A number of years ago I had the pleasure of meeting an entrepreneur who had founded a manufacturing business in Southern Ontario. (I will call him Frank.) He designed and manufactured highly specialized and complex equipment for demanding customers in the food packaging industry. Most of the equipment was customized for specific purposes and much of it was of his own design, for which he held valuable patents.
Over the years Frank built up a loyal customer base and his company was recognized for its focus on quality design, reliability and service. His office displayed the many awards and testimonials that were accumulated over the years. His pride of ownership was evident, and well deserved.
Like most entrepreneurs Frank’s business was his life and for 35 years he was dedicated to fulfilling his dreams. Now that he was approaching retirement age, he was beginning to think about what he should do with his business. He wanted to move on, spend time with his family, do some travelling and explore other interests with his free time. However, Frank felt a responsibility to his employees, suppliers and customers. His first priority would be to protect his legacy and do what was necessary to enable the business to continue successfully into the future after he was gone.
Frank approached this challenge methodically and carefully. He began to design his Exit Plan by identifying his goals, considering his various options, understanding what needed to be addressed, and setting out an action plan, including a timetable to keep him on track.
Frank had adult children who had worked in the business over the years, but they were now pursuing their own careers and were not interested in taking over the family business. So Frank began to look outside for third-party buyers. After meeting with various business brokers and some potential investors Frank came to the realization he did not want to simply sell the business to the highest bidder. Although the money was attractive, he had worked too hard to place his company in the hands of strangers who did not share his values.
Frank decided he would hire and groom a successor to take over the company after a period of close mentorship. After a careful search, he found an individual who fit the bill and they struck a deal where Jack (not his real name) would join the company, make an initial investment in the business and become, in effect, Frank’s partner. When he was ready, Jack would purchase Frank’s remaining interest in the business and assume the role of CEO. Everything was in place for a successful transition.
Once he was comfortable with Jack’s progress, Frank retired and was enjoying his time in Florida where he owned a seasonal residence. He kept a close eye on the company as he had helped Jack finance the purchase and still had a significant investment to protect. If anything went wrong, he would be able to take control of his company back.
After six months, Frank noticed from his reports that sales were declining. When he questioned Jack, he had difficulty getting straight answers. His concern was whether this was an aberration, or a serious trend that had to be urgently addressed. Frank decided to contact some of his former clients to find out why they had stopped buying, and what he could do about it. He learned the company had lost touch with its clients, and they hadn’t seen anyone from the company in months. So Frank set up a meeting with Jack and flew home the next day.
In the execution of an otherwise sound Exit Plan, Frank had failed to fully appreciate the value of his energetic approach to client relationships, and that his leaving the company would put that at risk. Jack, whose area of expertise was in production, was not adequately prepared to take over this key responsibility from Frank.
Fortunately for Frank, he had invested in a comprehensive Exit Plan which protected his interests. The purchase and financing agreements contained conditions that enabled him to step back into the business to see that the problem was properly and permanently resolved.
When entrepreneurs leave their businesses, they take with them years of valuable experience and a depth of expertise. For an ownership transition to be successful, it’s essential that the business be able to carry on without the owner. That requires the owner’s contribution to the organization to be fully understood, with measures put in place to ensure their departure doesn’t put the business at risk.
Ian MacFadden is co-founder and Partner of exitRITE Planning Services. His column appears the first Friday of each month. You can reach Ian at [email protected] or go to www.exitrite.com
