Preparing your company for your exit strategy?
Part I of 2 –When/How is the leadership team important?
If you are one of the many thousands of baby boomers who built a successful landscape business, you are also most likely part of the tidal wave of privately held businesses that will be exiting their businesses over the next decade. Depending on the owner’s goals and preparedness, that exit could be:
- close the company and liquidate the assets
- transfer ownership within the family
- a management buyout (MBO)
- an ESOP (Employee Stock Option Plan)
- sale to a third party (either strategic or investment buyer) or
- a recapitalization with a private equity firm
- a combination of the these
In each instance, the executive/leadership team is important in achieving a successful transition. Part I on this topic summarizes the leadership team’s role in the various exit options. Next week, in Part II, executive compensation plans will be addressed. For companies to succeed beyond the ownership transition, total compensation and performance metrics for the executive team (or senior leadership team) are critical issues for successful outcomes. A well-designed compensation plan will focus the executives on measures that drive improvements in the company’s value for a short-term and long-term impact.
While businesses that close won’t be as concerned with long-term impacts, they still need key people to make sure the closing and sell-off is handled correctly. I’ve worked with companies that bought a large division but rather than sell the smaller pieces of the operation that they didn’t want, they opted to shut them down. Before the shutdown, they needed to complete existing contracts, inform employees, properly dispose of equipment, vehicles, property, and file the appropriate notices. Management created special incentives for those teams to reward the employees who stayed to accomplish the closing-down process in an orderly fashion.
Internal Ownership Transfer Family, MBO, ESOP
In the case of a family ownership transfer, a management buyout (MBO), or ESOP, the executive team will be critical to delivering the company’s successful results and should be compensated accordingly.
When a business owner plans to transfer the business to a family member, it’s often the leadership team that has trained and worked alongside the person in various aspects of the business. The future success of the company depends upon the continuing success of that team, now with a new family owner, through the next phase of the business’ life.
In the case of a management team and/or ESOP buying the company from the owner, it is also the leadership team that will be taking the company to its next level and, in this case, it’s with them as owners. Internal transfers of ownership will take as much if not more planning to be successful as third-party transactions. I’ve seen businesses liquidate because the owner had made no plans for the business beyond year-to-year goals.
In one case the owner was a great salesman but not a great business person. Without his involvement and with no real leadership team in place, the company’s performance was dependent on him. The company’s future performance was considered too risky for the third-party buyers who looked at it. His managers were too junior to run the business alone, much less buy it and take on the leader’s role. When the owner died accidentally with no insurance, no leadership team in place to run the business, and no plans for the disposition of his business, any value that might have been there was gone. While there was a residual stream of income from products sold previously, with him out of the picture some of those contracts began to drop off. The ultimate death blow to the company was the lawsuit that the adult children from his first marriage filed against his widow (the second wife). As you can imagine, his company died shortly after his death.
External Sale to a Third Party – Strategic Buyer or Investor
In most cases (for a business enterprise worth more than $1mil) an external buyer will expect that there is a second-in-command/General Manager/VP who can run the company successfully. That person will have credibility and relationships with existing clients, the loyalty of the next level of managers, and the confidence of the rest of the staff. Even if the selling owner/s agree to stay to assist in the transition, someone who knows how the company has run successfully and who can deliver those results in the future will be a key factor for a buyer. As the size of the company for sale increases, the size of the leadership team will increase also. For a $7 mil company (enterprise value), there will be several individuals who cover these responsibilities as well as a Controller and/or CFO (or equivalent arrangement with the CPA.)
How Should the Owner Begin?
Before the selling owner begins his initiative to exit the company, he will carefully explore his realistic options and timing. Based on his goals for the company, he will include his exit plan goals as part of his strategic plan for the company. The leadership team will be addressing how to achieve those goals (which may include improved margins, increasing sales, customer retention, etc.) as part of the company’s plan.
As the owner works through his options, he will identify the leadership team members who want to participate in buying the company themselves (if that is an option) or remain with a potential new owner. With the proper compensation plan, including the cash compensation pieces (base salary plus annual bonus) and longer-term incentives tied to future performance of the company, these team members will become even more focused on achieving results to drive the measures that will improve the company’s value.
The goal is to reward the executives with opportunities that would be competitive with larger companies as an incentive for them to stay with the seller’s company. The benefit to the company is having experienced team members who are even more energized about the objective goals and their ability to achieve them as well as opportunities for advancement in the “new” organization. In Part 2, executive compensation plans will be covered.
If you’d like to discuss your thinking about your exit plan and your executive team’s contribution to it, or other questions you have about buying, selling, or exiting your business, let’s have a conversation. We can help you determine your readiness for sale, sell or buy a company, or help with an existing acquisition’s integration.
I can be reached anytime via email: [email protected] or phone at: 224-688-8838.
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