What is Business Exit Planning? Business owners need to plan for transitions across the business life cycle. Business exit planning has many challenging facets. You can exit by selling your business (1) jointly, to a strategic investor (for an extension of line of business) or financial investor (for a “roll-up”), (2) jointly, to your managers (management buy-outs), (3) individually, to the enterprise (redemption) or (4) jointly, to employees (in an ESOP, or Employee Stock Ownership Plan). Maybe you split off parts of the business to new spin-offs. Every exit needs a solid plan.
What is “Corporate Divorce” (or “Business Divorce”)? Corporate divorce occurs when co-owners of a business want to block or veto each owner’s vision for the shared business entity. As a result, the majority owner(s) might expel a minority owner from employment, terminate contingent incentive compensation and possibly buy-out the minority owner. If mismanaged or hostile, corporate divorce hurts all owners, employees and customers because the enterprise loses its dynamism due to internal distractions, harming employee morale, new business opportunities, new product development, cash flow and enterprise value.
On a broader scale, “business divorce” may described both “corporate” divorce and “strategic alliance partner” divorce. Both involve critical mutual dependencies and a loss of mutual trust. One arises out of joint ownership. The other arises out of a contractual relationship, such as a key service provider, supplier or other “team” player in your value chain.
What Steps Can Help Avoid Corporate Divorce? As described in William Bierce’s book Smarter Business Exits: Strategies and Toolkits for Corporate Divorce, Succession Planning and Joint Exits (Leaders Press/Amazon), planning to avoid corporate divorce requires constant analysis and planning at each phase in the life cycle of the business entity. You must first develop a particular emotional intelligence that we call “business exit intelligence™.
What is Business Exit Intelligence™? Exit planning for business owners starts requires emotional intelligence and legal planning. By definition, emotional intelligence is a state of mind that is open, transparent and clear in defining emotional goals (beyond mere business success) and emotional limitations (including personal limits as to commitments and risk appetite). “Emotional intelligence” focuses on you as an individual. Successful “business exit intelligence™” uses strategies and toolkits to focus all enterprise stakeholders on achieving mutual emotional intelligence for mutual benefit. With this broader vision, you can choose from alternative allow for exits by each stakeholder that preserve, if not maximize, enterprise value. Business exit intelligence™ adopts design thinking on a daily basis with a focus on business process definition and redesign, alignment of financial interests with your co-owners, employees and other stakeholders, relationship governance and business continuity. Such design thinking requires ongoing adaptation to threats as part of SWOT analysis and management.
How to Avoid Corporate Divorce for a Startup? At startup, you can avoid corporate divorce by designing and adopting mutually agreed alternative avenues for exits depending on predictable scenarios. You will need to define narrowly the business scope to ensure all are pulling in the same direction. You should invest in a well-crafted shareholders’ agreement or other owner’s agreement, a stock option plan with deferred vesting, clearly defined roles and responsibilities in employment agreements and shareholders’ agreements. You will need to consider alternative exit scenarios, such as a buy-back (maybe funded by life insurance), buy-out offers and joint exit (with performance obligations pending completion of the divorce.
How to Avoid Corporate Divorce for a High-Growth Entrepreneurial Venture? After launch and generating cash flow, you are now a high-growth business. During the high-growth phase, you must avoid bad decisions in hiring, firing, compensating and leadership for your employees and strategic allies.
How to Avoid Corporate Divorce by Successful Planning for Succession and Transition? Aging founders have a choice of selling to managerial employees, an employee stock ownership plan, a strategic acquirer, a financial acquirer, a primary customer or a primary service provider. Succession planning for a change of ownership (or “change of control”) can merely pass the baton, or it can reconfigure the enterprise through strategic merger. For example, family founders might hire a new global manager to help integrate new owners who merge their foreign entities into a holding company, where the new global manager digitally transforms a once-local business into an integrated global service provider. Succession planning can use transformative techniques, designed with business exit intelligence™.
How to Avoid Corporate Divorce by Achieving a Joint Exit? For a business, a “joint exit” occurs when majority or total control is transferred to a new owner. Joint exits require careful planning to maximize value and satisfy the fears and premonitions of prospective new owners. A joint exit requires sufficient internal harmony to avoid both political and commercial disputes among owners before the “change of control.” Corporate divorce can stymie a joint exit. Hence, business exit intelligence™ involves plans and legal protections to prevent any stakeholder (other than the controlling owner) from botching the M&A deal. Clean “due diligence” thus needs planning and tools to ensure no minority stakeholder can hold the majority owner(s) hostage. Mr. Bierce’s book addresses blackmail and similar risks.
How to Avoid Corporate Divorce for a Family-Owned Business through a Family Succession Plan. Aging founders can transmit their ongoing business to a family member who has developed the skills and demonstrated the commitment to growth and entity viability. Identifying and training a key child (or other family member) requires a vision and program for successful transfer of control. Family succession planning can be simple, where one shareholder transfers shares to the next generation. Or it can be complex, where transfer of shares to one child needs to be offset emotionally by transfer of each value to each other child.
Family succession can be even more complex where unrelated minority investors will not be selling. In such cases, the child successor might increase his or her personal control and wealth by becoming owner of a supplier of new services to the founder’s enterprise, where the founder’s enterprise was not previously engaging in such new services. The child successor thus might escape a claim of conflict of interest or breach of fiduciary duty, and the succession could enhance the enterprise value for all shareholders by adding a new source of value that had not seen any investment prior to the succession. In short, family succession can avoid complex corporate divorce by successful training, vision added by the child successor and value creation for all.
How Can I Get Insurance to Mitigate a Disastrous Corporate Divorce? “Whole life” insurance policies can help finance a buyout of a departing co-owner in a corporate divorce or upon death. Directors’ and officers’ Insurance policies can limit risks of personal liability of owner-managers to potentially hostile minority owners.
What Are the Best Steps to Prepare for a Corporate Divorce? How can a Business Owner Get Help with Successful Exit Planning Strategies? Business owners can consult with many different professionals, including lawyers, accountants, insurance brokers, valuation experts, investment advisors, business brokers and investment bankers. A successful exit plan involves housekeeping (legal), growth (business strategy), value building (valuation planning) and much more. It takes about two or more years to accomplish. Whomever you choose, your primary coach should have business exit intelligence™ and the professional skills to implement, monitor and promote your exit plan.
What Role Can a Mediator Play to Prevent or Mitigate Corporate Divorce? If you already are in a dispute with a co-owner, you can perhaps negotiate a restructuring. If you or your co-owner have not found some resolution, you can call upon an expert negotiator to serve as neutral mediator. A mediator does not adjudicate or control an outcome. Rather, a mediator can offer business exit intelligence™ to both parties and identify and expand the zone of possible agreement (ZOPA). Through the mediator’s confidential questioning and looking for possible alignments, the parties to resolve all differences or at least define a method for resolution.
How can You Get Ready to Resolve your Business Divorce? You and your business partners might be living in daily emotional trauma. But a lawyer with a deep understanding of corporate divorce can recommend a variety of choices on resolution at whatever stage you are in. It’s your job to get informed and make some business decisions to avoid being surprised or abused. Don’t wait for a disaster: plan to avoid or minimize it.
How to Plan for Business Divorce. Set up an appointment with Bill Bierce, author of Smarter Business Exits, to help stabilize your company. He can provide support for resolution across the business life cycle. He can bring his business exit intelligence™ and strategies to help identify your needs.