Lack of an Exit Plan Equals Dead Company Walking

Part of a series on issues related to Manufacturers, Distributors and International Trade

Ralph Waldo Emerson warns that “rest, conservatism, appropriation, inertia; not newness, not the way onward” are forms of old age which causes people (I submit companies also) to be dead while they are yet alive. Yet, your manufacturing company can grow young again, if you as the leader/owner pursue and embrace strategic planning, innovation, and sustainability.

The root cause hindering such onward movement is frequently caused by a lack of succession/exit strategies for business owners/leaders. The Small Business Administration estimates that at any given time, forty percent of businesses are facing transfer of ownership issues. Without arriving upon a succession plan/exit strategy for the owner/leader, onward is not possible.

Rather, the bitter truth of humanity is realized – we all die and many times we take our companies with us. The familiar aphorism “shirtsleeves to shirtsleeves in three generations” describes the propensity of family-owned businesses to fail by the third generation. In fact, it is estimated that less than one-third of family businesses survive the transition from first to second generation ownership, and only 10 percent remain active for the third generation to lead.

By creating an exit/succession plan, a business owner/leader is forced to consider not only what the business needs today but what is needed for the future. The owner will make hundreds of decisions differently such as: making an S Corporation election; entering into contracts with key employees, distributors, and suppliers; maintaining clean records; developing and incenting a good management team; and/or transferring stock to family members. Without a plan, the business will mostly die due to the lack of necessary investment in leadership and talent, business systems, and “state of the art” equipment.

The Next Generation Manufacturing Study conducted by the American Small Manufacturers Coalition/Missouri Enterprise in 2011, makes the point that although a majority of U.S. manufacturing firms anticipate a possible change in leadership within the next five years, only 30 percent anticipate a planned succession and only 29 percent report that a succession is possible. Unlike publicly traded companies where the average CEO tenure is six years, many family businesses have the same leaders for 20 to 25 years. Such long tenures increase the difficulty of coping with shifts of technology, business models, and customer behavior. Making things even tougher, family business owners must create a strategic plan for the business, in addition to a family strategic plan, a succession plan and an estate plan.

Owners only have a few options for an exit strategy:

• Retain family ownership but hire outside management;
• Retain family ownership and management control (offspring must have the desire, ability and youth, or use an Employee Stock Ownership Plan);
• Sell to outside third parties (company needs to have an outsider transferable value significantly above book value) or inside key employees (trusted employee who has youth and desire to own); and/or
• Planned liquidation (owner adopts a current-cash based approach to convert business wealth rather than future equity based approach).

Your business will only be successfully transferred if you choose an exit/succession plan, and start implementing the plan today. The plan will take five to ten years.

Posted by Attorney Ruth A. Binger. Binger serves both emerging and mature businesses concentrating in corporate law, intellectual property and technology law, and labor and employment law. Her commitment to the success of small to medium-sized businesses, and her understanding of multi-faceted issues inherent in operations, are what distinguish Binger’s practice.