Human Resources | April 2012 | By Daniel P. Smith

What’s Your Exit Strategy?

Operators shouldn’t wait until they’re ready to retire to figure out what to do with the business.

J.P. Licks founder Vince Petryk isn't ready to let go of the fun in business.
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Since founding J.P. Licks, a chain of 10 Boston-area ice cream shops, in 1981, Vince Petryk has tried not to think about the day when he’ll leave the business.

“It’s almost like your last will and testament,” Petryk says. “I can’t imagine I’ll be glad to walk away when the day comes, which is why I don’t think about it much.”

But Petryk, like all quick-service operators, will have to face that day eventually. And today, as Baby Boomers reach retirement age, business owners are increasingly looking into the options available to them when they decide to retire.

For most, there are emotional ties to the history, staff, or even physical location of their business. There are also critical financial considerations for those looking to leave their business, as it’s likely they’ve invested a large amount of money into it. And many don’t know where to turn, who to trust, or what constitutes a fair sale.

These lingering questions, combined with an operator’s need to extinguish any number of other daily fires in the business, often pushes exit planning to the background.

“The biggest issue in exit planning is that business owners fail to plan,” says John Brown, founder of the Colorado-based Business Enterprise Institute.

When it comes time to exit a business, Brown says, operators must start by determining what they want. “First, when do I want to leave and what does that mean? Am I looking for a clean break or simply a departure from daily control?” Brown says. “Second, how much money do I need? And finally, to whom do I want to transfer the business?”

Once those questions are answered, operators have several options they can consider.

Sell to a third party

Selling to an outside third party is a common path operators pursue, largely to maximize the sales price. Some will use a commercial broker; others travel the do-it-yourself route.

Charlie Perkins, a former quick-service operator who became a commercial real estate broker, sells about 30 restaurants each year. He markets the property to targeted clientele, quantifies the business, assigns a valuation, and handles the sale’s mechanics.

“Operators don’t know where to market, are too emotionally involved, and tend to sell for an undervalued price,” says Perkins, head of The Boston Restaurant Group. “To that end, a broker helps.”

To avoid a broker’s fee that is generally in the 5–10 percent range, operators can also try to sell the business themselves. In this case, operators should contact their suppliers, industry colleagues, attorney, and accountant. “Put out feelers and offer a referral fee,” Perkins says of finding potential buyers.

In the franchise world, where any sale or transfer can be dictated by the franchise agreement, operators should understand what their agreement requires and permits, Brown says.

“Fortunately, many franchisors encourage their operators to engage in exit planning. They want that outlet to remain running,” he says, adding that some franchisors may even help find a buyer.

But sellers must be prepared to say goodbye to their business. Out of Perkins’ last 100 restaurant sales, only two buyers retained the eatery’s name and business model.

“This is largely because those who operate restaurants have an entrepreneurial edge,” Perkins says.

Sell to employees

In some cases, employees have the means and motivation to buy the business they work for, as well as the desire to maintain company tradition. Operators often sell their ownership stake to employees over time to maintain control, Brown says, while also earning an annual salary.

“For many, a gradual sale to existing management will make a lot of sense,” Brown says.

At J.P. Licks, where all of Petryk’s key partners are younger than him, the opportunity to sell to employees “has a nice emotional ring,” Petryk says.

“Of course, who’s to say they don’t want to create something all their own?” Petryk says.

Operators interested in selling to employees also have the option of using an Employee Stock Ownership Plan (esop). Requiring planning and groundwork, ESOPs are most commonly utilized by multistore owners looking to exit but not wanting to sell to an unfamiliar third party, says Corey Rosen, founder of the National Center for Employee Ownership.

In an ESOP, the company establishes a trust to hold company stock. The business funds the stock purchase out of tax-deductible pre-tax earnings, either by putting in cash annually to buy shares or, more commonly, by way of the trust borrowing money to purchase a larger chunk of the company at once. An independent appraiser, meanwhile, sets the price.

“Owners who know about ESOPs often feel they get a fair price and can define their role in the company moving forward,” Rosen says.

ESOPs, however, are not for everyone. The option is best suited for profitable chains that have a stable core of leadership beyond the owner.

Transfer ownership to family

Transferring ownership of a business to family members is likely the preferred option of many operators, Petryk says, provided the recipient is motivated to continue with the business.

In Petryk’s case, he says he would relish the opportunity to someday transfer the business to his two now-teenage daughters—even if they enjoy J.P. Licks ice cream far more than the prospect of someday running the business.

Operators can feel confident they’re providing something of value to their loved ones while at the same time ensuring the operation stays the same, Petryk says. Sellers can also benefit from a gradual sell-off that provides regular income.

In a family transfer, just as in any sale, key elements and expectations should be defined in a formal agreement, Brown says.

“Just because the business is going to family, there still needs to be controls in place,” he says.

For operators who cannot transfer the business or sell it because they will not receive the desired value, the simple solution is to maintain the status quo, Brown says.

In this case, operators can escape the daily grind by hiring someone to run the restaurant and designing incentives for improved revenue from the hired management. Brown says such an option might create more cash flow than otherwise available.