By: Patrick Ungashick
Most business co-owners understand that they need to be in alignment to grow the companies and operate effectively. However, they often underestimate the importance of being in alignment with each other to achieve exit success.
Exit goal incompatibility is the natural byproduct of the inescapable human differences among co-owners. Some co-owners are younger, some older. Some have smaller families, some have bigger families. Some spend less money. Some spend more. These differences often present no issues during the years the co-owners are working side-by-side with the common goal of growing their business. At exit however, the co-owners may find themselves pulling in opposite directions, unsure how it happened and what to do about it.
Co-Owner alignment is so critical for exit planning that we have identified seven steps to create and sustain alignment that would benefit all owners.
Understand The Issues
Understanding the issues is an essential first step because, without an adequate understanding, co-owners might apply ineffective or counterproductive remedies. Exit-goal incompatibility often emerges gradually over time without the co-owners even aware that this issue has entered the relationship and is causing tension and friction.
Establish Which Co-Owners Will Be Involved and to What Degree
The second step is to determine which co-owners are involved in the planning and decision-making process, and to what degree. In some situations, this is somewhat obvious—such as with two co-owners who each hold an equal fifty-fifty stake. Barring an agreement to the contrary, 50%-50% co-owners commonly have equal involvement and decision-making authority when pursuing exit plan. Other situations, however, may be less apparent.
There are a variety of scenarios where a co-owner may be given preferential involvement or decision-making authority at this point in time, regardless of the size of his ownership interest. For example, a founding co-owner’s exit goals might be given preferential status out of respect for his contribution, reputation, and legacy.
To create exit-goal alignment, ideally, the co-owners will reach consensus on whose exit goals will be assigned the higher priority at this time and whose will be of secondary or tertiary importance.
To help create clarity, we recommend grouping the co-owners into the following three tiers to define expectations and parameters around roles and input in the exit planning process.
- Tier 1 (Determinants) – Co-owners whose individual exit goals will determine to the fullest extent possible the exit tactics to be pursued at this time, as long as pursuing their goals does not harm the rights and interests of the remaining co-owners.
- Tier 2 (Considerants) – Co-owners whose individual exit goals will be taken into consideration when determining the exit tactics to be pursued at this time. Reasonable efforts may be made to pursue their exit goals at this time, as long as those efforts do not hinder or block achieving the exit goals of the Tier 1 Determinant(s).
- Tier 3 (Benefactors) – Co-owners in this group are expected to proportionately benefit from any exit tactics pursued. However, their individual exit goals are not specifically taken into consideration at this time.
Use the three tiers as guidelines to create clarity and set co-owner expectations, not as hard and fast delineations. In these situations, it may be advantageous to use a professional facilitator to help the co-owners reach consensus on these issues.
Co-Owners Determine Their Preliminary Individual Exit Goals and Priorities
The third step to create co-owner alignment is for each co-owner directly involved in the process (Tier 1 and Tier 2 co-owners) to draft a preliminary list of his or her individual exit goals in order of priority. It is impossible to know if the co-owners collectively have compatible or incompatible goals until the individual owners achieve a preliminary understanding of what their goals may be in a ranking of importance. At this step, co-owners should consider their individual exit goals to only be preliminary statements, because the goals might be modified once all of the involved co-owners come together to share and compare their goals (see Step 4 below).
Co-Owners Share Goals and Address Incompatibilities
Once co-owners have formulated their tentative, individual exit goals, the next step is to share and compare their goals and priorities with one another. This can be the most difficult step. Sharing exit goals might reveal significant risks:
- Sharing may require co-owners to reveal personal and private information, aspirations, fears, and feelings.
- Incompatibilities may be exposed that, up to that point, were either unknown or have been
“the elephant in the room.”
- Once shared, one co-owner’s exit goals may disappoint or upset other co-owners, even if the goals are not necessarily incompatible.
In nearly all situations, getting to alignment requires negotiation and compromise. To facilitate this, the co-owners’ outside advisors will bring their experience and objectivity to the negotiation and reconciliation process.
Address and Eliminate Alignment Inhibitors
Once business co-owners have started their exit planning, they may discover certain practices occurring (or not occurring) within their company that make alignment more difficult. These practices, called Alignment Inhibitors, usually seem harmless or sometimes even beneficial, but as exit draws near, they unknowingly and unintentionally inhibit co-owner exit alignment.
Such alignment inhibitors would include:
- Co-Owners working in the business without written job descriptions
- Co-Owners working in the business without job performance benchmarks and evaluations
- Tying co-owner compensation to ownership share rather than market rates
- No long-term strategic planning process or written strategic plan
- No financial budget and/or periodic performance reviews against that budget
- No regular co-owner-only meetings
The more Alignment Inhibitors found within a company, the more difficult it is to create and maintain co-owner exit alignment. Therefore, while drafting and sharing co-owner exit goals and priorities, it is helpful and important to eliminate Alignment Inhibitors where possible.
Implement Alignment Creators
Just as co-owners may do (and not do) certain things to inhibit alignment among themselves, there are certain things co-owners can do to foster alignment. Alignment Creators are practices, habits, and processes which help co-owners initially create and subsequently sustain alignment—both now and up to exit.
Examples of Alignment Creators include:
- Owner-Only Meetings
- Perks and Benefits Policy
- Responsibilities Policy
- Reinvest-Receive Guidelines
- Ownership Options
- Co-Owner Retreats
- Buy-Sell Agreement
- Drag-Along and Tag-Along Rights
- Employee Agreements
- Job Descriptions
- Performance Benchmarks and Reviews
- Compensation Guidelines
- Business Growth Plan (a.k.a. Strategic Plan)
- Annual Budget
- Board of Directors
Many Alignment Creators are tools commonly used to run a well-managed company. Thus, many businesses have in place some of these mechanisms for reasons unrelated to preparing for exit. However, co-owners may gain a new and deeper appreciation once they understand the important role these tools play in achieving co-owner alignment and exit success. Other Alignment Creators are less familiar and more specialized.
Co-owners, with help from their advisors, are encouraged to review the list of Alignment Creators and implement those which may help produce and sustain operating and exit alignment among the co-owners.
Monitor and Adjust with Time
Prudent business co-owners start their exit-planning years before their desired exit. During those years, one can expect that circumstances will change. Individual co-owners may experience changes to their health, marital status, family income, or other factors which could potentially cause them to reevaluate their exit goals.
Additionally, the following external factors may impact some or all of the co-owners: market conditions, economic environment, business performance, customer preferences, and the competitive situation. All of these factors change with time.
As one or more co-owners move closer to exit, co-owners must frequently monitor exit progress, be on the alert for relevant changes, and adjust their exit tactics appropriately.
For more information on exit success between business co-owners visit www.navixconsultants.com