The presence of multiple owners can make exit planning a more complex and tricky process than with a single or majority shareholder. In principle the same steps are required – understanding the shareholders’ personal requirements; determining what the business needs to achieve to meet those requirements; assessing and if necessary adjusting the business strategy and trajectory; and then executing the plan. However at each point the plan can come unstuck and with multiple shareholders one of the critical reasons is lack of agreement about the goals, the process and the progress of the exit plan.
This can be avoided if the business owners – ideally at the outset of their venture together – take Stephen Covey’s advice to “begin with the end in mind” and furthermore document their agreement and intent, ideally in a shareholders’ agreement.
However such advance planning often isn’t in place or may have become out of date as business and personal circumstances change. The idea of exiting i.e. stepping away from the business and selling some or all of the shareholding, brings into sharp focus a number of key issues.
To address the potential for progress and agreement to go off track we add a step in the early stages of exit planning that is focussed on shareholder alignment.
The primary alignment issue is often money. Shareholders may have different requirements about the sum of money they need or want for the next stage of their life and/or they may have differing views on the value of the business. Either way a material gap in the valuation wanted by shareholders from the exit will create significant issues and may well derail a potential sale.
There may also be issues around timing – both of the exit itself and the schedule of payments. Whilst many owners at the start of the process may think staying with the business for a period post-completion is a reasonable requirement and may be willing to do so, as the process gathers pace there is often a disengagement that makes a clean break the preferred option, further reinforced when the reality of being ‘on the hook’ to new owners (perhaps having a boss for the first time in many years) becomes clear.
Then there are multiple issues that may arise in the detail of the deal, especially warranties and conditions around deferred payments. With multiple shareholders, finding an agreement that balances all parties’ aspirations and attitude to risk can be a challenge.
If, as is usual, these matters haven’t been thought through and agreed before the exit planning process commences, it’s vital that shareholder alignment is sought and agreed. Understanding each shareholder’s ideal outcome and their ‘red lines’ is a good start. With external help and guidance it may be that the aspirations are in reality not too far apart and can be closed. If there are significant gaps then some form of mediation may be necessary.
Whilst it may be tempting to skip this step and go to market to find out ‘what we might get’ from a sale, it can be a very frustrating and divisive experience. Selling a business can often be time consuming and highly distracting – even for a single owner. Considerable time and expense can be incurred on the part of the seller and the buyer, plus advisors, if the desired outcome (or range of acceptable outcomes) hasn’t been agreed between the selling shareholders. Using the sale negotiation as a mechanism for achieving alignment is not recommended.
We have been in numerous situations where at the start of the process areas of disagreement are evident and also where issues are laying dormant ready to rear up and create problems. With exit planning there are no certainties about the outcome so a key skill is to get the probabilities in your favour to get the best result possible – to do that needs all the selling parties to agree their objectives.
If you are one of multiple shareholders wanting to commence your exit planning or have started but are finding alignment with your co-shareholders a challenge give me a call for an exploratory conversation…….