This is the second in a series of two related articles about exiting your business and succession planning.
The first article was posted on January 19 and appears here.
Exiting Your Business: It’s a Mindset, Not a Transaction / Part II
Navigating a Succession and Exit Strategy
By Tim Young
You got to be very careful if you don’t know where you’re going, because you might not get there.
This sage observation comes from the inimitable Yogi Berra, winner of 10 World Series titles—more than any other player in Major League Baseball history—and 18-time All Star.
If you’re like me, Yogi’s reflection—like many of his others—might leave you a little dizzy. Wait, what?
But if you allow it sit for a moment, it begins to make sense, particularly as it relates to exiting a business. He’s right. It’s not just about the destination, it’s about the path. It’s not just about what and where. It’s about the why, how and when of getting where you want to be post-exit.
At the same time, it’s an apt description of how some entrepreneurs look at their eventual exit—with only a blurry vision of a destination in mind. No path, no road map and just a vague sense of direction.
But successful exits are not purely about the destination—a transaction. They’re the result of a carefully planned, introspective process that incorporates several critical touchpoints. As I described last month, this process relies on a change in mindset that seeks clarity on a vision of success—what you want to do, how you want to do it and where you want to go – and identifying the best path to get there at the time of your choosing.
Navigating an Exit Strategy
Unfortunately, it’s all too often that business exit “plans” begin and end with a particular outcome. When an exit transition process begins with exit planning rather than succession planning—or a particular firm driving its unique discipline—chances are that one or more of these five key areas will be left unaddressed:
Ownership
Future ownership is the most fundamental consideration in succession planning. These discussions revolve around possible future owners as the business presents itself today.
Is there a next generation—a daughter or son—who is eager to create a legacy of success? Similarly, is there a key person—a current leader who helped build the business—who has an interest in carrying the business forward? Is there broader employee interest in acquiring the business as a group?
The answers to these questions point to specific exit options (outlined below) but they also are an important factor in developing clarity and providing a critical emotional anchor for an entrepreneur. With top-of-mind awareness of a realistic option and knowing that executional support is readily available, a strong intellectual and emotional understanding of a well-planned exit takes hold. A clear vision emerges, and we know how and what it will take to get there.
Leadership
Who is going to lead the business once the current owner is gone? The new owner? Maybe, but not necessarily. Ownership involves majority and minority shareholdings, not necessarily leadership.
Who are the current leaders? What is their runway? Will some leadership phase out with the exiting owner? Who’s next in line to take their place? Or, does new leadership need to come from the outside?
Management
Current management is often considered alongside current leadership with the strong caveat that a good manager does not necessarily make a good leader. This is where an unbiased assessment can be especially helpful.
Where are current managers in their careers? What is—and where are they—in their expertise? Do they display strong decision-making skills? Are they good communicators? What are their knowledge and leadership gaps? Whether done internally or externally, career coaching to fill in the gaps is often an excellent strategy—and provides additional emotional ballast—for an owner.
Relational
Relational considerations involve external and internal relationships.
Customers—where does the revenue come from? Who owns those relationships? What is the risk of those relationships continuing if current ownership steps away? How do you institutionalize the relationships to preserve the revenue? What is the plan to do that?
Employees–how does the next level of management and managed employees respond to the owner’s departure? With fear? Uncertainty? Confidence?
Other key audiences—and similar questions—include suppliers/vendors, creditors, government/ regulators, communities and, possibly, even competitors.
Cultural
Strong workplace cultures are generally established by the current owner and are worth their weight in gold. The key consideration is the extent to which each employee throughout the organization is aligned with the company’s strategy and direction, and understands how they contribute to the company’s success.
How will the owner’s departure affect the culture? Has it transferred successfully or become institutionalized among employees? Alternatively, if there is not a strong culture, how can it be improved and institutionalized over time?
A well-planned exit requires that addressing each of these five key areas is a pre-condition for discussing potential exit options. More information on these areas can be found here.
Exit Options
Next-Generation Transfer
A transfer or sale to one or more children, or possibly other relatives with an interest in carrying the business forward.
Inside Sale
A sale to a current leader/key executive that likely helped build the business.
100% or Minority ESOP (Employee Stock Ownership Plan)
A sale to company employees, which will move forward as majority or minority owners of the company. Interestingly, many entrepreneurs have either positive or negative pre-disposition to ESOPs. We will cover ESOPs in an upcoming article.
Do you know where you’re going? If you don’t, I can say with certainty, you’re not going to get there!
Just for fun, we’ve put together a collection of Yogi Berra quotes, malapropisms and witticisms. The language may be a bit twisted, but we can guarantee you, there’s some wisdom in just about all of them. And, they’ll make you laugh! Download the PDF below and enjoy!
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