Ep #094: Exit Planning For Business Partners: Why Business Partners Need to Plan for Exit and How to Get Started
Navigating Business Exits with Multiple Owners: A Comprehensive Guide
More than half of privately held companies have more than one owner. When it comes time for one or both of those owners to step away, sell, or transition the business to an employee or family member, the process can become much more complex. This creates the need for business partners to figure out a shared exit plan that allows each owner to achieve their exit goals.
Understanding the Complexity of Shared Exits
It's very common for owners to have different exit goals. One partner may want to exit sooner, while another wants to exit later. One might want to sell the business, and another might want to pass it down to family. Additionally, one owner may need more money at the time of exit to be financially secure, while the other needs less. Some owners might prefer a quick transition out, while others want to stick around for a longer period. These differing goals can create conflicts and stress.
Two Essential Steps for a Smooth Transition
Get Educated on Exit Options
Understanding the available exit options is crucial. Many business owners are unaware that they have multiple ways to transition and exit the business, each with different objectives and timelines. For example:
- Selling internally
- Selling to an outside third party
- Setting up an ESOP and selling to employees
Communicate with Your Business Partner
Effective communication with your business partner about each of your exit goals is essential. The goal is to reach alignment on a strategy for the business. Initially, there may not be alignment. For example, one owner might focus on increasing sales and hiring a sales team, while the other focuses on building an internal team to improve operations. This conflict can hinder progress.
Bringing in an Outside Advisor
Sometimes, an outside advisor can provide an unbiased perspective on the business's weaknesses and areas for improvement. This can help align both partners on a strategy that adds the most value to the company. For instance, if the goal is to sell to a strategic buyer, the business strategy will differ from one aimed at transitioning the business to a family member.
Preparing for Different Exit Timelines
Business partners often have different timelines for when they'd like to exit. To prepare for this, consider setting up a legal document such as a restrictive share agreement or shareholder agreement. This document outlines the terms for what happens if one partner wants to buy the other out. Without such agreements, internal conflicts and stress can arise, affecting the business's growth and the partners' futures.
Key Takeaways for Business Partners
Learn About Exit Planning
Educate yourself about the exit planning process and the options for transitioning out of a business. Utilize resources like the Exit Planning Institute, podcasts like Business Exit Success, and newsletters. The more knowledge you have, the better the outcome.
Communicate and Align
Open and honest communication with your business partner is critical. Align your goals and strategies to ensure a smooth transition.
Legal Preparations
Consider setting up legal agreements to address potential conflicts and ensure a clear path forward.
By understanding the complexities of shared exits, getting educated on options, and maintaining clear communication, business partners can navigate the exit process more smoothly and achieve their goals.
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