Exit Planning: How to Retire by Replacing Your Income and Replacing Yourself
Leaving any business that you’ve spent a career — and in many cases a lifetime — building into a provider for your family and the families of those employees that helped along the way can be a challenge, to say the least.
Beacon Exit Planning President Kevin Kennedy, a former owner of Elmira, N.Y. - based Evans Roofing, knows this first-hand having walked the exit-planning path himself. Through it, he learned what to do — and what not to do — and turned his experience into a new career advising roofing contractors and other business leaders how to successfully plan their exit.
He and Beacon COO Joe Bazzano are regular Roofing Contractor columnists in the topic and recently answered questions in preview of their presentation at IRE 2018.
IRE Session WE09
Title: Exit Planning & Succession: How to Retire by Replacing Your Income and Replacing Yourself
Speakers: Kevin Kennedy and Joe Bazzano, of Beacon Exit Planning
Date: Wednesday, Feb. 7, 7:45 a.m. - 9:15 a.m.
RC: When do roofers realistically need to start thinking about ‘replacing themselves’ in their business journey? Early career? Mid-Career? When business reaches a certain revenue point?
KK: Ideally succession should be a continuous process in your company’s educational program. If not, formal succession training should begin about 15 years from retirement, as it is a process and change of behavior as you move managers into a professional role, into leadership and begin coaching the next CEO. This change requires time with education, coaching and the stretching into new roles and responsivities. Time is your best friend and insurance in this evolving process.
Once the owner can visualize their financial future (exit plan) they can commit to the challenging role they play in leading succession.
RC: Why is it difficult for most roofers, in general, to reach this point of understanding how to manage their exit?
KK: First of all it’s emotional, as the business isn’t just what you do, but who you are.
Secondly, the exit is complicated, besides the owners being preoccupied with the day-to-day business.
The difficult exit process involves the coordination of various advisers such as accountants, valuators, business attorney, tax attorney, estate attorney, insurance advisers, financial planners, etc.
As exit planners, like architects, we design and coordinate these disciplines to meet the owner’s goal into a blueprint for the advisers to review and implement. The owners need to continue running the business as the exit planner untangles and coordinates all the moving parts to create a blueprint for the exit.
RC: Kevin, you’ve written extensively about how your exit from Evans had its challenges. Why are so passionate about this topic?
KK: The great news is my team did succeed in the exit and we passed the company off to the fourth generation management team. We were blessed with great associates and a formal succession plan that was continuous.
The exit was another story. We wasted a lot of time (seven years) and money (over $250,000) wandering down the exit path. After retirement I went back to school for two years to become certified in exit planning only to discover that our adviser’s cookie-cutter advice cost our team and company millions in additional unnecessary taxes.
I found out the hard way that, “You don’t know, what you don’t know.”
RC: Joe, why do you feel this work is so important?
JB: The exit planning process provides an opportunity to make a significant impact on an owner’s life as well as their families and their employee’s families. Closing a business down because of poor planning won’t only affect the business owner but will have consequences to the family, the owner’s legacy, employees and in some instances, the community. How many successful contractors have you seen fumble the ball in the red zone of their careers and end up in liquidation?
RC: What frustrates you both about the current attitude of most roofing contractors when it comes to succession planning?
KK: Most owners are uncomfortable giving up control, and don’t think they need to plan, but it’s more complicated. What got them here won’t get them there. In order to move into succession, the owner has to become more of a coach/teacher instead of just a CEO. This takes a different set of skills and use of outside advisers to use professional assessment tools on the new leaders and align the company for the future. Lastly, the owners don’t understand the financial risk of not being paid if the managers aren’t strong enough to produce the profits to buy the stock and pay the owner. Preparing the managers will be the owner’s legacy.
JB: In some cases you can’t blame the owner/s for the hesitation. Exit planning and succession planning means the near end to a career. There’s a sense of finality. The emotional aspect is just as important as the financial aspect.
Coaching the business owner to understand that there’s one guaranty in being in business, and that guaranty is that you’ll eventually exit. The idea is to leave their legacy on their terms and in a manner that will provide financial security for the owner, their family and the company.
RC: What will roofing contractors get out of your presentation?
JB: When we present to a group of business owners our main goal is to get them to understand that they have options when trying to exit the business. Each option has varying degrees of pros and cons. It’s up to the business owner to establish their goals when exiting the business and it’s up to the advisors to support those goals.
I think our messaging resonates with our audience because Kevin has walked the path and Beacon has alternate strategies that will help mitigate an owner’s risk and overall cost of exit.
RC: So, what is the difference between a business exit and a business succession, and why is there a common misperception that they’re the same?
KK: Most people use the terms interchangeably and cannot differentiate the two disciplines. In simple terms, exit planning is about replacing your income and retiring. Succession is about replacing yourself.
An exit plan focuses on monetizing the trapped wealth in your illiquid business without being clobbered by taxes, retiring and moving onto the next stage in life. The plan establishes and controls the process of when, who and how to monetize the illiquid wealth trapped in your business and protect your wealth.
Succession is more behavioral and about preparing your company to succeed in the absence of its owner/CEO. In a simple approach, it’s about grooming the management to move into a professional level, into leadership and replacing the CEO. In a broader sense, it’s about creating a culture of continuous succession that focuses on the human capital to delivering a top-quality product to your customer, and protecting the future of the company.
RC: How long of a process is it, typically?
KK: Creating the plan can take between five to eight months and will review all your options for exiting your business. After delivery it can take from six months to two years to unwind all of your options in producing the blueprint that you take to your advisers.
RC: How can roofing contractor owners identify the people within their own or other companies to cultivate into becoming future stewards of their business?
KK: A best of class company’s culture will include dedicated training and educational programs investing in their most important asset — their company associates. Companies need a strategy to identify future managers and bench strength. Your established managers are already in key roles.
The key is continuous improvement by moving the players into varsity positons and maintaining a championship level. The other key is having the communication with the managers identifying emerging leaders that you need to nurture and find a coach/mentor.
This is critical in today’s workplace as finding, growing, retaining and promoting is a real challenge. My view is simple: if associates know their leaders are their teachers and if they can begin to see their professional and financial future with a great team, then they’ll be loyal to the team, coaches and the company.