Exit Strategies: What's the Best Way to Leave?

November-December 2009

MANY READERS OF THE ONTARIO ARBORIST are individuals I consider great friends, close business associates, mentors and advisors. All of whom teach me incredible things about life, work, professionalism and business – and ironically, half of them aren’t even aware of it! Many of these people are business veterans who have laboured for decades to create corporations that are successful and sustaining. Over the years, I have observed a number of business models with significantly different systems and operational policies in place. Having started to “row” my own boat five years ago, pondering the pros and cons of each model has been a fairly constant occupation of my psyche in the hope of generating my own success story.

Many of these veterans are nearing the age or life position where retiring from their career is no longer a blip on the radar screen, but a clear and present object on the horizon. And so, at the ripe age of 32, I ponder (and yes, I “ponder” a lot!) which successes I should gravitate towards and which failures I should avoid in order to leave behind a legacy that is viewed upon by others as being highly successful.

I have often said that I don’t plan on retiring; I enjoy my career too much! Yet the reality is that one day I will simply choose to leave – or life will redirect me away from arboriculture. With this in mind, it is important to consider my exit from the industry and my business. Naturally, some days I wish the exit door was directly in front of me as the frustration and anxiety associated with business ownership builds to levels that are often challenging to bear.

The following are my observances of the more popular choices available to business owners within the tree industry in Ontario. These are by no means the only options. Creative imagination and innovation will produce significantly different options as more of our veteran business owners begin to retire over the next decade or two.

The Owner as The Entity: Close the Doors
One exit option, and perhaps the simplest, is to close the doors of the business. In some cases this will be the only option available, be it for speed of exit or the inability to choose another option – for example, no one is willing to buy the business. The main bonus of such a strategy is that you work until you are done, then stop.

But the primary purpose of a business is to generate income. So choosing this strategy must be done far in advance in order that the maximum income can be garnered from the company throughout its active life. This will require careful analysis and assurance that systems are refined to limit the amount of expenses paid. Also, systems will have to be employed to ensure that all of the income gained from years of working prior to closing the doors will continue to generate income post exit. Investments, real estate and stocks are all means of achieving this, however in the wise words of some fine trainers out there: “Plan your work and work your plan.”

The close-the-doors strategy has to be chosen and planned for with great care and insight. One negative of this plan is the potential impact on employees. If Advanced Tree Care was a one man band, then in my final day of work, I would only have to consider the impact on my loved ones and dependants. Very few tree service companies follow this structure. (though I should note that one of the arborists within this industry who has my greatest respect does).

At the very minimum, the majority of retiring arboriculture business owners have one or two employees to consider. If the exit model is somewhat calloused in regard for these employees, then simply shutting the doors and releasing the employees is one resolve, however keep in mind that the result may be a calloused bitterness in return.

Alternately, the owner could sell the business to an employee who shows promise, ambition and/or interest. This strategy may leave less bitterness and will be discussed later in this article. Bottom line: choosing the close-the-doors exit option is one that will be ruthless to the business, employees and customers – but also to the owner. They will need to pull as much income from the business as possible, expensing as little as possible, and no doubt sacrificing much over the years to do so.

The Business as The Entity: Continue On
Another exit option is to build the business to a point where it sustains itself in the absence of the owner. People and resources are in place to generate income on a steady basis for all stakeholders including the owner. Under this model, the owner leaves his/her active day-to-day role in the business to pursue retirement activities, yet draws the income required to sustain them.

There are several different strategies that can be used to employ this option with many positive benefits. After years of hard work, the owner gets to pursue the “afterlife” and still pay the bills they oblige themselves to incur. The business continues to exist and the subordinate stakeholders continue to make a living. Customers remain serviced and satisfied. And if desired, the owner can choose alternate exit options over time.

There are however some inherent negatives to this model. If the owner draws income inappropriately, it can become a great burden on the business and subsequently the team left behind to generate this income. By rights, income for absentee stakeholders should only be drawn from profits in order to maintain the forward growth of the business. When absentee stakeholders draw from normal revenues, the income expense sheet can become imbalanced and the fiscal success of the business challenged.

With this in mind, it is again important to pre-plan the exit strategy. If this option is favourable to the owner, they will have to grow the business to the point where profits or dividends are large enough to support their retirement. This will require them to ensure that there are adequate employees, equipment and resources to produce such profits.

