Business was really beginning to boom in the mid 1990s when we (three majority owners) paid the final check to our previous owner and took possession of our 200-employee company. It was 1995 and our roofing company was growing during the dot-com boom as Fed Chairman Alan Greenspan fueled the economy heading into Y2K.

In 1997 the booming economy was fostering many initial public offerings (IPOs), and the roofing contractor sector was no exception. There were several attempts at “consolidation” with roll-ups hoping to go public. Eventually, we received two offers from consolidators and two offers from boutique private equity groups that wanted to invest in our company. We explored an Employee Stock Ownership Program (ESOP) and, in 2003, began transferring our stock to key managers via a management buyout.

My past company’s team of three owners invested six years and more than $250,000 for advisers’ fragmented advice and considered several offerings as we wandered down the exit path. What key advice would I give to business owners so they can avoid my mistakes?

• Understand and clarify your personal and business goals.

• Determine how much money you will need after taxes to replace your income.

• Understand that each option has different values and tax consequences.

• Hire the best professionals who will save you time and money.

• Understand the compromises and benefits of each option.

• Pull all of the information together in one document that will be a blueprint for your exit.


Learn From Our Mistakes

Now allow me to share the six mistakes our team made that ultimately resulted in the advice above:

1. We didn’t realize the challenges posed by three different owners with three different goals.My team reacted to the marketplace when the roll-ups came courting our company. Our fear was we were going to be isolated and find ourselves at a disadvantage competing with several large major companies. We did not really think about our goals but got caught up with the momentum of the deal, being part of a new company that would change our industry and the opportunity to go public.

After going through the process, we came to the realization that our company did not fit “culturally” with most members of the consolidation group, and we wanted the freedom and independence. We wanted to be in control of our destiny. We went on to consider the offers from the private equity groups, but came to realize we wanted to give the same opportunity to our strong management team that the three of us (the owners) had received. We then focused on our goals, planning, our exit timing, succession strategy and preparing the next generation to fill our empty chairs. This planning in 1997 would have saved us a load of time and money.

2. We didn’t know how much money after taxes we needed to retire.I see advertisements from financial investment companies that ask, “What is your retirement number?” Our company valuation for “selling” to a consolidator was a number that I never imagined. But frankly, we did not know if the number would be more or less than enough to get us into our latter years. In other words, the exit planning process has to look at your entire business, personal and financial wealth. It also must consider the tax and estate issues to determine what after tax “number” will be needed to replace your income and the “magic number” you will have to receive from the sale of your stock to retire.

3. We didn’t understand in the beginning that each option had a different value and tax consequence.I went through an expensive process in my exit education, and I learned firsthand the different financial values of each exit option, as well as the compromises and tax consequences. This explanation is far beyond the scope of this article, but a valuation would determine your company value based on the path chosen to sell the stock. The ranges of values are ranked from highest to lowest:

• Synergy value— sale of the company to an outside/external buyer

• Investment or financial control value—recapitalization to a private equity group

• Investment value (structured)— management buyout

• Fair market value— ESOP

• Fair market value— gifting

The bottom line is that each value has a different tax treatment. It is not how much you get, but how much you keep that matters. Coincidently, great tax planning can reap (net) much more that than a higher valuation.

4. We didn’t appreciate the difference between good advisers and great advisers.Our company is located in a small city. Our advisers were the best in our area but lacked a deep understanding in the specialized area of exiting a business. My team explored each exit path and received fragmented information from our well-meaning professional advisers with no overall holistic directions that connected all the isolated information together. The inefficiencies cost our team and company additional time, disappointment and money.

Several years later during my exit planning training, long after I had sold the company, I realized the team had overspent millions in taxes. Ouch.

5. We didn’t understand the compromises and benefits of each option.Each exit path has compromises in financial and strategic control.

• Sale— Lose job (probably) and control.

• Recapitalization— Usually keep job but lose control.

• ESOP— Keep job and control.

• Management buyout— Lose job and control over time.

Understand this is a broad view and there are many exceptions, but you get the message. In our exit we learned more and more as we dug deeper into our deals. An exit plan would have put the power of information into our hands … upfront.

6. We did not have an exit blueprint. We did not have exit planners when I left my business. I got into this business after many requests for advice from my business owner friends. I did not become an exit planner until I went back to school for specialized training and certification.

So, as an exit planner, I am trained as a process consultant to move an owner’s goal into a matching path that meets the owner’s financial target; to replace the owner; and to protect his or her wealth with a comprehensive, holistic result. I pull together all the scattered information to arrive with one document that fits the puzzle together and pilots the owner down a business exit path for a desired outcome.

In a separate execution phase, I also can quarterback and coordinate different disciplines and professional advisers, including attorneys, tax attorneys/accountants, accountants, estate planners, insurance advisers, financial planners, business consultants, and others in the production and execution of the exit plan.

Exit planning is the orchestration of each of these eight disciplines coordinated in one comprehensive report. That report defines all the options to determine the best fit for your goals and navigates a path out of the business. This combined information will give you the best overall result once the exit is complete — advice we as owners did not receive.

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

Do you have a blueprint or understand your risk? We did not. We were lucky enough to exit our business, but a better plan would have saved us a lot of time and a bundle in taxes. Having all the information upfront is the only way to make an educated decision.

 Remember: You don’t know what you don’t know. And as I now know, this can be a very expensive lesson to learn.