What do Steve Huffmann of Reddit and Jack Dorsey of Twitter have in common besides a boatload of money? Neither really thought through their exit strategies and, because their hand-picked successors failed, were forced to return to the helms of their respective ships.
While I'm most certainly not in their league, I can relate to Messrs. Huffmann's and Dorsey's pain.
I know quite a few recently retired marketing firm founders who are absolutely lost at sea because they made didn't take three critical measures before turning over the reins of the firm they founded.
Some are utterly despondent since, after buying a Del Boca Vista condo, they've grown beyond weary of a daily routine that consists of a round of golf, a matinee and an early bird special. Others no longer feel wanted or needed (not a good thing).
Some, sadly, have passed away, which happens far too often by the way. Research conducted by three Austrian academics from the University of Zurich found that men, in particular, had an increased risk of death before age 67 when they retired early.
I'm happy to say I do have a plan for my own Act Two. But, it's based on gut instinct, not best practices. So, in order to validate my exit strategy thinking, I turned to Bruce Hoffmeister, senior financial planner at Peppercomm client, Wilmington Trust.
Hoffmeister identified the three things entrepreneurs must do before they bow out. And needless to say, many, such as Huffmann and Dorsey, didn't think through their exit strategies and missed these significant steps.
1.) Conduct a stress test of next generation leadership. Before you sail into the sunset, empower your next generation leadership to run the business as if you'd already left. This will provide you with a critical glimpse into the big picture and how things would play out after you're gone. Hoffmeister told me, "A stress test isn't a pretend exercise. It's actually allowing the selected future decision maker(s) to call the shots." He added that said successors obviously need to be completely knowledgeable in all facets of the business and, while they might make mistakes, their goofs wouldn't be catastrophic (and, if something should go south, you can quickly step in to right the ship). In the meantime, you can observe from the sidelines and see what life would be like without you and not have to make an unplanned return (a la Huffmann and Dorsey).
2.) Talk to the kids. I have two adult children, but haven't given any thought whatsoever to what I'd like my assets to do for them (actually I may just cut them off completely a la Warren Buffett). Hoffmeister says quite a few retiring entrepreneurs don't think about the legacy they want to leave behind. As a result, they fall prey to an age old practice: the first generation earns the money; the second generation enjoys the money; the third generation spends all the money.
The best way to avoid that rather horrendous scenario is to put your sales assets into a trust that will "...protect your family from themselves." The best way to get started? Talk to your kids. Tell them what your post-sale financial situation will be, and what they can expect in terms of inheritance. It'll solve a lot of problems for a lot of people down the line.
3.) Show me the money. Like any self-respecting, egomaniacal entrepreneur, I happen to think my firm is worth a lot of money and that I'll receive that sum when the day comes to sell. But, says, Hoffmeister, business owners almost always overvalue their companies. "It's important to use a valuation expert to get a range of values for the business, and then decide if you can sell the business for that price." Many times, entrepreneurs in search of an exit strategy are devastated to learn how little their firms are actually worth. In those instances, Hoffmeister suggests an employee buyout over a number of years.
Bottom-line: Find out how much the buyer is willing to pay you up front and what percentage will be cash. Then, make the decision.
While I'm in no hurry to sell, I intend to act on the second two points first, and then spring the stress test on my senior management team when they least expect it. I'm that kind of guy.