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In an ideal world, you could exit your business by selling the company for full value at the snap of your fingers. In reality, successful exits are rarely quick and improvised. Having a long runway expands your exit options, one of which is hiring a general manager (GM) to continue running the business on your behalf if you choose to leave.
- This can be an ideal strategy if you’re ready to transition, but your business isn’t positioned to transact for full value. That’s frequently the case with companies that are very small or owner dependent.
- The GM strategy can also be a good fit for a family-business owner whose kids want to retain the company but aren’t ready or able to step into a top leadership position.
Chris Vanderzyden, president and CEO of Legacy Partners, LLC, advises many of her firm’s small-business clients to hire a GM to build out their management team prior to selling to a third-party buyer. The tactic, she explained, reduces the risk of owner dependence and increases the marketability and transferable value of the business.
“It assures a buyer who is investing in the future value of the company that the strategic plan for growth will continue to be executed seamlessly after the business transacts,” said Vanderzyden. She feels that the best candidates are often promoted from within; however, candidates outside the organization can be ideal hires if they have experience in the industry, great leadership skills, and an owner's mindset.
Internal exit option
If a small business is not currently positioned to attract an outside investor and the owner wants or needs to exit, an internal exit strategy can be appropriate. Here, an employee assumes the role of GM with the intention of buying the business in the future. (Related: The right business successor: Key to retirement)
Many employees don’t have the funds available to purchase the business outright and will require a buy-over-time arrangement.
“When an owner hires their replacement, they have the chance to test run the capabilities of the individual,” said Vanderzyden. “In other words, can the person take over the management, maintain relationships, and continue to grow the business?”
If all goes well, the owner stands to benefit from business value growth and the reduced risk of management failure. The latter is of vital concern in a buy-over-time arrangement where the new owner is essentially leasing the business.
Vanderzyden related a firsthand example of the success of this kind of strategy.
“Legacy Partners had a client in the electrical industry who had developed their customer relationships over many years and created great trust,” she explained. “This was a very positive attribute for client retention and support of future revenue; however, the owner was the sole customer contact. To de-risk owner dependence, we advised the client to hire a general manager so relationships could be transferred away from the retiring owner. In this case, the general manager was identified within the industry, and the competitive compensation package had a vesting component, which incentivized the employee’s performance and encouraged their retention, thereby driving business value.”
GM for a family business
In some cases, an owner wants to exit a business that produces intergenerational wealth but realizes the family doesn’t currently have the experience, skills, or desire to run the company.
Hiring a GM to come in and run the business offers a way to continue growing wealth while avoiding interference from an outside buyer who may not preserve the family legacy and maintain the integrity and heritage of the brand and culture. (Related: Are you a ‘business first’ family?)
In these instances, the GM will sometimes mentor and train the younger generation for future senior management roles as well.
“Family succession is often the expectation for a business that has been handed down through multiple generations,” said Vanderzyden. “But we do run into instances where the next generation has not matured enough in the business to take over for their parents. Hiring a GM offers a necessary bridge to allow the parents' retirement while preparing the next generation to assume the role of full ownership.
“An owner should start the process of hiring a GM early enough to properly plan their exit and leave on their own terms and time frame. It’s critical that this be planned well in advance,” Vanderzyden continued. “Certainly, the last thing you want to do is wait for a triggering event, like a serious illness, disability, or death, to plan your transition out of the business.”
Being proactive and getting out in front of the situation is a win-win for everyone — you and your business, employees, and family.
Conclusion
If you’re contemplating your transition, consider whether hiring a GM is the right strategy to ultimately fulfill your exit plan. It can be a smart way to make your business less owner dependent, increase its transferable value, and prepare for a future transaction. It’s also an ideal opportunity to contemplate or, ultimately, experience the next chapter of your life.
Talk to us
A MassMutual financial professional has the training and experience to help you explore your options and determine your next steps. Talk to us today.
Discover more from MassMutual…
Ways to sell or transfer a business
Different types of buy/sell agreements
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