Family Walking Together

Building a successful business doesn’t happen overnight; thus, strategically preparing for an intentional exit shouldn’t happen that way either. Business owners can benefit from a thoughtful, formal process of deliberation that begins with picturing the desired end result, honestly evaluating the current state, and setting goals to move the needle.

The desired end result can vary dramatically. In some cases, a business owner may desire to pass ownership on to current company management or to the next generation. Or in other cases, perhaps a business owner wants to cash out and sell the business. 

Here are some thoughts to consider in the event of an internal or family transition: 

  1. What education should the successors have to make the business even more successful? 
  2. If working with multiple successors, how is the ownership and/or decision-making authority of the business divided?
  3. How are the family politics of the transition controlled? What’s the process when a dispute arises? 
  4. Should the owner’s intentions for the company legacy be formalized in stone, or should the plan allow successors flexibility should they choose to sell?  

Alternatively, considering the sale of a company prompts questions such as: 

  1. Will the proceeds be enough to accomplish all of the owner’s financial goals, including charitable giving, potential retirement, and providing for family? 
  2. How should the deal be structured to help ensure the highest after-tax value is received?
  3. What nonfinancial goals should be on the table, e.g., employee retention and continuation of the company legacy?
  4. Will there be an earnout period, and how should the business be transitioned successfully to the future owners?
  5. What are the owner’s plans after the transaction? For many, being an entrepreneur means possessing a passion for building businesses. Would the owner engage in a new venture, sail off into the sunset, or start a new career?

These questions require thoughtful consideration to create a picture of the end goal or what the exit should look like. Walking backward from the end goal, where are we now? Regardless of the gap between the current state and end goal, the next step is building the right team to power the business toward the finish line.

What does this team look like? A collaborative, innovative, skilled group that produces superior outcomes as a result of its alignment to a common purpose is crucial. To develop a team of this caliber, consider these four simple steps: 

  1. Identify the team
  2. Craft the vision
  3. Create the action plan 
  4. Monitor progress

First, identify or hire the team members to invest in. Ideally, this will be no more than four to six people; otherwise, the leader is not as effective. Second, work with each team member to craft the vision of how the organization can operate optimally, firing on all cylinders, without the primary involvement of the business owner. It’s important that this process is collaborative—an individual will fully support and buy in to a vision they helped create. Lead this process with the enthusiasm and energy expected of the team charged with execution. As part of this process, the owner will need to 1) disseminate appropriate information and 2) delegate authority, rather than simply delegating tasks. Team members have to understand the why and how as they relate to each puzzle piece that contributes to the organization’s overall goal. For example, instead of stating that any work-in-process invoices must be sent out by the first day of every month, explain that any time more than 30 days between incurring of the expense and receipt of payment requires a draw on the company line of credit, which increases interest expense costs. 

Once the vision is established, the team should then develop its own step-by-step plan for how to get from where they are now, both as an individual and as a team, to the common vision. The plan must be simple with clear, measurable objectives and consider incentives related to the accomplishment of objectives. Use a disciplined approach to build these leaders, and hold regular coaching meetings for accountability and to adjust the action plan as needed to follow the vision. 

Along with establishing trust and a sense of being valued, your management team can be further motivated by financial rewards in exchange for performance. By setting up a long-term compensation program in the form of ownership, or ownership-like wealth accumulation, an owner can unleash the full energy and passion of the team matched to the achievement of the company goals. 

Owners frequently hesitate to share in the benefits of wealth accumulation associated with the company, asking why they should give up what they have worked so hard to achieve. 

Challenge this mentality that adding to one person’s slice of the pie requires redistribution from the owner—instead, focus on growing the pie together so everyone has a slice of a larger pie. Use today’s financial metrics as the baseline for future measurement and profit-sharing. The growth in key performance indicators (KPI) that enhance transferable value is the slice of the pie to be shared. 

Consider rewarding KPI growth in the following areas: 

  • EBITDA growth from the previous three-year average 
  • Increased available cash flow
  • Reduction of identified risks 
  • Management teams’ mentorship of their future successors
  • Execution of the strategic plan 

For an inside transfer to family, or an inside buyout to management, an owner may grant equity shares in exchange for performance. Or, if giving up control is a pain point, consider some form of synthetic equity—a long-term compensation program that builds wealth in the form of a future payout. This future payout, or deferred compensation, may best be triggered by key events that are beneficial to both the company and the individual.

Planning with the end in mind brings to light a number of considerations that may be foreign, uncomfortable, and even surprising to an owner who may only enter into an exit strategy once in a career. BKD’s team of professional advisors holistically considers business succession, the transaction event, personal tax considerations, and wealth planning. We guide our clients through the process from beginning to end and provide our experience and technical knowledge to help business owners develop appropriate goals, avoid pitfalls, and land gracefully. 

Read all the articles in this series:

For more information on this topic, watch the archived webinar Building a Confident Future with a Holistic Approach.

Reach out to your BKD Trusted Advisor™ or submit the Contact Us form below for more information.

FORVIS Private Client services may include investment advisory services provided by FORVIS Wealth Advisors, LLC, an SEC-registered investment adviser, and/or accounting, tax, and related solutions provided by FORVIS, LLP. The information in this presentation should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies, mentioned in this presentation may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax, or other strategy mentioned herein. The information herein is believed to be accurate as of the time it is presented and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.

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