Exit Planning: Having the Hard Conversation

Australia is seeing the largest exodus of business owners in history as the Baby Boomer generation (born 1946-1964) reaches retirement age. However, Generation X business owners (born 1965-1980) should also be preparing now for that eventuality. A key issue facing organisations led by owners in these generations is that succession planning isn’t integrated into their long-term strategy — largely because of fear. Fear of rocking the boat, fear of what’s next, fear of being seen as trying to undermine power structures.

It’s easy to forget that succession planning is as much an emotional journey as it is a practical challenge for owners. Properly implemented, it also represents one of their greatest opportunities for value creation and re-engagement of employees.

The business landscape has changed through the global pandemic, and so too have the risks that business buyers are willing to take on. Some sectors have been particularly hard hit, such as travel, hospitality, and entertainment. For many businesses that have survived, this has been tantamount to a near-death experience.

Perhaps you’re a potential successor who sees the writing on the wall, a co-founder looking to buy out the business, or a management team that’s concerned about how the next decade will play out with the uncertainty around, well, almost everything.

Broaching exit planning can be a touchy conversation — owners usually have a deep emotional attachment to the business, they may view it as a prelude to a coup, or simply disregard the topic due to feelings evoked by the inevitable end of their life’s work.

No wonder so many leave it until it’s too late.

It’s worth remembering a few truths about what succession planning really means. Succession planning is not an ‘end’ for owners, but a chance to protect their legacy and a process to bring about renewed energy for the entire organisation.

One of the most common regrets that business owners face is not having begun their exit planning process earlier. In a survey by the Exit Planning Institute, 75% of business owners profoundly regret selling their business within 12 months of the deal.

Fewer owner responsibilities helps increase business value while reducing stress

For a business to achieve the highest valuation, owners would ideally begin delegating all responsibilities other than exit planning. Sure, they may still be a shareholder, non-executive board member, even a figurehead like Colonel Sanders.* But if owners are still relied upon for making decisions or day-to-day operations, it puts any buyer or successor in a precarious position following the transition. It’s a red flag that elements of the business need vital systems or teams built around them.

*Sidenote: Colonel Harland Sanders sold the US brand rights to KFC in 1964 but remained a paid spokesperson for the brand until his passing in 1980, aged 90. He was also an honorary Kentucky colonel for his contribution to state cuisine, not from military service.

The operation may have started as a one-person band, but as employee numbers have grown, they’ve also added complexity. That means good systems, management and governance are essential to continue scaling.

Picture a self-employed cabinet maker. They would have little to sell at their exit other than their tools, a lease agreement for the workshop and perhaps a client list. On the other hand, someone who has developed their business model to create factory lines, supported by sales teams, customer service protocols and manufacturing staff has an actionable ‘magic formula’ that will be far more appealing (and less risky) to a potential buyer.

Address gaps in the onboarding process to open the conversation about exit preparedness

How long does a new recruit take to get into the swing of things at your business? How long would it take to perform optimally if they received no guidance at all? The gaps here are a sign about exit readiness, that the systems and documentation mentioned above have not been implemented. It’s also a constant source of frustration to current and incoming employees.

Expertise and special knowledge must be systematised, digitised and automated where possible. Relying on tacit knowledge is a big red flag for buyers – especially with The Great Resignation in full swing. For an owner that means articulating everything from plans, systems, org structures, profit models and even cultural rituals.

Choosing your timing and being vulnerable

“Going first” is an incredibly powerful tool used by practised radio and TV interviewers — showing vulnerability to have it reciprocated. Doing so may be a way into tabling the subject at all.

An immediate reason to start this conversation is within the context of Covid planning. Sharing your own fears following two years of upheaval to the global business landscape, flagging that it could be seen as close-to-negligence not to have a contingency plan for losing key personnel.

Your business now has policies in place and actions to undertake if employees are close contacts or test positive for Covid antigens. What about if someone in leadership passes away suddenly? Having a pragmatic conversation about these possible outcomes now is a reasonable way to get the ball rolling for everyone’s sake.

Presenting solutions for a smooth transition

Selling the business to leave isn’t the only option available to a business owner. A professional exit planning adviser can talk through potential pathways to a better business through strategies such as offering Employee Share Plans or a mid-market merger.

There are also ways to minimise tax on exiting, which means all that hard work isn’t wasted when the time to leave the business arrives. Owners need to understand their exit in the context of their best interests.

While a business owner may not be planning to exit for a few years yet, a window of two years to get their “ducks in a row” will be a blessing for the value that can be added to the business, as well as reducing the stress for everyone involved.

Buyouts and dissolving partnerships

Perhaps your co-founder/s are no longer aligned on the vision for the organisation, their priorities have shifted due to family or health issues, or they’ve simply lost the passion for the business that got it off the ground. Maybe a personal rift has damaged the professional relationship.

When these sorts of circumstances arise, it puts a pretty big elephant in the room, the presence of which reverberates through every level of the organisation. Open, honest conversations are the only way to sort out these issues. It might be time for a ‘vision & strategy’ session to collaborate and calibrate your compasses.

You may want to have a session like this facilitated by an advisor or executive coach, to discuss priorities inside and outside the business, turning over all the cards on the table about timelines for your own exit eventually.

Start thinking about your own exit goals from the beginning

The number one piece of advice I give business owners is to “begin with the end in mind”. That means an extended timeline for planning and strategy. Having a goal that is five or 10 years out, not 90 days.

It takes time to build and increase value. The difference between equity (or long-term value that can be extracted when you exit) versus income is the timeframe. So, start early, know what your business is worth at transition, and map out what needs to be done to drive value higher and make the business more attractive for when you are ready to realise that value.

Feel like you’re ready to have the hard conversation? Talk to our advisors.