I believe that the medical profession and exit planning have a lot in common. In essence, we deal with highly fragile situations and customize solutions by first letting our 'patients' tell us 'where it hurts'. Like any physician, only so much can be learned about the patient by reading their medical chart. That chart will, hopefully, provide the salient parts of the patient's background, allergies, past medical conditions, and the overall history of the patient's relationship with the doctor and their office. Beyond that, a doctor needs to sit face-to-face with a patient and ask them, 'where does it hurt', or perhaps 'why are we sitting down and talking today'. The doctor puts down the chart and listens to the patient's concerns.
In exit planning the patient's - here the business owner's - charts are their financial statements and history of the company that they run. We can only discern so much from these past representations, because the owner is sitting with you, today, to discuss the problem that they are facing with their exit plans. And, what no chart or financial statement can tell you is the culture of a business and the owner's relationship to the people and the entity that they have created as their success story for twenty (20) or more years.
At a recent full-day educational event in Maine, where I lead the morning session, I was invited to stay for the balance of the presentation. After my fellow advisors spoke on their areas of specialization, there was a panel of three (3) Maine business owners who had all gone through an exit transaction. Two (2) of these owners had sold their businesses to outsiders and one (1) had chosen the route of an Employee Stock Ownership Plan (ESOP). Now, despite the different exit paths that each owner chose, they all had one 'must have' in their transaction. They made it a condition of each of their business transfers that the employees maintain their jobs (to the greatest extent possible), and, without room for any negotiation, every company owner was firm on the demand that their businesses remain located in the state of Maine.
Each company's culture was so ingrained in the business that the idea that any buyer (or any form of transition for the owner) would result in the business being relocated, downsized, or otherwise substantially disrupted was so distasteful that none of the three (3) owners on the panel would even consider it as a part of their exit. Rather, their advisors were provided with specific advice that before any potential buyer would consider the purchase of their business - at any price - that the buyer should understand the leaving the business in the State of Maine was an unconditional portion of any agreement.
For those owners who sold to outsiders, one needs to ask, 'how much money did they leave behind with this decision?', and 'how did this limit the pool of potential buyers that they could transaction with?' As advisors, we may think that our client's interests are best served when we can 'maximize value' with the exit transaction. Although this may be true for many owners, there are many more who believe that a transaction that meets the owner's true goals of preserving their company's culture is the only transaction that is worthy of their consideration.
We as advisors need to remember that financial statements, forward projections of EBITDA and cash flow, the economy, interest rates, capital gains tax rates, availability of capital to transaction, and other factors that we track and measure on a daily basis are only a portion of what is important to an owner who values their company's culture and employees above all else. So many owners see their first priority to themselves and their immediate family, with their employees and company as a 'very, very close second'. This means that preserving employee jobs and a company's culture is, often times, as important to many owners as their own best interest in monetizing the illiquid asset which is their privately-held business.
I was humbled by the manner in which these owners stuck to their convictions while facing the largest financial and emotional decision of their lives. It is without doubt this same conviction and adherence to their values and company culture that empowered them to stand before an audience as successful owners who had exited on their own terms. By putting their company culture and employees first, they exhibited the same type of leadership that made them great companies to begin with. The fact that they held true to these beliefs through their exit transaction makes them exemplary role models in my opinion. And, for the purposes of this newsletter, they provide a guide and insights into what we as advisors need to remember when we counsel our owners on their exit. Namely, that the financial figures and economic conditions that are the foundation to make for a successful exit transaction are only the tip of the iceberg of this decision for an owner. Below the surface appearance of this transaction, lies the substantially deeper decision that an owner faces as to how they will care for their many constituents while moving through this exit phase.
As advisors we need to remind ourselves of this and incorporate it into our conversations and advice that we provide. Remember that a company's culture is the thread of the fabric of that organization - it's what holds it together. And, any future owner should want that culture preserved as it represents much of the value of a typical business that depends on its people for its success.