Chapter 1. The challenge of exiting your business
All the world's a stage,
And all the men and women merely players.
They have their exits and their entrances;
And one man in his time plays many parts...
William Shakespeare (1564–1616)
As You Like It, Act II Scene VII
Anyone can buy or create a company. But how do you exit successfully? A Business Exit is not just a simple question that you might ask yourself as a business owner: Do I exit – yes or no? Most business owners find the issue excruciatingly difficult to grapple with because it is not just one decision; rather, in most cases, there are many interrelated decisions to be made, such as:
- What will you do with your free time after exiting? What new purpose will your life take on?
- How much money will you receive upon exit? Will this be enough to cover the objectives that you’d like to achieve? If you are nearing retirement age, will this be enough to cover retirement expenses, leave a legacy for your family, and cover possible medical costs?
- What will happen to your staff, clients, and business partners?
- What is the best timing for your exit, given the economic cycle of your country and industry, as well as the growth curve of your company?
- What will be the best form of exit (e.g. sale, going public on a stock exchange, selling to management, or transferring to your children)?
- How will you preserve confidentiality during the exit process, to ensure that your business isn’t damaged?
- How will you actually run the process and conduct a Transaction? What kind of advisors will you need? Who will you use?
- How will you minimize (legally avoid) taxes?
- How will you help ensure the continuity of your company? Should you seek or be available for a post-exit role in assisting your company to manage this continuity?
- How will you invest any proceeds from a Business Exit?
You’re not alone: most business owners hesitate or even procrastinate when making decisions about Business Exits. The sheer impact of the decisions may give pause; the timing may not be perfect (it seldom is!); or you may simply not be prepared, emotionally or psychologically, to exit. Hesitation is normal, but procrastination may be dangerous. The best time to plan your exit is when you don’t have to exit. If you really have to exit, it may already be too late.
In Box 1, I share a personal experience that marks the beginning of my dedication to this subject and graphically illustrates the danger of ignoring or postponing the planning of a Business Exit, as well as the fuzzy thinking that often accompanies it.
Box 1. An engineering consulting company
In 1968, my father founded an engineering consulting company, based in Toronto, Canada. By the 1980s, it had grown to over 130 engineers, having served clients in over 40 countries. A number of competitors had approached my father on several occasions with a view to buying the company, but he rejected all approaches in a rather summary fashion. My father was a dynamo; a self-made man who was fiercely proud of his independence.
In 1989, one minuscule event had an enormous impact: a tiny blood vessel in the back of his brain burst. The stroke disabled his speech for months, clouded his judgement, and left his body partially paralyzed. He was just 67 years old at the time. Meanwhile, his business, already feeling the effects of a recession, went into a tailspin. It was unable to attract new clients, began losing existing clients, not to mention staff, and started piling up serious losses.
A few months after his first stroke, my father temporarily regained sufficient judgement and speech to consider what he believed to be his three options. First, he considered hiring someone to run the business, but could not find anyone who had the many competencies required, or who could be trained quickly. He had neglected to groom a successor inside the company. Second, he could find a buyer for the business, but he quickly realized that without being available himself for at least a year or two to ensure an orderly transition, even if the company could restore positive cash flow, it would have no real market value. Given his state of health, this was a non-starter. His third option – or as he found out the hard way, his only real option – was to shut down the business. All other options were illusions. The liquidation took two months and was very painful. The remaining staff members were let go, assets were sold for a pittance, and the business was wound down in as orderly a fashion as possible. Instead of providing cash, the honouring of all corporate liabilities absorbed a significant portion of his remaining personal cash.
No one was more devastated by the shutdown than my father. Twenty years of incredibly hard work had been frustrated by the momentary misbehaviour of one tiny blood vessel. He deeply regretted that his company did not survive him (he had harboured a vague desire that I take over from him, even though I was not an engineer and had repeatedly declined his offer). Laying off staff pained him greatly. He viewed the shutdown as a colossal waste of his life’s work.
Because the majority of his net worth had been tied up in his company – which at its peak may have theoretically been worth many millions of Canadian dollars – he realized that not only would he be unable to bequeath much to his family, but also that his remaining personal assets were insufficient to provide for his own nursing care in the medium to long term. My father passed away in 1993.
From my conversations with thousands of business owners over the years, I know that most either procrastinate in developing an exit plan or suffer from similarly fuzzy thinking. It’s natural to avoid thinking about matters that are unpleasant, such as death or major life changes. Most business owners are so caught up in the day-to-day aspects of managing their businesses that there is a tendency to prioritize matters that are ‘urgent’ over matters that are ‘important’. Business Exit Planning consumes a considerable amount of time. It also requires input from multiple disciplines. So the tendency to procrastinate is not surprising. According to a 2008 UK study, 30% of all business failures are due to succession failure.i And of those owners who do manage to exit, a large number do not maximize the full potential of their Business Exits.
