business_exit_plan

Many consultants will tell you how discouraging it is to find that many small companies have no plan for the eventuality of the owner’s or CEO’s exit, due to retirement or other causes. There are many causes for this neglect. Managers are often caught up in short-term planning, that is often relegated to the next month’s or next quarter’s results. In this approach, the small business managers copy large corporation practices, who tend to focus on boosting their share prices which are subjected to constant public scrutiny. Small companies are generally privately owned, and are responsible only to a small group of shareholders and their employees. Therefore, succession planning is easier to achieve and the impact of this planning brings benefits for the company’s present and future success.

Another factor is the reluctance for business owners to face their own mortality. This type of planning should be viewed as similar to making a living will which clearly defines the manner in which assets should be passed on. Many owners tend to over micromanage their business and leave no room for the rise of potential successors. This person has to be carefully groomed over a substantial period of time before they are ready to take over the helm. The sooner this process of mentoring and fostering is started, the better the consequences for the business and the owner. Succession and exit planning may be a time consuming process, but time constraints should be superseded by the importance of leaving the company in good hands after the departure of the prime mover. Here’s are nine steps to take to plan a thorough business exit.

1. Put your house in order. If you want to get the most for your business when you retire, the first order is to ensure that the business is operating at its optimum potential. Maintain this level until you are ready to turn over the reins to someone else. This may call for some outside advice for optimizing the organizational structure, putting in financial controls, reconsidering the business plan, and improving the efficiency of the operation. It may be difficult to allocate the necessary time for thoughtful planning, but doing this is beneficial no matter how far you happen to be from a reasonable retirement age. If you plan to turn over the company to the next generation of family members, you can do them no greater favor than to turn over an operation that is operating on all cylinders.

2. Anoint a successor early. Through objective evaluations decide who within the organization is best suited to replace you. No matter who you choose, it is better to do so earlier than later and dedicate the time and effort to mentor the candidate. Let them know that you have decided on them, but make sure that they do not take this for granted. Set personal goals and objectives for that individual and verify that they are met or exceeded.

3. Allow them to succeed in replacing you. As you watch your successor progress, turn over some of your key responsibilities to them. Introduce them to your clients so that they can get an early heads-up on the coming changes. Then, step back and let them run their own show while still maintaining some control. This builds confidence, and opens up possibilities for new and creative thinking from a different generation.

4. Offer binding incentives. If the decision is to turn over the operation to a family member or another insider, offering shares or/and share options provides that extra incentive to remain with the company and make it as successful as possible. There is no greater recognition and incentive than seeing the possibility of becoming a part owner. Structuring this kind of share participation requires the services of legal and financial experts, but the owner should have a clear idea of what they wish to accomplish.

5. Set long-term objectives. Your exit strategy should incorporate a long-term plan that reaches beyond the expected retirement age of the owner. This should consist of a more generalized plan that not only concentrates on financial goals and objectives, but also defines the corporate culture and public image that the owner wishes to preserve. While care must be taken to allow the successor the flexibility to run the business, there may be corporate policies or cultural prerequisites that are important to the current owner well into the future.

6. Search beyond the walls. The assessment of whether a member of the current management team has the talent to take over the top post should be made long before the exit of the owner. This includes family members, who may be positioning themselves for an eventual takeover. Let family know that your choice will be made for the best interests of the company whose shares they will eventually inherit. If there is no one interested, then it’s time to find someone with a proven capacity to operate a successful business. Look to your industry and find where some exceptional talent may be hidden.

7. Look for possible mergers and acquisition options. The right exit decision may end up being the sale of the company to a third party. Research the industry for good horizontal or vertical fits for the acquisition or merger of your business with theirs. Nobody will know the competition as well as the existing owner, and whether overtures are made directly or through a broker, this provides a solid head start. Discretion in this type of undertaking is of the utmost importance. Make sure that the perception is that you are dealing from a position of strength and have many options.

8. Set a target date for departure. Procrastination is the greatest enemy of the exit plan. By making it a high priority, the owner can avoid barriers that lead to continuous delays. Being forced to make last minute arrangements, or being incapacitated to participate in the decision making process on succession, can lead to unwanted consequences. Set the date, put together a team of insiders and outside specialists, and get it done within a specific fiscal period.

9. Expect a transition period. The accumulated knowledge and experience of the owner in all areas of the business is an indispensable asset on which the successors may want to lean on for a bit. This is often required in the business sale agreement. It is important to negotiate this transition time to ensure that it is fair to both parties. There should be an option to end the transition sooner, if all parties agree that the new team is ready to take charge. In a family takeover, the owner may accept a position on the board as an adviser. Don’t let this become an excuse for continuing to constantly look over the shoulders of the new generation who have taken over the business.

George Mikituk is an independent small business consultant and business owner with a mission to help entrepreneurs improve their management skills. He has recently written a book featuring a DIY approach to small business restructuring, available on Amazon. His professional website and blogs are dedicated to providing practical solutions and insights to small business.

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