When is the best time to plan your exit from your company? Now.
Most people start their companies either with a great idea for a new product or because they feel they can improve an existing idea by delivering better quality, better service, or by doing it faster. Usually I find that owners come from a sales or a manufacturing background—rarely from the financial side of the business. They often understand one aspect of the business significantly better than others which can prove to be a detriment down the line.
What comes to mind are two examples where this bears itself out—when a defensive coach gets promoted to head coach in the NFL, he sometimes is really, really good at managing the defense but he doesn’t necessarily know how to coordinate all the pieces or to lead the team as a whole.
Another example is in churches: It’s so hard to have a pastor who is a fantastic preacher in the pulpit who can also manage the administrative duties of the church facility and who is also nurturing on the pastoral care side. We’re human: it’s hard for us to excel in all things.
It’s important to surround ourselves with people who bring different skill sets, passion, and experience to the game. They can serve to complement where the owner is not as strong and to provide an alternate perspective in decision making. The biggest challenge I see for owners is to let them.
And that leads me to succession planning or exit planning. Most owners cannot imagine themselves “post-company” that they lovingly birthed. They love every day and want to be involved. In their intensity to build a successful business they often have neglected to develop outside interests that will hold their interest in “retirement.”
One owner may have had hopes of passing the business to his children. There may be one child who has worked their way up and another who doesn’t have any interest in it. I recently worked with a firm where the owners had 3 children- one who was learning the ropes and showed a lot of promise for becoming the successor, one who was “employed” at the firm but just not gaining his footing, and a musician who was off doing his own thing. They were challenged by how to treat them fairly while recognizing the one who was becoming an integral part of the firm.
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I read recently about JW Marriott who selected a non-family member who was their CFO to become CEO when Marriott was 80. His son had been at the firm for 30 years, working his way up from the kitchen. Mr. Marriott recognized that his son Bill was no longer enjoying his work and had the tough conversation. The son soon left the company to pursue other interests.
The other issue I come across is the owner who just does not want to let go. What can happen here is that a defining event can happen: death of the owner, death or illness of the owner’s spouse, or the owner is no longer fully capable of running the firm. The company can be left in chaos all of a sudden because the pre-planning was not done earlier. Often the owner manages the top customer relationships. Start including other managers in those sales calls earlier. Make sure the client knows there’s a deep bench behind the owner. The owner may hold all the “institutional” history—why some decisions were made years ago and which ones are still valid, and which ones we need to move on from. Document processes and job roles, even if it seems silly or pointless in a small firm. You’d be surprised how valuable that can be when someone is out for an extended period or leaves the firm.
Another big reason to plan your exit early is to build the data that will support your exit. Is the firm structured properly to benefit from taxation issues that may come into play with a transition? Granted, this a moving target in this period of regulatory uncertainty but do your homework. Trying to change your corporate structure late in the game is harder.
Are your financials maintained in good shape so that any time you are approached by a potential buyer you could support your valuation with strong data?
Do you have breadth across your client base so that if a top client should leave, you would not be devastated? We’ve seen this happen too often.
Is your management team aligned with your goals and are they compensated in a way that they would want to stay after your exit? Measure and track the behavior you want to see repeated and compensate; and incentivize the results you want to encourage.
Having clear, current transparent information always gives bankers who might fund an exit transition and the buyers confidence in what they are buying. It makes everything run far more smoothly. May you put the hard work in ahead of time so this can also be true for you.
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