Putting together an exit plan is about having plans that are flexible and fit your needs. In fact, most of the time we believe that business exit planning and scenario plans go hand in hand.
Business exit planning is often around transferring ownership of a business. In my experience the owner is often not interested in transferring their business or not able to transfer it for financial reasons. If they’re not interested in transferring their business they often are interested in changing their relationship to the business.
Changing the owner’s relationship to the business usually means working less hours and being less involved in the day-to-day operations. If we do our jobs properly, a well run private business can stay private for a very long time. When this happens, the need for extreme financial planning is reduced and the owner’s safety for retirement income increases.
Today’s environment is not a good one for selling your business. In many instances it’s better to sell your business to key employees and management than to a third party.
The goal when selling to your managers is to reduce the total tax cost of the transaction. We know that when we do a stock sale, the maximum amount of total taxes are paid. This is because the buyer uses after tax dollars to pay for stock.
I was reading an article in the New York Times last week about how a company used an ESOP to help the founder exit from their business. As I was reading the article I thought there were some things that might be useful to review if you’re thinking about an ESOP, (and every business owner I’ve talked to has thought about one).
For those who don’t know, an ESOP stands for Employee Stock Ownership Plan. An ESOP is a qualified retirement plan and as such has tons of regulations that are governed both by the IRS and the Department of Labor. I’m not going into the technicalities of an ESOP, just some of the things you would want to think about if you’re contemplating doing one.
One of the questions I’m asked on a regular basis is whether our Clients should give stock to their key people. Many private business owners believe that if they give their managers stock, those key managers will take a more active “ownership” interest in the company.
For the most part I’ve found that this belief is false. Managers who are given stock don’t often take an ownership interest. In my experience whether a manager owns stock or not has little to do with how they act towards the company.
I was thinking about the topic of entitlement the other day as it relates to the family business. Having the opportunity to join the family business is an opportunity that few children seem to take advantage of. Often children see their parents work very hard for a long period of time to get the business established. As a result they either don’t want to work as hard as their parents or often feel entitled to the goodies the business provides, but not have to work hard to deserve those goodies.
Parents often feel guilty for the amount of time they’ve spent building the business. To make themselves feel better parents will sometimes not put requirements for their children around material objects. If this is done to an extreme basis this can lead to a feeling of entitlement by the children. This entitlement can become a problem if the children join the family business.
One of my favorite blogs is John Warrillow’s called built to sell. I always find his questions and ideas interesting.
In his most recent entry he is asking the question about whether having a number two is a good thing or should you build a strong senior management team. My answer is you should do both.