By: Bryan P. Murray, CFP®

July 2019

The end of last November, I was sitting in a hotel room enjoying some fantastic day-time TV waiting for the end of a twelve hour(!!!!) flight delay for our trip to South Africa. As I aimlessly flipped through channels, I came across a marathon of Charlie and the Chocolate Factory (yes, both versions) While watching, I apparently hadn’t taken off my financial planning hat yet because throughout the movies, all I could think about was Willy Wonka’s true goal in the movie – developing a succession plan for his business! Admittedly, this lead me down a bit of a rabbit hole of comparisons (some more of a stretch than others), but this gave a great basis for discussing the various exit paths available to business owners.

When we discuss succession or exit planning strategies with our business owner clients, we’re typically evaluating five different exit paths to determine the best option for them and their business. While there are several iterations of each of these, the primary five exit options I’ll be covering today are:

1. Family
2. Co-Owners
3. Internal (Employees or Management Team)
4. Outsider Buyers
5. Go Public

While the “Golden Ticket” competition shows that Willy had one idea in mind, many of the other options appear throughout the movie. We also must note, we’re making several assumptions about the business and its operations. Many of which could be a bit of a stretch, but fun to think about nonetheless!

• What is it?
  • Bringing close family members that are typically already active in the business into the leadership or ownership circle. While the financial end of this is typically considered first, there is also a management and control transition that’s necessary. For this exit path to be successful, there must be a transition of the business, rather than just a transaction of the value of the company. It’s critical that the time is taken to introduce the incoming daughter/son/granddaughter/grandson/etc.. to customers, suppliers and even other professionals in your industry. Those other individuals could want to see more from the next generation to prove they earned their spot in the company.
• Would this be a good strategy for Willy?
  • In the original movie, it doesn’t appear that Willy has any family involved in the business, or really any family at all. In the re-make, Johnny Depp’s character has a father that appears in the beginning and end of the movie. In either case, transitioning the business to a family member does not appear to be an option for Willy. One could argue he was looking for his “family” through the competition and the course of the movie.
    
• If not, where could this work? What concerns could there be?
  
  • When a business owner is evaluating this option, they’re typically considering family members that are active in the business. This could be a sibling or even parent, but often, we’re looking at daughters & sons or even nieces, nephews, and grandchildren.
    

Aforementioned, a big hurdle for the firm, successor and exiting owner will face is the perception the internal and external forces will have. If any of those forces are uncertain about how well the next generation will come into the fold, they could question buying from, selling to or working for the organization after the senior generation exits. However, even if the kids have been active in the business, there’s still the question of employee v. owner mindset. If the successor has only been exposed to their position in the business, they might not realize the other aspects that come into play. The son building the houses may not be exposed to hiring/firing or business development, the daughter in marketing may not have relationships with suppliers, etc.. They also must understand the sacrifice that may be necessary as an owner. They never saw Mom and Dad mortgaging the house to ensure they could cover payroll, they only enjoyed the fruits of Mom & Dad’s labor.

• What is it?
  • When there are multiple partners in a business (family or not), with a discrepancy in age or work timelines, there could be an opportunity for the retiring/exiting partner to be bought out by the remaining partner(s). With a properly structured buy-sell agreement, the terms of the buy-out could have been structured years before anyone is ready to exit, allowing for more seamless transition of ownership to the remaining partner(s).
• Would this be a good strategy for Willy?
  • It doesn’t appear that Willy has any active partners in the business, so it’s unlikely this is an avenue that we’d be exploring.
• If not, who does this work for? What concerns could there be?
  • In the real/non-Willy Wonka world, having a business partner is a very frequent and normal part of many businesses. When evaluating this exit path for your business, there are two primary questions that must be considered when evaluating a co-owner to assist in your ultimate exit from the business;
• Do they want to take sole responsibility for the business going forward?
• How long do they plan on continuing to work?
  • If you have a more-junior partner in place, there’s a good chance they will be around long enough to continue the success you’ve had.
  • If you and your current partner are close to the same age, do they plan on sticking around that much longer after you depart? If not, this option is unlikely the right answer for you and your partner.

Employees

• What is it?
  • Selling your company to a plan that is completely owned by your employees. Meaning, you’ve sold your company to your employees and had the liquidation event that allows you to (hopefully) enjoy your financial independence.
• Would this work for Willy?
  • Much of this will depend on how he envisions the company being run in his certain absence. If Willy wants to see the continued innovation that the company has been known for to that point, or just wants an external face of the brand, there is not a clear leader amongst the current employees that could take this role.
• If not, who does this work for? What concerns could there be?
  • For this to work for any company, there’s a level of leadership and existing management that must be in place. While equity ownership may be passing down to all employees at that time, the hierarchy and reward balance still needs to be in place for this to work.

