Planning Your Exit Strategy Can Save Your Business

Every day we open the doors to our kitchen and bath firms and are faced with a never-ending string of challenges and opportunities that will consume our day. It's not surprising that few of us seem to have the time to give any thought to what would happen to our firms if something were to happen to us.

There are several critical areas that should be considered when you prepare a plan for the continuation of your business. Much depends on the structure of the organization you have in place now, so the first thing to do is make an assessment of this. Once you have this inventory in hand, you can develop a plan to fill in the holes that are indicated. Finally, it's important to begin to develop an exit plan for the longer term.

A Current Assessment

Begin your assessment by asking yourself a few simple questions:

  • If I did not come in to work today, what would happen and who would be in charge of things?
  • What would the impact be to our sales volume without my participation?
  • Will production on our projects continue without my direct involvement?
  • Are there sufficient cash reserves to get our company through the initial adjustment period?
  • After the initial adjustment period, can/should the business continue on without me?

The first question leads to an evaluation of the type of organization that is in place in your business. Most kitchen and bath firms employ fewer that a dozen people and do not really have a "middle management" level of employees. It's typical for each employee to have specific responsibilities, with the supervision and coordination falling to you, the owner. In larger organizations, there usually are mid-level managers that handle the day-to-day decision making. Partnerships involve a unique set of circumstances that will normally provide the "in charge" individual to step in.

We will focus on the smaller organization, where the owner's absence will have the greatest impact.

One of the most important steps that can be taken with any business is to establish systems and procedures that your staff and employees will follow that will keep the business functioning today without your direct intervention. Properly envisioned and implemented, such a system will keep the organization operating without a successor for a reasonable period of time.

Once you have asked that first question concerning who would be in charge, you need to make sure you have an answer for it. Begin with a written "disaster" plan that will spell out how your business should function without you present. The questions above provide an outline of the form this plan might take.

There is likely a person within your organization who you work through when you are off on vacation or absent for other reasons. This is probably the person who you should designate as the "in charge" person to handle the initial phase of any future absence. If your family is involved in the business, members will usually step in to deal with the more important decisions involving finances, etc. If there are no family members capable of fulfilling this role, then an attorney or other trusted advisor should be sought out in advance and identified in your disaster plan.

At the earliest possible time, whoever will wind up in the ownership position should meet with the person or persons who will be in operational control of the business to clarify responsibilities. It will be important that these people establish and maintain good communication throughout the transition process.

The written plan you prepare should deal specifically with the short term, setting out how the business will function for a few weeks without you present. If you have, in fact, designated who is in charge, that should be communicated to all concerned immediately so that employees, subcontractors, customers and suppliers know to whom to look for direction.

One of the most immediate needs your business will have without you is operating cash. You should expect employees, suppliers and subcontractors to be concerned about the business' ability to meet its obligations. If you do not have adequate cash reserves to pay all of the bills for one month, you should arrange for a line of credit that will remain in force even without you in the picture.

The next issue that should be addressed is the short-term viability of the business. It's essential to retain critical employees and staff if the business is to continue. Thus, in the event of an emergency, it will be necessary to have your designated "in charge" person meet with the entire staff and lay out the plans for the future to reduce the uncertainty that is sure to prevail.

Planning for the Future

It will be much easier to deal with the aspect of an unplanned exit if there is a plan in place for your ultimate (planned) exit from your business. Like the disaster plan discussed above, exit plans have a way of being put off indefinitely.

Exit plans, or succession plans, require that one acknowledges that he or she will not be around forever and has a desire to leave the business under his or her own power, and with enough resources to enjoy that next phase of life.

The first step is to pick a date for that exit and then start planning for it. In all likelihood, it will normally take several years to plan and implement an exit. Once a date has been established, the next step is to identify a successor. This may be a child or other relative who is working in the business. It could be an employee capable and enthusiastic about taking over the business, or it could be a competitor wishing to expand.

It's important to identify this successor early on and make sure that the person is the right one to take on the responsibility.

Depending on the direction this succession plan takes, there are numerous financial considerations that will have to be worked out. A sale of the business to a competitor will usually not involve great financing difficulties, while the sale to an employee will likely require the business to generate the cash flow to buy you out. Transfer of the business to a family member involves numerous emotional issues along with the financing ones.

The mechanics of how a buyout might work are beyond the scope of this column. The important thing is that there needs to be planning for your eventual exit from your business.