Getting into a business is considerably easier than getting out of one. Sir Edmund Hillary was not the first man who made it to the top of Mount Everest; there were several before him. More precisely, Hilary was the first man to make it down from the summit alive. Making it up a mountain, when you are physically and mentally geared towards reaching the top, may be easier than making it down, when it is much easier to slip and fall.ii
My point is not that every business owner should exit the business, but that every business owner should have a plan to exit the business. When you plan for the ascent, you should also plan for the descent. (And you might also plan for an early descent, in case of bad weather.)
Most business owners only plan for the ascent, and hence find the descent – the exit – extraordinarily difficult. This is partly because many business owners usually look at running their businesses and exiting their businesses as completely separate, unrelated, and distinct acts, not realizing that the two are inextricably linked. A Business Exit should be a culmination of the process of building a business, part of a natural continuum. From inception, and while building the business, you should always have the endgame in sight. You should continually ask yourself: Are the steps I am taking to build my business enhancing the value of my business from an investor’s perspective?
Many business owners never succeed in the exit, at tremendous cost to themselves and to their businesses. Others do so in a way that either fails to best achieve their personal objectives as shareholders or fails to find the right type of investor for the business. Many owners who do exit leave a lot of money on the table – all because they did not properly plan and execute their Business Exits. As the saying goes: failing to plan is planning to fail. Despite the huge stakes involved, many business owners spend more time planning their holidays than the long-term future of their businesses.
Fortunately, there is an emerging body of knowledge – Business Exit Planning – that helps you plan for the descent. There are an overwhelming number of options available to owners of mid-sized businesses – options for those who want to exit in the financial sense, but remain active in the business; options for those who no longer want to be active, but may want to remain invested in the business; and options for those who want to sever ties completely. There are options for owners who seek an immediate exit, and options for those who prefer a staged exit over time. Fortunately for owners of mid-sized businesses, an enormous amount of capital has been mobilized to invest in the mid-market: so, there are many options available!
This book deals with two major subjects: Business Exit Planning (presented in more detail in Part II), followed by Transaction Management – what a business owner needs to know in managing the exit Transaction – (covered in more detail in Part III).
Once you, as the owner, have decided to exit (and have made all those exit-related decisions set out at the beginning of this chapter), proper execution of a Transaction is vital to success. This involves a different but related set of skills, which, using the title of Donald Trump’s book, I call the art of the dealiii – how to obtain the best possible price and terms. But even here, it is not just a question of agile negotiation, but also of painstaking preparation. What kind of process will be involved in the sale? What kind of information disclosure do investors receive? You will need to prepare extensive information disclosure. Will the investors uncover any surprises during Due Diligence? How well can you satisfy their Due Diligence concerns? These are just some of the issues encountered. The artful negotiation is the tip of the iceberg – seven-eighths of the iceberg, the preparation, is submerged under water, invisible.
A book that covers both Business Exit Planning and Transaction Management will equip you, as the business owner, with an overview of what’s involved in exiting your business. That does not mean that this book covers everything you need to know. As the saying goes: the larger the circumference of light, the larger the circumference of darkness around it. Part of the value of this book is that it will make you more aware of possible blind spots, where expertise is lacking within your organization, or where you may need to seek further advice.
A properly planned and executed exit is usually linked to a liquidity event that unlocks your wealth so that it may be used for your retirement, to lay the financial foundation for your family members, or for other purposes, while ensuring an orderly succession for the governance and continuity of your business.
There are millions of business owners the world over who have faced or are facing similar issues concerning a Business Exit. As I’ve said before, you’re not alone. Many have never exited a business before, and are perhaps not even sure where to turn for advice.
Most business owners are unsung heroes of society. Only a few business owners are widely celebrated or acquire superstar status. But as a business owner, you have probably created or grown an organization that provides value to society, provides jobs and revenue for employees, and provides work for suppliers. Most wealth creation is driven by business owners. It would be a terrible shame not to let the benefit of these superhuman efforts reverberate through future generations, as well as benefit families and loved ones. That will require Business Exit Planning followed by a successful implementation of the plan.
Exiting your business may be a once-in-a-lifetime experience; yet few business owners really understand at the outset what is involved. May this book help you in your endeavours; may it help you visualize your destination and how to get there; and may it make your journey more enjoyable and successful.