CEO Best Practice: Exit Planning

Executive Tools

• Executive Summary
• Self Assessment Checklist

Expert Practices Articles

• Winning Beyond Business
• Exiting the Business
• Creating the Exit Plan
• Selling the Business
• How to Sell the Business
• Succession Planning
• Transferring the Business
• Finding Fulfillment After the Business
• The Search for Fulfillment
• Finding Your True Calling

Case Histories

• Conduct Internal Due Diligence

Tools & Analysis

• Action Plan for Succession Decision Making
• Business Succession: The No Tax Solution

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Winning Beyond Business

Without some sort of plan in place, you will likely receive a much smaller financial return on the business than you deserve. Worse, you run the risk of wandering aimlessly through retirement wondering "Who am I?" and "What went wrong?" Conversely, when you make conscious, purposeful choices about when and how to leave the business and what to do afterwards, you end up with an infinitely more rewarding outcome. Winning beyond business -- having a rewarding and fulfilling second half of life -- requires addressing the following issues:

1. Determining when, where and how you will leave the business
2. Maximizing the value of the business
3. Identifying your successor (if you decide to transfer rather than sell the business)
4. Estate planning to protect your assets and transfer wealth with a minimum of taxes
5. Discovering who and what you are beyond the business
6. Identifying your true passions and "callings"
7. Finding new ways to achieve the sense of fulfillment your business currently gives you
8. Setting a course for the second half of life for individuals who can challenge you and help your business grow.

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Exiting the Business

First, understand that as the owner of a privately held business, you have two key roles -- CEO and shareholder. As CEO, your job is to make the best decisions for the business. As shareholder, your job is to make the best decisions about your investment. When it comes time to exit the business, these two roles often do not coincide. Effective exit planning must therefore take into account the differing needs of each role.

It helps to understand the key principles of exit planning:

1. Understand the full extent of exit planning. Exit planning encompasses a wide range of activities that include:

• Deciding how, when and to whom to sell the business
• Identifying a successor if you intend to transfer rather than sell
• Determining what you will do with your life when you no longer own/run the company
• Taking steps to maximize and protect your assets (estate planning)

Exit planning also involves a process, not a one-time event. Depending on the owner and the state of the business, it can take several years to develop an exit plan. Once in place, it should be revisited on a regular basis as business and life circumstances change.

2. Separate the job from the investment. Exit planning for the CEO involves figuring out what to do after the business. Exit planning for the Shareholder involves turning an illiquid investment into cash and investing it in something else. In a successful exit, each role accomplishes its separate goals.

3. Position for the transaction. Selling a business is much like selling a home -- in order to receive full value, you have to get it in top shape. Because positioning a business for sale can take several years, Collins recommends managing the company to maximize shareholder value rather than just top-line growth. By focusing on the areas needed to maximize value, you automatically keep the business in shape to sell.

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Creating the Exit Plan

To create an effective exit plan, Collins recommends a three-step process:

1. Set goals. This first step addresses three critical questions:

• When do you, the CEO, want to stop working here?
• After selling the business, how much would you like to have in the bank so you don't ever have to work again (or worry about it)?
• When do you want to get liquid, stop investing in this company and invest in something else?

Answering these questions identifies three important goals: the date the CEO will leave the business, a financial target and the date the shareholder will leave the business. According to Collins, the answers to questions one and three are often very different.

2. Conduct a current state analysis. Step two begins the process of determining how to achieve the goals set in step one. This involves a careful analysis of three key points -- the value of your business, the strengths and weaknesses of your business and your company's strategic position in the marketplace.
Start your analysis by determining a reasonable and realistic value for your business and compare it to your answer to question #2 in step one. This identifies the gap between how much your business is worth and how much you need to have in the bank in order to finance your retirement.

Next, identify your company's strengths and weaknesses so you can fix any glaring defects or problems.

Finally, understand your company's strategic position in the marketplace by asking questions like:

• Which companies are buying other companies like mine?
• Which companies are being sought by strategic buyers and why?
• Does my company fit that profile?
• Who is likely to be a strategic buyer for my business?

The ideal time to sell, says Collins, is when your personal goals, the value of the business and market conditions are all in sync.

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Selling the Business

The best time to sell your business, say TEC speakers Peter Collins and Phillip Currie, is when the future of your company looks brightest, not when you've reached a peak or have entered a down cycle. In particular, Currie recommends selling when:

• You have dominant market share or a recognized position, such as price leadership
• You have some sort of technological or competitive advantage
• Margins are good and have the potential to get even better
• You have something -- such as infrastructure, distribution or access to a niche market -- that can be leveraged by the right buyer
• Your industry and market are in an up cycle

Before posting the "for sale" sign, however, it helps to familiarize yourself with the following concepts:

• Recognize that the company is the product.
• Look at your company through the buyer's eyes.
• Understand the buyer's motivation.
• Enhance the intangibles that make your business attractive.
• Know the value of your business.

