In this series on succession planning for sole proprietorships, I will highlight the ways an exit can be implemented.
Exit and succession planning is done in stages. The last stage is when the sole proprietor makes a final exit from the business.
There are many ways a sole proprietor can exit from the business and still maintain a legacy. The method chosen depends on the needs and desires of the owner. Does he or she wish to make a total exit, or maintain some level of influence over the business?
If the owner wishes to make a total exit from the business, then a sale is the most ideal exit strategy. Potential buyers of the business can include staff members or external investors.
There are a number of ways an exiting founder can still retain ownership of the business. One could opt to restructure the business in such a way that third parties manage and control the business while he still retains ownership.
Under this model, the owner is not actively involved in the business. This is ideal where the owner has a pool of trusted persons he can delegate the business to, such as highly competent staff or external management companies.
It is also ideal where the owner’s exit from the business is informed by temporary affairs such as a relocation to another country. This model allows the business to continue running despite the owner’s absence.
The founder can regain control of the business as appropriate. The model is affected by suitable management agreements with the persons who will manage the business on the owner’s behalf.
The disadvantage is that the owner will still carry the legal risk of the business. This means that he or she will remain personally liable for any liabilities despite delegating management to others.
A third model is where the owner converts the sole proprietorship to a new entity that will allow external participation and ownership.
He or she could, for example, convert the sole proprietorship into a partnership and admit new partners who will then take a more active role in the running of the business. He could remain in the business as a silent partner or founding partner.
A founding partner is one whose role is not very active in the business, but one who is entitled to receive profits and pass a vote on important matters.
This model allows the business to continue in posterity and allows the founder’s dependants to continue reaping from the business despite the founder’s inactive role.
I have seen cases where founders remain as consultants or mentors even after conversion of the business. Under this model they may opt to exit fully from the business after a few years of co-owning the business with third parties. For example, they can first start by converting the business into a partnership. After a few years of remaining as a partner, they can then begin a full exit process.
Such a process would entail selling hisor her equity to an incoming partner who will then buy a stake from him. He or she would then sign a suitable agreement with the remaining co-owners on the extent of his involvement in the business. I have seen cases, especially in professional services businesses, where the founders remain on as consultants or mentors in the business.
It is a win-win situation as the business will continue to benefit from the founder’s goodwill and brand, while the founder continues to earn from the business even after exit.
