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Business Partners and Exit Planning – Overcoming Conflicting Objectives

Business PartnersDaniel and Henrik are shareholders/partners in Swedeco, a steel fabrication business they started in 1984.  Daniel is the extrovert, and has led the sales/marketing side of the business, building a strong team and an effective sales process.  Henrik is more introverted, but leveraged his engineering background and close attention to detail to lead the operations side of the business.  With skills, knowledge and personalities complementing each other so well, the two men have built a very successful business.  Fifteen years ago, they bought the real estate the business occupies, and a few years later invested their profits by buying the building next door, which they rent out.  Over more than 30 years together, their business, financial and even social and family lives have become intertwined.

But the last couple of years have brought new stress to their partnership.  Daniel is now 60 years old, and can’t wait to sell the business and spend winters at his newly purchased vacation home in Palm Desert.  He and his wife have already developed a social circle among the other snowbirds, and are ready to golf, travel and take it easy.  Henrik’s objectives are much different.  At 58 years old, he still arrives at the plant before anybody else, and cannot imagine what else he would do.  His wife plans to work for a few more years, and their son Bo has taken a real interest in the business.  Bo completed his engineering degree and came to work full time five years ago, and has quickly earned the respect of his co-workers.

Daniel and Henrik listened to their business advisors 30 years ago, and executed a shareholders’ agreement that dealt with lots of potential happenings, but like most such agreements it did not address their eventual exit from the business.  Good planning and communication has helped them to avoid serious conflict in the past, but now they avoid talking about the future.  Essentially, for the first time in their relationship they have different and conflicting objectives, and don’t know what to do about it.

We have seen this scenario several times recently, and we expect to see it much more as baby-boomer business partners approach retirement age without a documented plan that will take into account their different objectives.  The most important first step is to restore good lines of communication – to get the partners talking openly and respectfully.  There is almost always a solution to every problem, and with help from their business advisors, the partners can usually find a way to move forward.

The second step is to identify and document each partner’s personal, family and business objectives.  Without truly understanding what they want to do, where they want to go and what is important to them, we cannot even begin to identify a solution.  This will include meetings with the partners together, and with each partner individually.

With their objectives understood, we can now analyze the business and industry, and start to identify options.  In the case of Daniel and Henrik, we might propose the following options:

  • Henrik might buy Daniel’s shares in the business, allowing Daniel to retire and Henrik to move forward in the business with Bo;
  • Bo might buy Daniel’s shares in the business, with a plan to buy Henrik’s shares in the future when he is ready to retire;
  • A manager with similar skills as Daniel might be identified, either internally or externally, to buy Daniel’s shares and become partners with Henrik now, and with Bo when Henrik retires;
  • Daniel and Henrik might decide to sell the business in its entirety, with Daniel retiring and Henrik using his proceeds to start a new business with Bo.

It’s important to note that the financing of transactions such as these is becoming less of a challenge.  Corporate reorganizations, such as estate freezes, can be used to carve out the current value of the business and attribute it to preferred shares owned by the retiring partners, allowing the new owners to acquire common shares at low prices.  And if the retiring owners want to take some of their financial chips off the table, banks and credit unions are becoming more and more interested in financing employee/management and generational buyouts, some even lending for these transactions based on cash flow, rather than just on assets.

The years leading up to retirement and exit can be stressful and challenging for most business owners.  When partners face these situations with different and conflicting circumstances and objectives, the challenges could seem daunting.  But by building a value enhancement and exit readiness strategy at least 3-5 years before exit, the likelihood of a rewarding and happy experience will be enhanced.

Let our advisors help develop and implement an exit strategy that’s aligned with the objectives of all partners and shareholders. Contact us today for a no-obligation consultation – the coffee is on us.

 

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