6 minute read
Transitioning Your Company
Eight Different Ways to Transition Your Company
By Deborah Cole
All successful companies, small and large, make plans. The plans may be short-term or long, general or quite detailed. The more outlining of the road to success the better. Typically, business plans are developed at the starting line and, if leadership is focused on success, the plans are reviewed and refined on a regular (yearly) basis. Most plan templates include seven to nine components that are familiar: company description, statement of problem solving for clients, products and services, leadership and structure, market analysis, marking plan, an audit of the competition, goals and objectives and a financial plan. Sounds pretty complete, right? But one of the most critical components is never addressed. What does the founder(s) do when it’s time to leave the building? Missing from the majority of business plans is the exit strategy. In a review of the 20 most-followed models and templates for a business plan, only one included a section on an owner’s exit.
Admittedly, no one likes to consider the end of a new endeavor, because it is human nature to be excited about startups. The founder(s) is/are excited along with their families. Friends are supportive, cheering on as the business gets under way. Suppliers are elated to have a new customer and, hopefully, the marketplace is overjoyed at another option. Everything is exciting and optimism is high. But, realistically, everything has an end and we must plan for it to maintain control of it. Our commitment to operate for the benefit of customers, employees and our families must include how it all ends. This end can be planned or left to chance. We strategize for all possible contingencies to set everyone’s mind at ease and to protect those we care for. What occurs more often than we would like is that a young business owner encounters a medical emergency or accident, and life is cut short. Families are left with the burden of unraveling all of the details of the business during a time of grief.
Also, part of the reason we plan for the future is so that we can maximize our return on all of our hard work. A healthy transition means a second half of life that is rewarding and secure.
There will come a time when a business owner wishes to live a life without the stresses of the business world. If he/she waits until this critical point and then scrambles to develop an exit plan, options may be more limited. When plans are laid early in the life of a business, options are many. We will investigate a few of these. No matter what the choice, it is important to have the plan in writing and detailed with the help of an outside advisor.
1. Die with your boots on.
This is not advised. There are no plans and many risks. The advantage of this head-in-the-sand plan is that there are no expenses, no thought that goes into a plan. This may suit some owners. The disadvantage is that when the owner exits the company, there are no provisions for continuity, and family members are left to clean up the mess.
2. Shut down the business in a methodical way.
This plan requires minimal planning (12 months or less). The advantage is that there is minimal cost and as long as loans are paid off and there are enough assets and resources to close out financial accounts, it is simple. Unfortunately, any equity in the company is lost and any value in the company for support of the owner in future years is lost. But if ending customer and employee relationships is not a personal concern, this is an easy way to exit. Plan for future sources of income.
3. Transition the business to a family member.
This is the hope of many business founders. The dream is to pass their business on to one of their offspring. The advantages are that there is a sense of pride in passing on the legacy of a business that has been built. It is also guaranteed new ownership. A disadvantage is that often the founder and the next generation have very different ideas on the way a business should be run. Often the older generation has conservative ideas and the newer leadership wants to implement new ideas, new concepts, new innovation. There may or may not be financial considerations or an official sale involved.
4. Transition the business to a friend.
If financial arrangements are satisfactory with both parties and all details can be set out in writing with the help of outside counsel, this can be an option. Every detail of sale, transition and future operations must be nailed down without exception. As a warning, It is difficult to maintain a friendship and a business transaction. One or the other suffers.
5. Sell the business to an employee.
This is often a desired plan. Employees of long standing know the business, know the market and are an easy fit. The downside is that an employee may or may not have the financial ability to purchase a company. Owners who carry notes often wish they had not.
6. Sell the business to a national or regional landscape company.
This has been the most frequent method of transition in the past decades. Unfortunately, large companies often do not have similar company culture, and the acquired staff feel the difference. It is important to understand this ahead of the transaction, especially if the owner plans to remain in the business for a period of time. Also, national companies only place value on maintenance contracts. Design/ build or construction companies often have difficulty finding a buyer.
7. Sell the business to a local competitor.
Even if the purchase price is acceptable, there can be difficulty. Company cultures may not be in alignment, and it can be difficult to continue to live in a community where a former competitor has acquired the business.
8. Create an ESOP (employee stock ownership plan) or sell the business to employees through a hybrid ESOP .
There are pros and cons to each of these. It is up to the owner/founder of the business to determine what fits his/her needs and the needs of his/her family. The ESOP is a highly structured manner of turning over the business to employees and, at the same time, allowing the founder to exit with a nest egg to fund his/her future. The traditional ESOP requires the company to be of a size to absorb the payout to the owner and to handle all of the reporting required by the government (ESOPS are tax exempt). Hybrid ESOPS fit the bill for smaller companies that are comfortable with long-term acquisition of ownership by employees.
About Deborah Cole
Deborah Cole is the founder of a commercial landscape firm with multiple locations throughout Texas. She now devotes herself full-time to speaking, writing and consulting. www.deborahcoleconnections.com
