In 2003 I signed the agreement with two other owners to sell our 200-employee roofing company via a management buyout to five new owners in a deal that was structured over 10 years. I was the last owner to exit the company at the end of 2008. The new team was well prepared for the transition as they were eager to have their day in the sun. They have exceeded all of our expectations as they have navigated the company through the latest economic headwinds into 2012 with a strong performance.

I was the last of the three owners to leave in 2008, and I never realized what a minority our company was in until I became a student of exit planning and consulting. Our company had passed several critical milestones to enter into the special milestone club of the “one percenters.” When I left in 2008, we successfully transferred our 62-year-old company to the fourth generation of owners, which put us into that elite club.

According to a study done by the Family Firm Institute, the odds are stacked against a private business succeeding into the fourth generation. Here is the math:

• 70 percent of businesses fail to make it into the second generation.

• 90 percent of businesses fail to make it into the third generation.

So a business has a 3 percent chance of making into the third generation, and the odds of making it into the fourth generation are less than 1 percent.

There is not enough room for me to go into our entire story, but allow me to share five things you must know to protect yourself in this exiting and succession process.


1. If You Don’t Have a Plan, Then Plan to Fail

There are many moving parts to juggle as you exit your business, monetize your wealth and replace yourself. Most owners are confused by the fragmented, dislocated information they are hearing from their accountants, valuators, business advisors, tax attorneys, lawyers, estate planners and insurance advisers.

My past company’s team of owners invested six years and more than $250,000 for fragmented advice and offerings as we wandered down the exit path with two offers from industry roll-ups and two offers from boutique private equity firms that wanted to invest in our company. Additionally, we investigated an employee stock ownership program and used a management buyout to transfer the stock of three owners to five new owners.

Don’t lull yourself into thinking this is easy. The sooner you plan, the better the odds to align all the moving parts and to have the flexibility of aligning your associates, personal savings and the tax efficient strategies to leverage your exit.


2. Begin With Your Goals

Take time to analyze your business, financial and personal goals. These are the key areas of focus when preparing your exit strategy. (See Figure 1.) Much of this planning may or may nor be provided by advisors.

Studies indicate most business owners have 70 percent of their wealth trapped inside their business. If you do not have a plan to replace that income and liquidize the stock, then you will stay trapped inside your business.

You need to determine the value of your company, your outside savings (liquid & illiquid) and see if that amount can generate the income to support your retirement. This requires financial planning and valuations of different exit options and tax advice.

Once you can picture your financial freedom you can turn your attention to the dream you want to live outside of your business. Start taking more time off and focus on developing the team that will replace you and your exit options.


3. The Company Pays for Everything

Your company’s “cash flow” is the key value driver in determining the value of your business. But did you know your company has different values that are determined by your path?

Let’s eliminate the two paths of liquidation and the Initial Public Offering (IPO) and rank the options by the highest values:

1. Synergy value – sale of the company to and outside/external buyer

2. Investment value – recapitalization to a private equity group

3. Investment value (structured) – management buyout

4. Fair market value – Employment Stock Ownership Program (ESOP)

5. Fair market value – gifting

In a financial/technical perspective, my five steps are simplified compared to the chart from an authority named Robert E. Slee in his seminal reference on exit planning titled “Private Capital Markets.” My role is to simplify this for my readers. (See Figure 2.)

All of these paths have a different value, tax treatment, strategic control and financial control. But the bottom line is that cash flow is the value driver and the company pays for the exit.


4. It’s Not How Much You Make … But How Much You Keep

You know from being an owner of a company that it is not the top line but the bottom line that counts. It is the same with exit planning. There are three parties in exiting: the buyer, the seller and the government.

So when we lay out the different valuations in the plan you also have determine the correct corresponding tax treatments. Further, if we plan far enough out we can implement different savings and benefits packages inside the business that can be deducted and deferred to meet your future financial goals. With enough time, planning ahead can make it possible with certain strategies and trusts for professional advisors to eliminate income and capital gains to legally save millions of dollars. Yes, I said millions.


5. You Need to Replace Yourself

A professional exit planner can produce a document that maps out a path to deliver the results needed in three to six months. The execution of that plan and the review needed by the outside professional advisors can take a year or more. But the succession process or replacing yourself takes more time, so begin early. Why? Because you have to professionalize the upper management, move them into leadership roles, and then pick the next CEO. This all takes time, education, coaching and stretching them into their new roles and responsibilities.

The good news is your company will be worth more as a result of their better performance and the owner will have more options. The subject of succession is a book by itself, but you can e-mail me ( and I will send you my white paper to explain Beacon’s five-step process.

Finally, you probably are entering into the largest financial event of your life to harvest the wealth trapped in your business. You want the best information to minimize the risk, make the correct decision, and understand your financial and strategic control compromises in your company to replace your income. This exit process protects your hard-earned wealth and legacy.

 Go to a professional exit planner to find all this fragmented information combined in one comprehensive document that draws your path, puts you in control, delivers the best exit solution, and guides you to your goals.