I retired from full time employment just over a year ago. I made up my mind to retire long before that though, so the last few years, I spent time to think about how best to hand over the work I used to do, managing and representing an international organization. This is quite a challenging question as it seems rather normal for humans to hang on to a position of power as long as possible and not spend time and energy to prepare for an effective exit. Looking for answers I stumbled upon an article by Andrew Blackman and below I quote his suggestions as to what to consider when planning for an exit:
“You’ll find plenty of advice on building a successful business, but people don’t talk so much about how to leave it behind. And yet there are many good reasons for wanting to exit a business. Maybe you’ve found a better opportunity elsewhere and want to start a new venture. Maybe you want to retire or scale back. Maybe your business has just run its course, and you don’t have the passion for it anymore. Maybe you need to raise cash quickly, and selling your business is the only way. Even if you don’t plan to leave any time soon, it’s worth thinking through your exit options and having a strategy in place. Each one has its own particular advantages and disadvantages:
- Pass It On
The natural transition for many family businesses is simply to pass ownership on to the next generation. In reality, however, it’s often not quite so simple. Here are some things to be aware of.
Advantages
When you pass your business on to a family member, the main advantage is continuity. No outsiders need to be involved: you can pass on your business to someone you trust, and see it stay in the family for another generation. It’s also a great way to provide for your children’s future, if running the family business is something that interests them.
Also, it can be relatively simple to complete the transition if everyone is in agreement. You don’t have to go in search of external buyers, negotiate a sale, and endure a complex due diligence process. It can be a smooth transition with minimal impact on the running of the business.
Disadvantages
Unfortunately, not all transitions to the next generation go so smoothly. Sometimes your son or daughter may have different ideas about how to run the business, or there can be conflict between siblings over who has control.
In extreme cases, families can be torn apart by disputes over the direction of the business. Also consider the tax implications. If you transfer ownership of the company either for no payment or for less than its market value, the tax authorities may view it as a gift and charge gift tax.
Tips for Success
Know your family, and make a decision, based on what’s right for the business. Management consultants Ernst & Young recommend taking on external advisors to get a more objective view, as well as creating a formal succession plan to ensure that expectations are set clearly on all sides.
Also ensure that you’ve passed on all the necessary skills and training to your successor and consider creating a “roundtable” or family board to ensure that major decisions are made fairly, with involvement of all family members, and that any potential conflict is quickly defused. - Management or Employee Buyout
If passing your business on to a family member is not an option, consider another “friendly buyer” like your existing managers or a group of employees. They can pool their funds and buy the business from you.
Advantages
A management or employee buyout is also great for continuity. These are people who know exactly how your business is run and have the skills to continue running it successfully. They may pursue a slightly different strategy, but it’s still likely to be a smooth transition. It’s also satisfying: business owners often worry about what will happen to their long-term employees when they leave, and what better way to know they’re well taken care of than for them to be the new owners?
Disadvantages
For your employees to buy you out, they must get the money together first. This can be a problem, especially with larger, high-value businesses. In some cases, the group of managers or employees will need to take out a large loan to fund the purchase, which can be difficult to arrange.
One solution is for them to pay you gradually over time out of the company’s profits, but this is an obvious disadvantage for you as a seller, both because there’s a delay in receiving the money, and because there’s a risk that the company will struggle, and they won’t be able to pay you the full amount.
Tips for Success
As with option one, the main danger here is in letting personal relationships cloud your judgment. Negotiating a price can be difficult with people you know well, and you may end up leaving money on the table. So, try to keep things strictly business, and bring in outsiders to value the business and draw up a fair agreement. When the deal is completed, resist the urge to stay involved, unless you’re asked to of course. Generally, it’s better to step away and let the new owners run things in their own way. - Trade Sale
This option involves selling to another company perhaps one of your competitors, or a larger firm looking to acquire a subsidiary in your industry.
To be continued next week
Ton Haverkort
ton.haverkort@gmail.com
