Business owners with exit strategies take into account many external factors.
The exit strategy is how the owner will write the next chapter in his life when he passes the business on to someone else for maximum value. The external factors are all the circumstances of market, credit, taxation, and other forces beyond his control that will affect his efforts to find the right transaction.
The process is complicated. The external factors will help determine the timing of the transaction.
Internal factors have a role, too, and the business owner is well-advised to have strategies to address them.
Often, for instance, a company may build its reputation on the performance of key employees. While the adage “no one is indispensable” is arguably true, the contributions of some key employees can affect how attractive a company will be.
Even if those employees’ contributions are not readily apparent, a buyer is going to give the company close scrutiny and recognize that success in the short term, at least, will depend on the continued contributions of those key people.
Generational Equity helps its clients develop pro-active plans to make sure internal factors will help propel a transaction rather than obstruct it.
The first step is a realistic assessment of the value of key employees to the overall business and the cost of replacing them. Some of the values in the assessment include how difficult it might be to replace key people with others who are equally productive. A departure might trigger a disagreeably long search. The costs of recruiting could be very significant, including relocation, higher rates of compensation and recruiters’ fees for the replacements.
Generational Equity helps with those assessments by applying objective appraisals to keep the strategy on track and the internal factors in perspective.
One tactic for the business owner may be to make a confidential, pre-emptive offer to key employees. Sometimes called a “golden handcuff,” the offer enables the employee to share in the forthcoming transaction.
“It’s better to address the problem up front rather than wait until deal structuring time when there are so many other, unavoidable concerns on the table,” said Dwight Jacobs of Generational Equity. “We have seen situations where a key employee held a deal hostage, in effect, when everything else was settled.”
A simple example of the golden handcuff gains the employee’s agreement to remain employed until a target date in return for an attractive cash bonus.
Somewhat more complicated is to establish a growing stake for the employee, who receives share options that can be cashed in at a future date. The options accumulate quarterly throughout the crucial transition for a new owner. If the employee leaves early, the shares are forfeited.
There are many other such tactics for retaining the people who help drive the value of the business. Both examples here illustrate the principle that a seller can reduce the risk of losing a key employee by rewarding them for staying over the critical interval.
Jacobs, who is Vice President for Mergers and Acquisitions for Generational Equity, tempers the golden handcuff tactic with the reminder that most employees are not prepared to move on, even if they are apprehensive about the sale of the company. “If people like what they are doing, and if they are earning what they can reasonably expect, they usually are not prepared to leave a position, even if the company is to be sold,” he said.
“Nevertheless, that is one of the many concerns we look at because we bring the experience of many transactions to each client’s situation.”
To learn more about Generational Equity’s services to business owners and buyers worldwide, visit their website at www.genequityco.com.
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