When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.
~ Chinese Proverb

Good fortune is what happens when opportunity meets with planning.
~ Thomas Edison

Good plans shape good decisions.
~ Anonymous

With an increasing number of owners of small and family owned businesses reaching retirement age, business continuation and exit planning are critical issues for owners, employees, customers and communities. We personally know of at least 400 good paying, stable jobs at risk in local businesses if the owners should retire, die or become disabled. All of these owners are in their mid-60’s and not one has a concrete business continuation and exit plan.

In the old model for exit planning, a business owner would contract with a broker; get the books in order and sit back to wait for purchase offers. The resulting sale would often result in disruption to the business and, possibly, failure. In our experience many business sales do not succeed due to poor planning and execution in the human relationship issues. And we make no bones about it, the most important aspects of business continuity lies in the leadership of who will take over the company and the high quality employees who will stay with the company under new leadership.

We’re starting to see a new and encouraging trend. We have been approached over the past several years by a number of people who want to network into a business acquisition and most want a one- to three-year transition period of mentorship under the current owner. These buyers are successful business people who understand that success is dependent on succession. They want to glean as much knowledge as possible from the owner and build on the loyalty he/she has generated among employees, customers and the community.

It’s time for a new model of business continuation and exit planning. This new approach not only eases the transition, but helps protect the future of the business and its employees as well as safeguarding the owner’s retirement and legacy.

Step One: Build an Advisory Team

The owner builds a strong Advisory Team comprised of:

• a business consultant with behavioral background to assist with talent assessments and goodness of fit with all parties as well as an understanding of the culture of the company and deep experience in transitions in business.
• a proactive CPA who thinks strategically
• a financial consultant
• a solid proactive business attorney

Not all of these advisors are active at the same time, but all have a role to play in guiding the owner through all phases of the planning and implementation process.

Step Two: Quantify Owner’s Goals and Resources

The financial consultant and CPA team helps the owner determine the amount of money he/she needs to retire and retain his/her accustomed lifestyle, then compares that number to his/her current available liquid assets and calculates the difference. Plans to bridge the gap must be juggled against the value of the business. All too often, business owners believe their business is worth more than it actually is.

The Advisory Team also works with the owner to define his/her vision for the future of the company beyond his/her tenure, as well as his/her future beyond the running of the company.

Step Three: Build Value Drivers

With the help of the business consultant, the owner invests the necessary time to top-grade the management team and internal systems to ensure that the business is ready to move on under new leadership. The CPA analyzes cash flow and evaluates financial systems to identify areas in need of enhancement. Once everything is in order, the owner obtains a value estimate for the business.

Another critical step at this stage is to create “stay incentive” plans for key managers and executives. When owners think of retiring, (and often even before they think of it) employees are thinking about their own future and are vulnerable to being acquired by other firms. The business consultant, who is usually the leading trusted advisor of the owner, assists with the ongoing transitional issues of succession, keeping everyone engaged and focused.

Step Four: Identify Transfer Options and Financial Implications

With the help of the Advisory Team, the owner networks to find high-quality prospective buyers. The advisor meets with each prospect, executes a non-disclosure agreement and arranges facilitated meetings with the owner. During a series of meetings in both business and social settings, the owner has a chance to get to know each prospective buyer and get an initial “gut” feeling about the suitability of the match. This step is critical because the retiring owner will stay on to teach the business to the new owner over a period of one or more years. The two must be able to work well together and have similar visions for the future of the business.

After meeting with all prospective buyers, the owner and Advisory Team select the best candidate and move forward with the attorney and/or the CPA in charge of the purchase negotiation process.

Step Five: Personal Wealth Management and Estate Planning

The Advisory Team helps the owner build a strong financial plan to manage the wealth from the sale, as well as an estate plan that integrates family legacy and social capital.

Step Six: Risk Management

The owner and the Advisory Team reduce risks for the future of the business by ensuring that proper life, long term care and property/casualty/liability insurance policies are in place. They also draft and implement business continuation agreements, strengthen key performance indicators, and implement leadership growth strategies for key managers as well as continue to execute an aligned and focused strategic business plan

The result of this new model for business continuation and exit is a smooth transition, similar to what you would expect for a well-planned inside sale, but with a third-party buyer. This new model creates open communications and good will, gives employees a sense of comfort about the transition and allows the owner to remain flexible while ensuring the future of the company he has built with his blood, sweat and tears.

We think this paradigm shift is the right direction for many business transitions. What do you think?