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How to Sell Your Business

In general, board functions include:

• ·Establish corporate objectives and policies
• Enhance CEO and senior management effectiveness
• Act as arbitrator between major stockholders (board of directors) or during family control issues (board of advisors)
• Act during a crisis, such as the death or departure of a CEO
• Lend credibility to investors, customers and vendors
• Plan strategy development
• Make key introductions

All boards share certain responsibilities that should be clear to each member when they agree to serve. These include:

• Attendance. At its most basic, members must agree to attend board meetings and agree to take part in some committee work.
• Planning and support. Board members should be involved in reviewing the company's fundamental purpose, priorities and goals. From there, members should oversee and evaluate strategic business plans, and support management in carrying out these plans.
• CEO monitoring. In publicly held companies, the board of directors is legally responsible for selecting the CEO, approving executive compensation and, if necessary, dismissing this individual. Regular assessment of CEO performance is another key function.
• Finances. A formal board of directors approves a company's annual budget and ensures that the company adheres to it. The board can also contract for an independent audit; review financial performance against budget, prior years and competition; control investment policies; and manage capital or reserve funds.
• Board effectiveness. Board members should be able and willing to assess their own performance. They must effectively monitor themselves for results, practices and organization. A board must govern itself.

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Succession Planning

1. Identify the successors. When it comes to deciding who should run the business after you're gone (assuming you don't sell outright), the options are:

• Family member(s)
• Partners and/or shareholders
• Professional managers or key employees
• Some combination of the above

From these options, select a successor according to two criteria -- who you want the business to go to and who is best qualified to run it after you leave. Often, these two people are not the same.

2. Plan for every contingency. The next step involves planning for any and all events -- such as retirement, death or disability -- that can trigger the succession plan. Be sure to identify the appropriate successor in each case, because they may not be the same.

3. Memorialize the plan. Formalize and memorialize your succession plan by putting everything in writing and creating the necessary legal documents, such as buy-sell agreements, partner agreements and living wills. These documents also specify where the money will come from to facilitate the transition of the business.
In the vast majority of cases, succession planning leads to a smooth, orderly transition of the business upon retirement or the decision to sell. However, in the event of your untimely death or disability, says Kiley, your succession plan should:

• Include an up-to-date financial statement
• Clearly state what happens with key employees, who is in charge, and what roles they play
• Identify a board of advisors to help your surviving spouse through the crisis

In addition, Kiley strongly recommends writing a "love letter" to your spouse that details what will happen to the business should you die unexpectedly and whom he/she can turn to for advice. When creating the board of advisors, avoid anyone directly connected with the business. Instead, identify independent, skilled business people whom you and your spouse both trust.

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Finding Fulfillment After the Business

TEC speaker Carl Samuels and former speaker Gregg Levoy believe that how you plan to spend your time in retirement has a greater impact on your post-business quality of life than all the business, financial and estate planning issues put together. They also believe that exiting the business presents an ideal time to explore new possibilities and discover (or rediscover) other aspects of yourself that may have been suppressed in the drive to achieve economic success.

The biggest obstacle to this major life transition is that most entrepreneurial CEOs have invested too much of their identity and self-image in the business. Not only do they find it hard to let go of their position and explore other alternatives, many can't even think about themselves apart from the business. Developing a meaningful life means recognizing and accepting that you are much bigger than your business and that life has much more to offer. By shifting your outlook and understanding that you have 25 or more vital years ahead, you can re-invent and re-energize yourself and lead a useful, rewarding post-business life.

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The Search for Fulfillment

According to TEC speaker Carl Samuels, the journey to personal fulfillment tends to move through four predictable phases -- shake-up, self-exploration, renewal and integration. Passing through each phase takes roughly a year, with the primary issues in each phase laying an important foundation for the next.

• Shake-Up. Shake-up is a precursor of a life transition often known by other names, such as mid-life crisis, paradigm shift or wake-up call. It involves confronting a set of obstacles and challenges that your vast skills and past experience cannot address, let alone solve. Overcoming these obstacles requires letting go of your old self-image and crafting a new vision that can sustain and inspire your new life passion. Key questions during this phase include:
  • o How much time do I have?
  • Who am I besides my business?
  • What are my priorities?
  • What am I doing that no longer fulfills me?
• Self-Exploration. This phase involves examining what was revealed during shake-up. You discover unfamiliar aspects of yourself, parts left undeveloped, hidden or rejected. Rather than avoiding or denying these parts, you begin to mine them as a source of new energy, untapped wisdom and imagination. The fundamental question during self-exploration is, "What do I want?"
• Renewal. Renewal is a time for connecting with your new-found vitality, passion and calling. It involves reprioritizing life goals so they mirror your growing new vision. The key question during this phase is, "What is my passion?" Renewal also addresses questions like:
• How would I like to be different as a person five years from now?
• What do I want my legacy to be?
• What is my life purpose?
• Integration. Integration allows you to put your new sense of self and new life passion actively and consciously into the world. Then, through the art of mentoring, you generously share this "knowing" as a living legacy for your peers, the community and generations to come. The key question during integration is, "How can I serve?"

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Finding Your True Calling

Levoy helps people align (or re-align) with their passion and sense of purpose in life. He refers to this process of self-exploration as "finding your true calling." He describes a calling as "any urging that comes from the geographical center of yourself and tells you what it will take to make your life literally come true."

Obstacles often get in the way of pursuing callings. Levoy identifies the three worst offenders as:

1. Societal pressures. Because callings tend to be disruptive, society rarely trains or even encourages people -- especially those in positions of great responsibility -- to pay attention to them.
2. Self pressures. At the same time, many CEOs feel deeply responsible for the lives of their employees. Hence, they tend to tune out any inner voices that may distract them from running the business.
3. Ambiguity of callings. Perhaps the toughest challenge of all involves picking out a true calling from all the "background noise," the fanciful daydreams that seem like callings but have no real substance to them.

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