed by your coach, the likelihood of successfully advancing the ball or scoring is remote.

This review of your objectives is the time to consider what you want to do post-exit and to address the type of legacy you want to leave to your family, your business and your community.

By working through The Next Move Program™ with Art and Pete, we identified that Art was actually very comfortable with a 5 year transition. He really wanted to transfer the company to Pete rather than to an outside buyer. He was also willing to accept less than what an outside sale might bring.

This depended on having sufficient assurance Pete would stay committed to this transition and Art would have viable alternatives if Pete failed to deliver. Likewise, Pete was willing to commit to a transition on these terms. Based on this, we designed a Transition Growth Plan which called for a number of stages. We established a Business Model Innovation Program to move the company back to long-term viability. To address the transfer of ownership we adopted a combination installment stock purchase with a rolling-vesting stock bonus. Working with Art’s financial advisor, we also included a funded buy-sell agreement that protected both Art and Pete if future events warranted a change in plans.

This successfully met the needs of Art, Pete, their families, and their business associates. In a tax efficient way, this plan provided Art the financial and legacy results he wanted, while making the transfer of ownership over a period of time to Pete in a way he could afford.

Next Newsletter – How Bob’s misunderstanding of his company’s transferable value changed his retirement plans.

 

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