Exiting Before You Begin! What’s With That?

One of the challenges in the publicly traded corporate world continues to be succession planning at the executive and board level.  Boards and shareholders are looking for leadership that are not only creative and responsive to markets but who can be people of integrity in fiduciary responsibilities.  This challenge seems to be more complex in the private company environment.

About 90% of our economy revolves around the small and medium business environment.  Most of these companies with more than ten employees are often family owned or have a tight knit management team.  Often unlike the corporate entities that negotiate executive packages with exit plans, these businesses do not have business or personal exit strategies.  That is unless the exception for a business is exit strategy that will be required to formulate if investors are participating.

What’s the difference in exit strategies?  Most often, when the discussion is engaged about an exit strategy it is related to investors and what the investors want in return for taking the risk in a company.  The math for this type of strategy is not all that extensive but it varies depending on when an investor comes into the company.  This type of exit strategy is most often established in business plans.  Other and often more critical exit strategies are the small and medium business (SMB) executives’ personal strategy and the board member strategy that often takes a back seat. 

 The focus for the moment is the SMB executive exit strategy.  The founders of businesses in this environment usually get going with their hair on fire and learn that the space fantasies talking about warp drive is not all that far fetched.  The fact that life happens along side of various business activities seems in the nebula.  So when one some thing happens, not only are hats spinning but so are heads with the dumb founded look of, what happened.  I look at four areas that need to be prepared for in personal exit strategies:  Disability, Death, Divorce and Departure.

•  Disability, I know the effects of disability first hand.  I had a major accident that devastated one of my first businesses.  The fact was that I did not have succession plan in place and did not train employees sufficiently to carry on with critical aspects of the business.  Because of that, the entity collapsed.  One never knows when a debilitating accident will happen.  What I learned in the military about training your replacement, I did not carry into my business life.  But I learned the hard way and have ensured ever since that if I as the chief executive and bottle washer go away, the business can sustain itself because others can carry on.

•  Death is inevitable and no one knows when it will appear.  With that, the idea of looking into your organization and training key people is critical to the legacy of a business.  If there is no one that you think can sustain the business, then have some plan laid out for outside counsel or your Advisory Board to do a search for a replacement.

•  Divorce is another devastating life experience.  I don’t know about this one first hand but know enough folks in business to understand that this event can cause a business to come apart.  There is not a rational way to prepare for this potential except to take care of your spouse first.  Business will get done but an unhappy home life affects many things including the company.  If this event does occur, then having had the knowledge to train up others will help obviate the instability caused by a divorce. 

•  Departure is something that we all would like to occur in a most positive manner.  In this positive light, succession planning is critical.  What are the benchmarks that need to be established for the SMB executive to transition?  These often are personal financial targets achieved, age, family goals or any of a hundred targets one could set.  This takes a working process just like any exit strategy.  With this positive side comes the dark side.  If the business entity is a Partnership then there may be issues between partners that cause one or more to depart.  These may be for the bright side of an exit strategy but it could be for other reasons.  Hopefully the partnership formation contracts accounted for the exit of each partner.  The same is true for an LLC in that the formation documents should clearly articulate an exit plan for the active members and specifically those in management.

I find that in working with any size business, the concept of developing an exit strategy of any flavor is not often thought about and planned for.  This is especially true at the early stages of forming a business entity.  I always, get the quizzical look when I talk to business startup executives about having an exit before they start.

What is your exit strategy?  Do you have one that is business plan focused to the investment community or have you looked at the executives in the company to define what their exit could be?  Either will have major effect on the business and its sustainable legacy.