Set objectives when considering a merger

By |  October 10, 2016

Begin your exit planning process early, and you and your family will be better off.

giannamore-paulSmall children quickly learn it’s easier to solve a maze by working from the exit to the entrance. In the same way, the exit planning process involves getting out your crystal ball and trying to envision your ideal future. You may envision running your business until you retire to Florida, or working for another four years and then joining the Ultimate Fighting Championship circuit. Whatever your end goal is, it is here that we begin.

Give serious thought and consideration to your desired outcomes and goals. Remember, these are not written in stone, but they absolutely should be written somewhere on paper. Your goals may be a moving target, and that’s OK. It’s better to aim at, and miss, goals than to not aim at anything at all. At least if you’re aiming at something, you can learn from it and make adjustments.
 

How to begin

To begin the exit planning process, you need to answer three questions.

1. How long do you anticipate working before exiting your business? One more year? Five years? Ten years? If you are 50 now and you want to sell your business when you are 55 to pursue other interests, write 2021 as your target exit date.

For some, this is a financial question. You are saving for your retirement and will be ready to sell when you have enough money. That’s fine. But for now, humor me and write down a date that would be ideal for you.

Business owners who are clear and concise about an exit date, and give themselves a deadline, tend to focus their efforts on increasing value in their businesses to hit this goal. Pest management professionals (PMPs) who define “proximate objectives” early will be more likely to hit them than those who don’t.

2. How much money do you need from the sale of your business to support your post-exit lifestyle? A better way to phrase this question is: What amount of money will you need on an after-tax basis per year to maintain your current lifestyle, or the lifestyle you envision for you and your family after you exit your business?

Assume you make $300,000 per year in a combination of salary and dividends from your pest management company. Will you need to continue making $300,000 per year once you exit your business? Will you need to make $1 million per year? Or will $100,000 suffice?

Notice I didn’t ask, “For how much do you need to sell your business?” Although you will most likely end up with a lump sum of money when you sell your business, it is your annual income requirements that will help determine the amount of money you need from a sale.

Your financial advisor will guide you as to the total after-tax proceeds you will need to receive from the sale of your business to support your post-exit income requirement. For example, say you want to earn $165,000 per year in perpetuity (meaning when you pass on, the original principal amount will be left to your heirs) after you retire. Your financial advisor might tell you he needs to invest at least $3.9 million to meet that goal. Now we know what we need to receive, after taxes, from the sale of your business.

3. To whom would you ultimately like to sell your business? For most PMPs, three main categories of exit options exist.

  • Internal transfer — Sell to your management team or employees (management buyout or employee stock ownership plan/ESOP), perhaps in partnership with a private equity firm.
  • External transfer — Sell to another pest management company (strategic buyer) or a private equity firm or individual (financial buyer).
  • Family succession — Sell or transfer ownership to the next generation through gifting and/or a sale.

Each of these exit avenues will entail different planning measures. However, for this step in the process, it’s important to choose the one that is most appealing to you now. For example, you may want to sell your business to your children, but if they are only 8 and 11 now, you can’t even be remotely sure whether they’ll have any interest in being involved in the family business. It doesn’t matter because we are worried about your goals and objectives right now. We’ll worry about everyone else’s — including your children’s — later in the exit planning process.
 

Set realistic goals

The goal-setting phase of exit planning is the cornerstone of the process. In fact, if you are writing down your goals on paper right now, you are far ahead of the overwhelming majority of business owners on the planet.

Although goals and objectives will drive the planning process, it’s very important that your goals are realistic and achievable. For example, your goal of having $10 million in cash and retiring four years from now is not very realistic if you’ve got $50,000 in the bank and your business is worth $500,000. In this case, you are going to have to exit your business much later than four years from now, or you will have to dramatically lower your $10 million goal.

To focus your efforts and channel your energy into hitting your goals, choose an exit date, a financial target and an exit option (internal, external or family succession) today. Without them, you’re likely to drift along like a rudderless ship at sea.
 

Planning pays off

For those of you who have business partners or adult children working in your business, it is in this phase that you need to have frank discussions with them about your goals and desires. Oftentimes, children assume they will be taking over the family business. They forfeit other opportunities in their lives to “stay faithful to the family business,” and in return, expect Dad and Mom to pass the gavel to them after the retirement party. Sometimes, this promise is explicit. But more often than not, it’s an implicit understanding on behalf of the children that one day the business will be theirs.

One of the worst situations parents can find themselves in is to have an adult son who expects his father to pass the business on to him, but reneges once the child has devoted his life to the business. This is an extremely common occurrence, and it tears families apart.

If you own a sizeable business, there is a high likelihood that your children will not have the resources to buy it from you outright. When retirement time comes and you haven’t put a plan in place for your child to buy the business, it’s going to be very difficult to hand him the keys to the company when an acquirer comes knocking with a
$9 million check. (Without fail, I deal with this situation a few times a year, every year.)

For parents who are seriously considering passing on the business to the next generation, there are many fantastic exit-planning tools, such as annual exemptions of Federal Gift Tax and non-qualified deferred compensations plans. However, unless you utilize these tools early (at least five years before a transfer), many of them become ineffective.

For those of you who intend to sell your business to a strategic acquirer, there are countless ways to increase the value of your business to an acquirer by 20 percent to 30 percent per year. They also require careful planning, however.

Don’t let the business you’ve worked your entire life to build cause you frustration, estrangement from your family and partners, sickness, or premature death. Consult an investment banker or mergers and acquisitions advisor who helps PMPs plan for their exits — and do so right away. The sooner you plan, the better off you will be.

Paul Giannamore, a partner at the Potomac Pest Control Group, advises shareholders and managers on creating value in their businesses and advises sellers on the sale of their businesses. He may be reached at paul@potomaccompany.com or 215-525-0689.

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