Many business owners put their whole lives into their companies, working late nights and dedicating themselves to helping them thrive. So when it’s time to retire or sell, how do they ride off into the sunset?
With the proper planning, answers Steve Haarstad.
This is where businesses need a succession plan — or exit strategy — in place, says the Enterprise Minnesota business growth consultant.
It’s about more than knowing who will run the business next. It’s also about ensuring the company’s attractiveness to potential buyers through long-term profitability. And, of course, about preparing the sunsetting business owner for the next chapter of his or her life, financially or otherwise.
This is the kind of long-term planning project that takes help and expertise. Last fall, Haarstad earned the Certified Exit Planning Advisor (CEPA) certification from the Exit Planning Institute, with the goal of guiding business owners through the exit process.
In his exit planning workshops, Haarstad shares the story of an old friend whose father spent a decade building a small chain of convenience stores. When the father sold the highly successful business, he became an overnight multimillionaire.
But when tax day rolled around, he found himself owing half his new fortune to the IRS. Less than two years later, while facing the loss of his untimely death, his family found themselves owing half of what remained in estate taxes.
This type of nightmare scenario is avoidable with proper management and financial planning, Haarstad says.
“There are ways to be more tax efficient and to minimize the tax burden. You can set it up so that you leave a legacy for your family,” he says.
Life after retirement
Haarstad likens the exit planning process to a three-legged stool: personal planning, personal financial planning, and business planning.
The first step, personal planning, is all about helping the business owner figure out what his or her next chapter holds, once he or she is no longer running the company. Whether the next milestone is starting a new business, volunteering, or spending time with grandchildren, business owners risk feeling lost if they lack vision for the future.
For Mary Jo Harris, vice president and co-owner of Harris Hardwoods, beginning this process was overwhelming.
“What is life like after retirement? When you spend your life doing this and every day that’s your focus, it’s hard to imagine after the fact,” she says.
Harris and her husband, founder and co-owner Tim Harris, partnered with Haarstad along with another CEPA-certified advisor to develop an exit strategy. This began with personal evaluations of their psychological readiness to one day leave the business, from their values and goals to the everyday practicalities of retirement.
Haarstad likens the exit planning process to a three-legged stool: personal planning, personal financial planning, and business planning.
But even if psychologically ready, the Harrises didn’t know the true scope of what exiting the business would entail. Throughout the exit planning process, they’ve broken down the process into practical steps, and they know how to build the team required to make it happen.
They’ve now gone from overwhelmed to prepared, Mary Jo says, secure in the knowledge that there’s a plan in place once they decide they’re ready to retire.
Returning to that strategic plan on a regular basis introduced a sense of purpose and security into the day-to-day business operation, too. With Haarstad’s help, the Harrises set business goals that they revisit quarterly — goals that have increased the value of the company at an accelerated pace, according to Mary Jo.
“This is our life’s work,” she says. “This has really helped us realign and stay focused.”
More than a numbers game
A business owner’s post-retirement life plan comes with a new task, which is Haarstad’s second leg of the stool: financial planning. Once an owner has a retirement plan, he or she can determine how much income will be needed to sustain the desired lifestyle.
This is a particular concern for business owners, many of whom have invested every penny they earn back into the business, leaving them ill-prepared for retirement. In fact, studies suggest that 80 to 90% of a business owner’s wealth may be tied up in his or her business, according to Haarstad. But with proper financial, tax, and legal planning, owners can ensure they’re equipped to fund their next chapter. And they can also ensure they’re properly set up to manage and maintain the wealth gained from selling their business.
A sale isn’t only a numbers game, however. For many owners, that first personal values exercise also guides considerations for potential buyers.
This was important to Brent Cochran. He’s owned R/C Machining since 2000, after purchasing it from his father, who founded the company in 1975. He had previously worked with Haarstad, so when the CEPA certification was finalized, Cochran jumped at the opportunity to collaborate on a five-year exit plan.
Early on, Cochran identified a value: He appreciates the role R/C Machining plays in his Glenwood community, keeping business and jobs local. It’s a value that can now guide any potential sale decision.
He’ll seek out a buyer who will ensure the company remains in Glenwood and continues to employ local residents. Any improvements Cochran makes now will contribute to the future viability of the company — and, by extension, those jobs.
“The sale is more than just money. What is my community going to look like after I leave?” he says.
Strategic planning
These first two steps provide the necessary insight required to complete the third step: business planning. The most familiar to business owners, this step can encompass any number of strategic initiatives. It covers everything from ensuring the business is efficient and profitable to determining what a sale number might look like.
Of particular concern to small manufacturers, according to Haarstad, is diversifying their customer base. If a company relies on a single customer for a large percentage of its business, a potential buyer might have concerns about the manufacturer’s long-term viability, should the company lose that customer.
“We would put strategies in place to mitigate those risks,” Haarstad says.
Exit planning is something that can benefit a manufacturer’s customers, too. Rick Adair, owner of Bloomington-based Adair Plastics, started thinking about his eventual retirement when a customer raised concerns. Without Adair, is there someone to carry on the work?
“The sale is more than just money. What is my community going to look like after I leave?”
Customers have trusted Adair as a partner and founder since 1979, so he knows that transition must happen gently. That’s where Haarstad came in — with a training plan for Adair and his team, along with plans for a revamped web and social media presence to solicit interest in others who may one day carry on the work.
“We’re working to develop a plan that would allow me a controlled and proper exit,” Adair says.
Many of these exit strategies are improvements any business might make, even without an eye toward exit. A strategic exit might include documenting company processes for future reference. It might mean expanding the customer base or embracing automation to ensure profitability in changing markets. It might involve establishing a cadence of communication among the leadership team.
“Anything that a leader could do to help the business run more effectively, to do more with less, that would trickle down to having higher profitability,” Haarstad says.
‘Start sooner than you think’
For Larry Van Iseghem, owner of Duluth-based Van Technologies, the key to exit strategy is to “start sooner than you think.” Though he doesn’t plan to retire anytime soon, he believes it’s a conversation best begun while times are good.
Van Technologies partnered with Haarstad on a financial assessment of the business after previously working with Enterprise Minnesota on achieving ISO 9001 certification.
“It made us feel secure,” Van Iseghem says. “Through our history and extrapolation of where we are headed, we got a good perspective of where our value is.”
It’s helped him and the company plan, both for growth and for the long-term eventuality of Van Iseghem’s retirement.
“You’ve got to start when you know your vision for the future. Plan accordingly,” he says.
Haarstad agrees, noting that exit planning is not an overnight task. He recommends at least three years to build value and plan that strategy. The more time, the better.
“You can still successfully exit a business in less time, but you are selling yourself short,” he says. “You’re probably leaving money on the table.”
A team sport
Haarstad views exit planning as a team sport. “No one individual or function or discipline out there has all the expertise needed to help a business owner exit that business,” he says.
Rather, Haarstad sees himself and other CEPA-certified consultants as the quarterback, helping all advisors align to the same plan. The rest of the team might include a financial planner, estate and tax attorney, CPA, business broker or investment banker, and a value advisor — all of whom play key roles at different stages of the process.
While the CEPA certification is relatively new for both Haarstad and Enterprise Minnesota, he sees it as a natural extension of his existing role as a strategic consultant. And it’s a need he’s seen for a long time, after years of working with business owners on other strategy projects.
After all, as he puts it: “Exit strategy is good business strategy.”
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Featured story in the Winter 2022 issue of Enterprise Minnesota magazine.
