We have outlined three different methods to consider when you think about your exit strategy – maximize price, maximize continuity, and maximize legacy. We will now take a deeper dive into each strategy and how you can approach thinking about each one.
Very few business owners end up pursuing a maximize price exit strategy. In general, that strategy gets balanced out by other non-monetary factors that are important to the business owner. One of these factors is continuity; seeing their business continue beyond them through internal succession. This strategy can work in a family or non-family business, but we will focus on non-family businesses for the purpose of this post.
One of the biggest risks of selling your business to a third party is what strategy they choose to pursue after you are gone. Focusing on an internal succession plan generally mutes this risk, as the culture of the company is more intact when internal leadership changes. A third-party who pays top dollar for your business will generally pursue the most lucrative strategy rather than prioritizing cultural harmony. This is the first challenge of the “maximize continuity” strategy: finding the next generation. You must work early and often on internal succession for it to work long-term. Specifically, you should have a leadership development program in place, with a clear path to ownership for your employees.
You also need to think intentionally about the timing of your exit from ownership of the business. An internal succession plan takes patience. If executed in multiple tranches, you could be looking at a buyout plan that spans 10-20 years. You should adjust your exit strategy accordingly so your buyout lines up with your personal retirement plans. The upside of the length of buyout is it can be much more tax efficient. You most likely will have significant capital gains on the sale of your stock, so spreading it out over multiple years can be very advantageous to you from a tax perspective.
The final consideration with this strategy is the emotional component. Internal succession can have many benefits from a legacy standpoint, as you know the people you are handing the business off to and have a chance to train them and instill your values before you exit. Given the longer-term nature of this strategy, you also have the emotional benefit of giving yourself time to slowly transition out of leadership roles at your company to allow the next generation to take over. There will be pains along the way as you watch a different approach take hold and your value to the business starts to slowly decline as you have less influence, but the step-by-step nature of your exit should soften the emotional blow.
As you approach this strategy, it is helpful to be transparent with your company about your plans where appropriate. Make sure employees have a clear path to being a successor. Instill your values in them as you lead. Plan for your personal finances so you are free to execute your plan with little worry. Cast a vision of legacy. Maximizing continuity takes sweat equity and patience, but seeing the plan follow through on your vision is a reward worth waiting for.
Garry North, CFP®