One of the primary reasons most small businesses aren’t prospects for venture capital is because of incompatible thinking regarding the exit strategy. VCs expect to get their money back within a few years (less than 10 but closer to five) while a business founder typically thinks of running the business until he or she gets tired of it and/or retires.
Regardless of exit strategy goals, all business owners must think about how they’re going to exit the business they founded: selling to a new owner, going public, handing the reins to family members, or as in way too many cases, simply going out of business. But sadly, as much of a certainty as it is that a founder will exit the business, most fail to plan for this inevitability. And the result of this failure to plan an exit often results in an expensive and painful scenario for the owner, and in the case of health problems or death, the family.
But all of this inefficiency, pain and brain damage can be prevented with a strong resistance to floating down that river called denial, plus some forethought and planning. If you’re having trouble making this happen, your problem can be fixed by talking to professionals who know how to hold your hand and get you on the right ownership transition track, regardless of which exit scenario is most likely to be in your future.
Once you’ve come to grips with your ultimate departure from the business, you can start to accept that the way your business is operated and structured when you show up each day - let’s say, in the middle of your ownership tenure - will be different from the way it will look on the day you convey the business to the next holder of the keys, whether an arms-length sale or a family transaction.
Recently, on my small business radio program, The Small Business Advocate Show, I talked about the process of planning for the orderly and successful transfer of ownership of a small business with a member of my Brain Trust, Dr. David Gage. David is a leader in the field of business mediation, a founder of BMC Associates and author of Partnership Charter: How to Start Out Right with Your New Business Partnership (or Fix the One You’re In).
Take a few minutes to listen to this conversation and be sure to leave your own thoughts, including any business transfer stories you might have. Listen Live! Download, Too!
October 28th, 2010 at 5:29 pm
It’s unfortunate that there are few places a business owner can truly learn about the details of an exit strategy. From my own research it seems that after years of successful business operations, the tax burden alone often derails the sale of the small business to another entity - making it very challenging to find the profitability expected on both sides.
You mentioned “thinking about it” and “planning” being the key step - but planning on it from an emotional and family or employee communications standpoint is different than knowing the legal and tax requirements, which seem to be the big hurdles. Personally I think the frustration of all the uncertainly revolvling around the legal/financial rules causes much of the stress and resistance to planning. It’s like giving a speech when you are unprepared - it stresses you out to the max. How do you plan when you don’t know the rules? Where do you get the rules in writing? An attorney’s verbal discussion doesn’t give you anything concrete from your side of the fence so saying you need “good legal advice” is somewhat of an oxymoron unless you know the best.
You didn’t really discuss “types” of exits - stock deals, long term consultant agreements where the business owner stays on for one or two years in exchange for hefty fees, and other creative methods of exchanging value seem to be some common methods that can also reduce taxes. But I’ve seen these fail as well. Maybe it seemed like a good deal on the front end but the entrepreneur may not have understood the real legal and financial ramifications of the buyer’s contracts - which are typically written by more experienced legal teams. How many entrepreneurs can afford to get the same expert legal advice as the larger entity purchasing them? And the rules are different state to state to make things even more complicated!
Many experts seem to suggest maintaining some stock and percentage of profits as part of the sale - but this can be complicated, difficult to manage and even more difficult to correct should a problem arise down the road - such as the seller feeling like they are not getting the amount they thought they would receive. The seller may have the legal right to audit but who will help you enforce this if the buyer is uncooperative? And what if out and out deception is used?
From all I’ve read, turning the business over to family members could entail a myriad of tax consequences that make it a challenge to all but the most savvy of estate tax business professionals.
It seems that reorganizing a company with an Employee Stock Ownership Plan may be an attractive option if you are a smaller business looking for a reaonsable exit strategy, but few talk about it.
It seems even more important to have long term personal and employee based compensation, bonus and retirement strategies as the primary focus, then consider the business transition only after that time. Unless you start a business with the sole intent of selling it within a certain window of time and plan from the very beginning to do so. Even then, good luck because the lawyers and M&A experts don’t seem to understand all the rules.
I would guess few employees remain upbeat and happy after a business has been sold. The few I’ve seen were given very attractive bonuses prior to the sale or as a condition of the sale and still did not choose to stay on long term. Expecting a business to go on as usual after a sale is kind of a fantasy.
May 10th, 2010 at 4:08 pm
It’s unfortunate that there are few places a business owner can truly learn about the details of an exit strategy. From my own research it seems that after years of successful business operations, the tax burden alone often derails the sale of the small business to another entity - making it very challenging to find the profitability expected on both sides.
You mentioned “thinking about it” and “planning” being the key step - but planning on it from an emotional and family or employee communications standpoint is different than knowing the legal and tax requirements, which seem to be the big hurdles. Personally I think the frustration of all the uncertainly revolvling around the legal/financial rules causes much of the stress and resistance to planning. It’s like giving a speech when you are unprepared - it stresses you out to the max. How do you plan when you don’t know the rules? Where do you get the rules in writing? An attorney’s verbal discussion doesn’t give you anything concrete from your side of the fence so saying you need “good legal advice” is somewhat of an oxymoron unless you know the best.
You didn’t really discuss “types” of exits - stock deals, long term consultant agreements where the business owner stays on for one or two years in exchange for hefty fees, and other creative methods of exchanging value seem to be some common methods that can also reduce taxes. But I’ve seen these fail as well. Maybe it seemed like a good deal on the front end but the entrepreneur may not have understood the real legal and financial ramifications of the buyer’s contracts - which are typically written by more experienced legal teams. How many entrepreneurs can afford to get the same expert legal advice as the larger entity purchasing them? And the rules are different state to state to make things even more complicated!
Many experts seem to suggest maintaining some stock and percentage of profits as part of the sale - but this can be complicated, difficult to manage and even more difficult to correct should a problem arise down the road - such as the seller feeling like they are not getting the amount they thought they would receive. The seller may have the legal right to audit but who will help you enforce this if the buyer is uncooperative? And what if out and out deception is used?
From all I’ve read, turning the business over to family members could entail a myriad of tax consequences that make it a challenge to all but the most savvy of estate tax business professionals.
It seems that reorganizing a company with an Employee Stock Ownership Plan may be an attractive option if you are a smaller business looking for a reaonsable exit strategy, but few talk about it.
It seems even more important to have long term personal and employee based compensation, bonus and retirement strategies as the primary focus, then consider the business transition only after that time. Unless you start a business with the sole intent of selling it within a certain window of time and plan from the very beginning to do so. Even then, good luck because the lawyers and M&A experts don’t seem to understand all the rules.
I would guess few employees remain upbeat and happy after a business has been sold. The few I’ve seen were given very attractive bonuses prior to the sale or as a condition of the sale and still did not choose to stay on long term. Expecting a business to go on as usual after a sale is kind of a fantasy.