Two members of the Vertical IQ team and I attended the 2018 Exit Planning Summit in Nashville last week because many exit planning experts need and appreciate industry research. Having been a business banker for many years, and then personally being involved with founding and selling several successful businesses, I’ve had first-hand experience in dealing with this sensitive topic. In fact, I’ve written about both the advantages of selling your startup as well as some of the compelling reasons why a founder may not want to sell their business.

The fact of the matter is that we’re all going to die one day, and thus the process of transitioning ownership is an issue for every business owner. But what hit me about the Exit Planning Summit was that the attendees were primarily financial advisors/wealth managers, CPAs, or exit planning specialists, most of whom charge fees for their expertise. I thought: Shouldn’t bankers provide much of this advice… for free?

A will is not enough; communication is key

When done properly, “exiting” or selling/transitioning ownership of a business requires a lot of communication with vested parties such as family members, other owners, employees, customers, advisors, and so forth.

I learned that the most successful business owners communicate their desires and intentions to those vested parties well-in advance of any change. This approach provides people the opportunity to voice their opinions about the decisions the founder/owner is making, and hopefully feel that their thoughts have been heard and duly considered.

Despite what many people think, creating a will to transition business ownership simply isn’t enough. Documenting your intentions isn’t sufficient to make for a smooth transition to new ownership or leadership. Too often in such situations, people become bitter, perhaps because they don’t understand the deceased’s intentions in the will.

I definitely don’t mean to discourage anyone, business owner or not, from making a will. They are extremely vital and helpful documents, which should be updated frequently. I’m simply saying that no matter how much specificity is included in a will, it is no substitute for verbally communicating your wishes about how your company should be managed following your death and allowing stakeholders to share their feelings about your plan.

How bankers can help with exit planning

As a banker, it is critical to recognize what a big deal business ownership transition is, especially due to the large number of baby boomers who own businesses and will soon need to transition them in some form or fashion.

There are basically five options that business owners have for transitioning their business into someone else’s hands:

  1. Sell the business to another company: A strategic acquisition can benefit many businesses, regardless of the owner’s age.
    How bankers can help: Bankers know a lot of people. Using their own network or even the bank’s, they can introduce the business owner to potential competitors/partners who might want to buy them.
  2. Sell the business to an employee stock option plan (ESOP) or directly to employees: This is a popular choice among small or family-owned businesses, benefiting both the owner and loyal employees.
    How bankers can help: Bankers can not only provide advice about ESOPs but also provide the initial loan an ESOP needs.
  3. Transition ownership to adult children/family: This is another common and attractive solution for small family-owned businesses.
    How bankers can help: Banks can fund upfront shares that can be repaid through dividends.
  4. Plan to shut down the business: Some owners opt to close their business, disposing of assets.
    How bankers can help: Bankers may know of other customers who would want to buy the closing business’s assets, which also helps bank’s other customers.
  5. Sell the business to a private equity company: Selling a large portion of ownership to an investment firm may enable a gradual transition of ownership and offer liquidity to the owner.
    How bankers can help: Some of these deals can be partially financed through the bank’s senior loans. Additionally, the bank can help calculate how much of the purchase price should be debt versus equity.

Since banks can play a key role in each of these five options, bankers should be proactively asking business owners about how they plan to transition their business. But when is the right time to bring up this delicate subject? Here are some pointers for asking a business owner about their transition plans:

  • You want to be sure you have a solid business relationship where you can have this conversation. I’m not going to lie: It can be awkward. Sometimes an owner may feel reluctant to talk about it because, frankly, they don’t think it’s a lot of people’s business. They have to trust you and have confidence that you won’t go talk to others about their business. This is the type of trust you earn through using the type of questions you’ll find on Vertical IQ—industry-specific questions that show that you intimately understand their business.
  • Thoughtfully phrase your questions. Maybe try causally phrasing it such as, “What’s your plan for the company in the next 10 to 12 years?” With this approach, the business owner may offer their exit strategy without feeling “undressed” by your invasive questioning. It’s also important that they don’t feel you are trying to persuade them to sell their business, as this will inherently feel like a sales pitch to sell financial products and not to help them.
  • Do not bring up this topic in front of others…it should be a one-on-one conversation so as not to make them feel put on the spot. However, I do think it’s appropriate to encourage them to tell others their plans on their own, when they are ready, as described above.

Exit planning is a subject worth discussing, both for the business owner and for you as their banker. Much like a CPA or financial advisor, you have highly relevant expertise on topics related to business transitions. But unlike those other professionals, you can provide your insights to your client free of charge, elevating you to the coveted “trusted advisor” status with that business owner, opening to door to numerous cross-sell opportunities.

So review the Vertical IQ Industry Profile for your client’s business, gather your thoughts, and then find an opportune moment to broach this conversation.


Bobby Martin | Co-founder & Active Chairman