Is Exit Planning Worth the Time and Money?
An Opinion from the Front Lines
For busy business owners it isn’t surprising that they question whether the time and money devoted to Exit Planning are worth the benefits.
To answer that question, The Exit Planing Review ™ asked Kevin Short,an investment banker who works every day with owners of small and mid-sized companies, about the value of Exit Planning.
“Good exit planning can be the difference between a successful closing and a complete derailment of the sale process,” says Short.
When asked to explain, Short focuses on setting objectives, determining the value of the business and maximizing and protecting the business value. “When an owner sets his objectives in an Exit Planning context, he or she does so methodically and proactively. Owners who wait until entering the M&A arena to decide how much cash they want and need from their companies do so re-actively and often are blinded by attractive bait held out by less-than scrupulous buyers.”
When developing an exit plan, owners and their advisors place a value on the owner’s company. “When an owner’s first valuation experience happens in my office, and that owner is primed and ready to sell as soon as possible, learning that the company is not worth what he or she had hoped is a painful experience. Even more painful is the subsequent re-focusing of effort to building the value of the company.”
In Short’s opinion, “The element of Exit Planning that gives an owner the biggest bang for the buck is, without a doubt, the process of building and maximizing the value of the company”
One technique that exit planners use to motivate managers to remain with a company post-closing (a vital Value Driver) is the Stay Bonus. An effective Stay Bonus accomplishes three tasks: 1) it gives the key managers a reason to stay; 2) it is structured so that it increases the value of the company, and 3) it includes a penalty (usually in the form of a covenant not to compete) that prevents key managers from taking key clients, vendors or trade secrets with them should they leave before or after the sale.
Short can rattle off far too many horror stories about owners who, believing that their loyal employees were happy and already well compensated, were held hostage by those same employees.
“We recommend that owners get very aggressive implementing Stay Bonuses with anyone who has a significant impact on a company’s performance.” Short elaborates, “The Stay Bonus should apply to anyone—and that might be the janitor—whose cousin is your biggest client—who has leverage against the company.” And, of course, tie the stay bonus to a covenant not to compete (or similar agreement), first checking with your attorney about how to best create enforceable agreements.
Advisors also work with owners to protect business value. One method is to clean up shareholder agreements (again, well in advance of any contemplated sale or transfer). “If a shareholder agreement does not force a minority shareholder to sell when the majority shareholder does, majority owners can (and often do) find themselves unable to sell, or held hostage by minority shareholders.”
“By and large,” adds Short, “entrepreneurs ignore both Stay Bonus Plans and shareholder agreements because they believe that other shareholders or employees will ‘come along’ on closing day.” Short observes, “What owners forget is that every shareholder and every employee figures out leverage and most intend to use it.”
From these and many other examples from his practice, Short believes that Exit Planning is indeed well worth the time and money owners devote to it. If you’d like to learn how exit planning might save you time and money, please contact us.
This article contains excerpts from an article in The Exit Planning Review™ published by Business Enterprise Institute, Inc. Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning. Please contact us or if you would like to sign up for a free subscription to The Exit Planning Review™, if you have any questions or want additional Exit Planning information.
