Exit Planning – Step 2

Last month’s blog was the first in our series about Exit Planning:  how you as an owner‑manager should start the process of planning for your retirement.  We emphasised the crucial importance of having a lead adviser to guide you on what may well be a challenging journey.

So having taken that first step, what should you do next with the help and guidance of your chosen leader adviser?  In this month’s blog we cover Step Two, the subject of determining your personal objectives.

If you know of someone who you think would benefit from this blog please forward it to them.

James Hunt and the team at Everyman Legal

Taking the second step:  determining your personal wishes and objectives for your retirement

As the owner and manager of your own company it is not possible to separate your personal objectives from the objectives of the company.

So your first task, with the help of your lead adviser, is to decide what your personal objectives are and consider how they relate to your ownership of the company, which may represent your largest asset.  When would you like to step down and do you think you would like to phase your retirement?  What sum of money (net of tax) would you and your family need to be financially secure?   You may find that the gap between what you want or need and what is realistic and absolutely assured on a sale, is a frighteningly large sum particularly in a world of low interest rates.

But you must have the courage to confront that gap:  to determine that number.  If you do not you will end up putting off making the key decisions until ill-health or death takes the decision out of your hands.

The challenge here can be particularly difficult where you are one of two or more owners.  It is particularly complicated if you and your co-owners have markedly different ages, lifestyles and personal circumstances. For example, if one owner wants or needs a significantly higher sum his determination to achieve his personal objectives may mean that you are unable to achieve your own.

These hidden tensions may be unspoken (and perhaps not even admitted by your co-owner) but can all too often lead to breakdowns in relations.  Such a breakdown may occur when one of the owners has a health problem or a family member dies.  Whatever the trigger, it can be very stressful to learn that a fellow business owner has his own objectives and will not support your own. And family pressure from both sides may make matters worse. These difficulties can be avoided by employing a skilled independent adviser to help each of the owners to assess their own personal and financial objectives.

Choosing the best way forward

Once you have decided on your personal objectives there are three further questions which need to be addressed. The first is to try and assess what your company might be worth (which we will deal with next month).  Secondly, what are the strengths and weaknesses of your management team?  Thirdly what might be the practical obstacles to a sale of your company?

We know from experience how difficult it can be to sell a private company for what you as owner may think it is worth.    Buyers of companies will be cautious and risk-averse.  Even if you can agree a price the buyer may well find it difficult to raise funds to meet the agreed price.  You may then be faced with a very high risk deal with deferred and/or contingent payments and the suggestion that you take shares in the buyer.

This is why we think it so important for you to consider your management team (perhaps a strengthened team) as a potential buyer.  But going this route may require a lot of forward planning.

At Everyman Legal we have developed a process called the Initial Exit Assessment, which allows us to address these key issues efficiently, cost‑effectively and (hopefully) in a timely manner.  This way you have the time to plan for your exit. Do contact me if you would like to see a copy of this form.

The result of your assessment will be one of four alternatives (and quite frequently a combination of the four):

• A Trade Sale, meaning a sale on arms’ length terms to a third party;
• A Management Buy-Out, but not necessarily a traditional one where the managers have to find the funds to buy you out.  A powerful alternative could be for you the seller to provide the finance (by accepting deferred payment) and keep a minority stake.  In a future newsletter we will describe this alternative and how you might be able to use this to plan and execute your exit plan;
• A Family Transfer;
• Closure.

The assessment may lead to the conclusion that a combination of these alternatives is needed.  Perhaps one division needs to be closed and another prepared for sale to a management team.  Or the management team may need to be developed or strengthened over a number of years before the team could confidently run your company and undertake a buy-out from you.

The key to choosing the right path is to take stock methodically and with careful analysis.  Objective advice and long-term planning is essential and this is where your lead adviser (see our September newsletter) can play an invaluable role.

Hints and Tips

• Decide what is important to you and what resources you will really need in retirement;
• Grasp the nettle in good time, especially if your business has multiple owners;
• Use an independent adviser to assess the objectives/needs of your fellow owners to ensure that good relations are maintained;
• Consider the Everyman Legal Initial Exit Assessment as an aid to taking stock and evaluating your options.

Next month …

Next month’s issue will be about valuations.  It goes without saying that your personal objectives must be rooted in the real world – and what can be achieved – as opposed to what you would hope to achieve. In a future blog we will also be looking at how share incentives may be used to recruit, motivate and lock-in your management team.