Management Team

• What is it?
  • This is typically seen in an organization with one owner but several other executives or team leaders that are interested and capable of managing the business either together as one management unit or a continued management team with a single lead executive.
• Would this be a good strategy for Willy?
  • I’d argue this is 1) exactly what he had in mind and 2) the best option of him. As mentioned previously, the business appears to manage itself thanks to the Oompa Loompas, so the remaining responsibilities for the new owner/operator would be new ideas for candy (product development & innovation) and expanding the brand and growing the top line. These are the kinds of things someone needs to be groomed to able to carry out. There’s also a considerable timeline that would be implemented for the successor
• If not, who does this work for? What concerns could there be?
  • If choosing a new CEO or leader from an existing management team, you likely already know their competencies and weaknesses, along with how they work with the rest of the executive team and company. However, when choosing one from a group, you’re running the risk that one (or more) of your management team will disagree with the decision. That could cause not only clashes in operations, but you may see one of your top team leaders headed for the exit if they felt they’re more qualified to lead the company than the chosen individual.
  • On the other hand, if you’re grooming a successor in a setting that doesn’t necessarily included the remainder of a management team, you still have a few considerations to make about the process. First, much like bringing a family member into the ownership/management fold, you may not have seen this individual in an ownership type role. Finding a way to understand their risk tolerance and role as an owner is critical before you put all of your exit planning marbles in their basket.
    

• What is it?
  • Selling a portion of you company to the public markets to raise capital for continued growth of your business that may not be attainable through present cash flow, private investors or debt financing.
  • If we’re going to be technical here, we don’t have a very good idea of the status of the capital markets in this Wonka world, but considering the size of the business, this could be a possibility. However, there are other considerations that must be made.
• Would this be a good strategy for Willy?
  • To be a public company, there will have to be considerable financial and business transparency.
  • A short-term focus and expectation for many investors could prevent Wonka from practicing the same innovative creativity that helped to build the company to what it is today.

So, in short, no. Going from disallowing all outsiders in the building, let alone opening his operations and finances to the outside world is not something that he’d be comfortable doing.

• If not, who does this work for? What concerns could there be?
  • A larger company that is in need of substantial financing and enough name recognition and financial wherewithal to entice investors to buy their stock and continue to support in a manner that leaves public markets open to the company for potential future financing.
    

• What is it?
  • There are typically two kinds of buyers in this space, financial and strategic buyers. This is typically the “Get me out at the highest price” kind of exit. A financial buyer sees buying your company as another investment – purely from a ROI basis. The strategic buyer, is a company that is already in your industry or looking to expand into your industry. In the Wonka case, this could be another candy company.
• Would this be a good strategy for Willy?
  • Yes, this could work. Again, considering the secrecy and tests for his visitors that Willy has enforced, it’s hard to imagine he’d be comfortable allowing someone else to take over. However, considering the lengths that certain members are willing to go to get Willy’s secrets (I’m looking at you Slugworth!), it’s fair to assume someone would be willing to pay top dollar for the patents, distribution network and process that Wonka has down.
• If not, who does this work for? What concerns could there be?
  • While this may get Willy out at the highest price, there are too many pieces of this that don’t work for him that it’s unlikely this would happen.
  • For others, the primary driver of this is going to be wanting to get the highest price possible for the business in your exit. However, unless the outside buyer is just buying your business for some sort of specific product or intellectual property, it’s likely the acquisition partner is going to want key people (potentially including you) to stay in place to keep the business running as it has under your leadership. The question then becomes, how do you incentivize key people to stay after you’ve taken your exit?
    

Now that we’ve run through the avenues Willy can take to exit his business, how can he determine the appropriate timing for his exit?

The first step is determining how prepared financially and emotionally the business owner is to exit the business. In Willy’s case, he appears to be aware of his own mortality and the need to begin charting his exit path. However, we must also consider the following:

• What kind of income has he been able to take out of the business over the years? What does his personal financial situation look like today?
• What net amount, after taxes and transaction fees, does he need to be financially independent?
• Can he afford to simply gift the business to his successor free of any expectation of payment now or in the future?

After determining the business owner’s financial and emotional readiness, we need to evaluate the dependency the business has on the owner.

In Willy’s case, the operational side of things seem to hum without his involvement – thanks to the wondrous Oompas. On the other side, will the Oompas be able to step into the creative side and keep the innovation and face of the business as it’s been under Willy’s leadership? Will this new person have the ability to take on those creative and business development roles?

While the example of Willy and the succession of his chocolate factory may be far-fetched, this idea of exiting your business is a very real one for thousands of business owners each year. If you’re one of those business owners looking to figure out how you’re going to exit, don’t leave it up to a golden ticket competition to determine your successor!

Get your exit plan started today with our Business Exit Readiness Index (http://berireport.com/Survey/Register/93813B4C_7070) and Owner Dependency Index (http://www.odireport.com/Survey/Register/93813B4C_96) Surveys or reach out to our business owner team today.

Bryan Murray is a registered representative of Lincoln Financial Advisors.

Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Wealth by Design is not an affiliate of Lincoln Financial Advisors.

Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

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