b'Learn fromMyBusiness Exit Mistakes Kevin Kennedy I 1995, we three majority owners paid the final check to our previous n owner and took possession of200-employee company. 1\o years our later, the great economy was fostering many initial public offerings, and the commercial roofing sectormoving into several consolidationsWe wanted was with roll-ups hoping to go public. Eventually, we receiv two offersthe freedom of ed from consolidators and two offers from boutique private equity groups that wanted to invest in our company.independence in We explored an employee stock ownership program (ESOP) and, in 2003, began transferring our stock to key managers via athe control of our management buyout.Aswe wandered down the exit path, my past company\'s team of three owners invested6and more than $250,000 for advisers\'destiny. 11 years fragmented advice and considered several offerings. What advice would Ito business owners to avoid my mistakes?3. Not Knowing the Full Range of Financial Values giveUnderstand and clarify your personal and business goals.Ithrough an expensive process in my exit education regarding wentDetermine how much money you will need after taxes to replacethe different financial values of each exit option,and tax compromises, your income.consequences. This explanation is far beyond the scope of this article,Understand that each option has different values andconse- but awould determine your company value based on the taxvaluation quences.pathto sell the stock. The values are ranked from highest to chosenHire the best professionals who will save you time and money.lowest: synergyor sale of the company to an outside/external buyer, valueUnderstand the compromises and benefits of each option.investment or financial control value (recapitalization to a private equityPull all of the information together in one document that will be agroup); investment value (management buyout);fairvalues andmarket blueprintyour exit.of ESOP and gifting. The bottom line is that each value has a fordifferent tax treatment and that it is now how much you get, but how much you Now allow me to share our mistakes:keep. Coincidently, great tax planning can net much more that than a 1. Having Three Majority Owners with Different Goalshigher valuation. My team reacted to the marketplace when the roll-ups came courting4. Not Seeking Good or Great Advisers ourOur fear was thatwere going to be isolated and com My prior company is located in acity. Our advisers were the best company.wesmall peting with aagainst several major companies. We did notin our area but lacked aunderstanding in the specialized area of disadvantagedeep really think about our goals but got caught up with the momentum ofexiting aMy team explored each exit path and received fragbusiness. the deal, being part of acompany that would change our industry,mented information from our well-meaning professional advisers, with new and the opportunity to go public. After going through the process, weno overall holistic directions that connected all the isolated information our came to the realization thatcompany did not fit "culturally" withtogether. The inefficiencies cost our team and company additional most members of our group, and we wanted the freedom of indepen time and money and caused disappointment.Itwas not until I received dence in the control of our destiny. We went on to consider the offersspecialized training in exit planning,Isold the company, that afterhad from the private equity groups but came to realize we wanted to give theIthe team had overspent millions in taxes. Ouch. realized same opportunity to our strong management team that the three of us5. Not Understanding Compromises and Benefits (the owners) had received. We then focused on our goals, planning, ourEach exit path has compromises in financial and strategic control, such exit timing, succession, and preparing the next generation to fill ouras losing both your job and control during sale, recapitalization, ESOP lottimeor a management buyout. In our exit we learned more and more as we empty chairs. This planning in 1995 would have saved us aof and money.dug deeper in to our deals.Anexit plan would have put he power of t2. Not Knowing Our "Magic Number"information into our hands up front. Iadvertisements from financial investment companies that ask, see6. Lacking an Exit Blueprint "Whatyour retirement number?" Our company valuation for "sellisWe did not have exit planners when Imy business. Exit planning is ing"awas a number that Iimagined. But frankly,left toconsolidatorneverthe orchestration of each of these nine disciplines coordinated in orte thecomprehensive report. That report defines all the options to determine we did not know ifnumber would be more or less than enough to get us into our latterIn other words, the exitprocess has years.planningthe best fit for your goals and navigates aouteThis to look at your entire business,and financial wealth. It alsopathof th business. personal,combined information will give you the best overall result once the exit must consider the tax and estate issues to determine what "number"is complete-advice we as owners did not receive. will be needed to replace your income and the "magic number" you will have to receive from the sale of your stock to retire.Kevin Kennedy isandof&iting. founderpresidentBeaconPlann14www.mrca.org- Midwest Roofer'