: March 1, 2011
Is Exit Planning Worth the Time and Money? An Opinion From The Front Lines
In the last several issues of this newsletter, we've outlined the seven steps in the Exit Planning Process. Whether you plan to sell to a third party, sell to key management or transfer ownership to a family member, we can help you.
To answer that question, we've asked Kevin Short, an investment banker who works every daywith owners of small and mid-sized companies, about the value of Exit Planning. "Good exit planning can be the difference between a successful closing and a complete derailment of the sale process," says Short.
When asked to explain, Short focuses on Steps 1, 2 and 3. "When an owner sets his objectives
in an Exit Planning context (Step 1), he or she does so methodically and proactively. Owners
who wait until entering the M&A arena to decide how much cash they want and need from their
companies do so reactively and often are blinded by attractive bait held out by less-than
In Step 2 of the Exit Planning Process, owners and their advisors place a value on the owner's
company. "When an owner's first valuation experience happens in my office, and that owner is
primed and ready to sell last Friday, learning that the company is not worth what he or she had
hoped is a painful experience. Even more painful is the subsequent rededication of effort to building the value of the company."
In Short's opinion, "The element of Exit Planning that gives an owner the biggest bang for the
buck is, without a doubt, Step 3 of The Exit Planning Process (Build and Preserve Value)."
One technique that exit planners use to motivate managers to remain with a company postclosing
(a vital Value Driver) is the Stay Bonus. An effective Stay Bonus accomplishes three
tasks: 1) it gives the key managers a reason to stay; 2) it is structured so that it increases the
value of the company, and 3) it includes a penalty (usually in the form of a covenant not to
compete) that prevents key managers from taking key clients, vendors or trade secrets with
them should they leave before or after the sale.
Short can rattle off far too many horror stories about owners who, believing that their loyal
employees were happy and already well compensated, were held hostage by those same
In one, Kevin describes an owner who was a week away from the sale of his company for $10
million. "At this very late stage of the game, the buyer met with each of the key managers to
reassure them that they'd be retained by the new owners at their existing compensation levels.
At its meeting with my client's top salesperson, it was lavish in its praise about her performance
and about how important her continued success was to the company's future success. When
the buyer asked her to sign a covenant not to compete before the closing date, the salesperson
asked for a break and headed straight for my client's office. She proceeded to remind my client
that she'd helped build the company to its current value during her tenure, and ever-sogenerously
consented to wait until the closing date to collect her $1 million bonus."
"My client paid the ransom. He understood that if the salesperson servicing his top four clients
left the company, the buyer would likely scrap the deal. If the buyer did come to the closing
table, it would reduce its purchase offer by far more than $1 million."
As a result of this and many similar experiences, "We recommend that owners get very
aggressive implementing Stay Bonuses with anyone who has a significant impact on a
company's performance." Short elaborates, "The Stay Bonus should apply to anyone—and that
might be the janitor—whose cousin is your biggest client—who has leverage against the
company." And, of course, tie the stay bonus to a covenant not to compete (or similar
agreement), first checking with your attorney about how to best create enforceable agreements.
In Step 3, advisors also work with owners to protect business value. One method is to clean up
shareholder agreements (again, well in advance of any contemplated sale or transfer). "If a
shareholder agreement does not force a minority shareholder to sell when the majority
shareholder does, majority owners can (and often do) find themselves unable to sell, or held
hostage by minority shareholders."
"By and large," adds Short, "entrepreneurs ignore both Stay Bonus Plans and shareholder
agreements because they believe that other shareholders or employees will 'come along' on
closing day." Short observes, "What owners forget is that every shareholder and every
employee figures out leverage and most intend to use it."
From these and many other examples from his practice, Short believes that Exit Planning is
indeed well worth the time and money owners devote to it. If you'd like to learn how exit
planning might save you time and money, please contact us.