Knowing what I now know as a CEPA since 2021, my two exits in 2004 and 2008 had negative consequences that could have been avoided by having a Certified Exit Planning Advisor (CEPA®) on the advisor team. I am Dan Bowdey, CEPA, MBA, and Master Business Coach with Focal Point, and this is my story about two exits guided by longstanding trusted advisors. Both exits initially held promise of producing the desired outcomes, yet both ultimately proved to have negative consequences for the seller as the deal unfolded. I am not at liberty to share the names of the companies or the parties involved, but that is not needed for sharing the lessons learned.
My Intent in sharing both stories is that you, my fellow CEPAs, will be reminded of the ways we are trained to guide an exit plan and assemble the right team of advisors to avoid the negative consequences that came about during my two exits.
Exit #1 from a $23 Million C-Corp Business
Situation
I was one of three key employees who were being given bonuses of small shares of the company over several years, with the understanding that we would be able to buy out the two primary owners once we collectively owned 33%. Funding of the deal was through a combination of buyer borrowing to bring cash to the table, a 10- year salary continuation agreement with the exiting sellers, and a 20-year seller’s note. I became a 40% owner with my two partners being 40% and 20% owners.
When we bought in, the business was at $3.5 Million in revenue. Together we grew the company’s revenue and profits to where, at the ten-year mark, we were able to pay off the final ten years of the note at the same time the Salary Continuation Agreement ended. A few years later, when revenue reached $21 Million, the 20% owner chose to retire early. We needed to investigate how to buy him out.
Operating Agreement
We had inherited our Buy-Sell Agreement from the previous 50/50 owners with only minor edits by their attorney, together with Cross Purchase Agreements that were funded with life insurance policies on each other to avoid ending up with one of our spouses as business partners in the case one of us should die prematurely. We never questioned the Agreement package we were offered and only much later understood the limitations of the agreement. We were being advised by the company’s outside tax and legal experts – CPA, business attorney, and estate planning attorney, none of whom were trained specifically on the nuances of preparing the business and the outgoing and incoming owners for their individual exits.
20% Owner Exit
The agreements did, however, allow for remaining owners to buy out their proportionate share of the exiting partner’s 20% shares. We each bought half of his shares and ended up as 50/50 shareholders. The problems began when the tie-breaking vote represented by the third leg of our ownership stool was gone.
Disagreement
I approached my partner with a succession plan like the one that the three of us experienced. I proposed that we begin giving bonuses of small shares of stock to three key managers who were 20 years younger than us, with the aim of the two of us selling and retiring in about 7 or 8 years. When he rejected my plan, I questioned why. It turned out that he had always coveted the idea of not having to answer to partners. I offered to buy him out so he could find a business to own on his own. When he refused, I felt life was too short to be in a business where we could not agree on a succession plan, so I agreed to sell to him and try something new.
Deal Wrangling
We shook hands on a plan to hire an appraiser who would set the value, including a discount for the risk the buyer would be taking on, and I would receive a large payout to apply to buying another business. This verbal deal never made it into writing when my partner discovered a loophole in the Buy-Sell Agreement. Although remaining shareholders had the right to purchase the shares of an exiting partner, there was no requirement to do so. Also, I could not retain my shares if I left the employment of the company. Stalemate! We continued to grow revenue to $24 Million while our lawyers hammered out a way to have the original verbal agreement become valid, which my partner finally signed.
CEPA Lesson
A trained CEPA would have rejected the idea of us inheriting the Cross Purchase Life Insurance and Buy-Sell Agreement, recognizing the loopholes that needed to be closed before we ever became shareholders. The CEPA would have guided the attorneys to include a clear exit path for shareholders to buy out other shareholders, as mandatory for the remaining shareholder to buy out the exiting shareholder or at least have an option for the exiting shareholder to find a buyer of his/her shares. Of the 5D’s, only Death had been considered in the Buy-Sell, not Disagreement!
Exit #2 from a $33 Million C-Corp Business
Situation
18 months after Exit #1, I was recruited as the VP of Operations of a privately held $11-million revenue business with the assignment to grow the business to attract a buyer, so the sole owner could retire. I was able to apply the systems and processes that had made my previous business successful, and we began to grow rapidly. The owner gifted bonuses of small shares of stock to me and two other key leaders, which would reward us with some extra cash when the company sold.
Private Equity Inquiry
By the time we were on target to hit $33 Million in my third year, a private equity firm came calling. I was frequently interviewed by the head of the PE firm, but not part of the negotiations. The selling owner was being advised only by his attorney, not his financial advisor, and of course had no CEPA on his team. It is worth noting that Chris Snider and Sean Hutchinson were just earning their CEPA back then.
Negotiation Sticking Points
The PE firm realized the seller had not replaced himself with someone else as the face of the business to prospective and existing customers. On the contrary, the owner was proud of being the face of the business. Thus, his goal to retire upon selling was thwarted when the PE firm offered to pay 67% of the offered value and placed a five-year handcuff agreement on the seller to replace himself, at which point he would receive payment for the final 33%.
Seller’s Remorse
I was kept on for nine months until the PE firm brought in their own CEO and CFO to position the company for either an IPO or to be acquired. During that time, the now 33% owner, having been demoted from President to VP of Sales, would come into my office once or twice a week, complaining that he was miserable at no longer being the boss AND having to work five more years until replacing himself with a fully qualified VP of Sales.
CEPA Lessons
A trained CEPA would have questioned going to market without addressing the three legs of the stool in an exit plan.
- Financial – In this case, the wealth gap would be closed with the sale of the business within the price range the seller was seeking. Check!
- Personal – The owner was convinced that an early retirement was a good choice. A CEPA would have uncovered that the owner had no passion for his next act/endgame beyond playing lots of golf. Not so fast, the CEPA would implore! Let us consider the ramifications of no longer being the boss and first find a new passion for post-sale.
- Business – The CEPA would have advised the owner that he best not list the business for sale until he replaced himself with someone else as the face of the business to prospective and existing customers.
Thus, with a CEPA advising, the owner would have simultaneously worked on replacing himself as the face of the business to clients and crafted a passion for the next chapter in his life before seeking a buyer. This could have been accomplished in 18 to 24 months. The Private Equity buyer would then have been more likely to have offered a full buyout, resulting in the seller being able to fully retire about 3 years earlier than happened. At least the odds would have been more in the seller’s favor, not having to continue working for five years with far less of a voice in the direction of the company. This highlights the importance of the three legs of the stool all being addressed and congruent with the seller’s desires before seeking a buyer.
Even better, although it would have taken longer, would be to bring in a value advisor business coach CEPA, like what my colleagues and I now do as Focal Point Value & Transition Advisors, to work on dramatically improving the four intangible capitals. Thus, the outcome could have been to bypass the PE firm and be attractive enough to be acquired directly by a larger competitor in a higher-multiple strategic buyout. It’s not magic, just applying the Value Acceleration Methodology to its fullest.
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