Potentially the largest pitfall of the absentee owner exit strategy is if poor communication, blind acceptance and faith are required routinely of employees. Team members require leadership and vision to believe that what they are producing is worth coming in to work for. Failure to employ a good leadership team and failure to maintain a vision of growth and sustainability will potentially cause disenchantment and bitterness – and the source of retirement income could quickly evaporate.

An employee who feels he/she is simply a source of retirement income, who feels there is no room to grow, evolve and mature as a professional, will eventually leave – but usually not before the entire workforce is infected with bitterness and resentment. Therefore, as with the preceding close-the-doors strategy, a solid continuance plan will have to be developed and implemented. Flying by the seat of the pants will not work.

In the years before this exit strategy is employed, communication is essential. Employees need to be aware that they have a means to fiscally, professionally and emotionally grow and evolve to new roles and responsibilities aligned with their objectives – and these objectives have to be known. Do they wish to remain a production arborist? Do they wish to take on a leadership role? Are they willing to pursue sales? What will make employees tick, and keep on ticking when the owner moves completely away from the business is key knowledge.

The Business as The Entity: Sell
The final exit option I’ll discuss (which is by no means the only other exit option) is the sale of the business. Personally, I think this is the choice of most of the fine business owners I know. The benefits of this strategy are that the business produces income for the owner both before and after exit in the form of liquidated equity. The owner simply walks away and no longer is tied to the business.

If successful, the benefits include a high return on the sale and a satisfying exit. The negatives of such a strategy are that the market of people or companies wishing to purchase an arboriculture business is narrow and what they are willing to pay will not necessarily reflect what the owner perceives to be the value of the business. Possible suitors are going to base their perception of value on the market share that the business holds. One thousand clients, even if they are paying premium rates, can easily be stolen by a possible suitor with an aggressive marketing campaign. However, ten thousand customers at discounted rates will be harder to market effectively against, so a possible purchasing company may perceive a greater value.

I myself was once asked to purchase a local competitor of similar annual income. I came to the conclusion that I could penetrate that portion of the market with a marketing campaign costing approximately 15% of the price proposed by the seller of the competing business.

I have pursued neither option as of yet. In the wise words of Neil Thiessen of Able Business Consulting, the perceived value is determined by “order of magnitude” – or in other words, the ability of the business to obtain and hold a large market share and the ability to add personnel, equipment and other resources as a result of high volume work and cash flow.

With the sell strategy, another potential negative will undoubtedly arise if employees are unaware that they will have a new employer. The day of the sale, and those following, can be exceptionally frustrating for them. Employees need to be made aware of the exit plan well in advance in order for them to align their personal goals and objectives. If they can not align themselves with the strategy, then concessions will have to be made. Successful development of the exit strategy requires the owner to convince the employees by words or actions that their personal goals and objectives are attainable within the strategy.

Overall: Still Pondering…
Generally, the business owners whose exit strategies I ponder the most have larger companies with greater workforces than my own. The scenarios possible for these successful business owners challenge my imagination. What is their preferred strategy for leaving the business? Will they sell? Most have very viable and successful businesses that large empires like Davey and Bartlett might find appealing. But a few are at the stage where their market share and perceived value of their company are not necessarily aligned with what a large company would be willing to pay princely sums for.

Some of these business owners have already entered into a state of retirement that requires little active involvement in the company’s day-to-day affairs and the business continues at a steady state of existence. Possible success stories I’m sure, but time has yet to tell.

I ponder at great length the effect on employees, especially highly skilled individuals, many of whom I respect and consider friends. Employees need to maintain a living income and achieve their personal goals and objectives. How are these needs being met by business owners of whom I have such great respect?

The primary role of the business is to generate income for all stakeholders, including the retired owner. How the owner chooses to take such income is an issue I perceive as one necessary for consideration. Is the volume of income taken versus the business’ capacity to carry that income detrimental to the cash flow of the business? Yup, I’m still pondering.

All facets considered, I believe that the biggest exit issue to address is communication – be it a business owner placing a plan on paper to communicate with themselves or a spouse; involving key leadership team members in the development of the plan; or simply sharing with employees their opportunities to grow and develop to the point of implementing the exit strategy. Without clear communication, the threads will begin to unravel.

Over the coming years, I will continue to pay attention to the successes and failures of our industry’s great entrepreneurs. And rest assured, my own exit plan is continually evolving and will always be refined by my observations.

— Kevin Mengers can be reached at email@advancedtreecare.ca

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