Friday’s Exit Strategy: Is Your Small Business Your Future Pension?
During a call earlier this week with ChannelE2E, an MSP business owner/founder described why he doesn’t plan to sell his company. Instead, he’s transitioning day-to-day operations to his chief operating officer (COO). And the owner/founder will gradually step away from the company — which will essentially pay him a monthly pension over time.
To be clear: The owner is not signing up for a formalized small business pension plan. Instead, the owner/founder will essentially retire but earn a monthly sum from the business (for some predefined amount of time) and treat that as a ‘pension’ of sorts.
Owner Transitions/Executive Agreements
It’s a promising strategy. But it also invites some risk for executives on both sides of the table. Among the variables:
- The owner — now 60 years old — and his COO have to align fully on a long-term business plan, financial targets, workloads, roles and responsibilities.
- The COO has to deliver on those financial targets in order to keep the business healthy and maintain a monthly payment to the founder.
- If the business underperforms on the financial plans, what safeguards are in place — if any — to ensure the owner/founder still receives that monthly payment?
Additional wildcards could involve an actual business ownership transition. For instance:
- In return for a monthly payment to the retired founder, does the company ownership gradually shift to the COO — and if so, at what rate, and over what time period?
- The founder and the COO also are discussing potential M&A scenarios: At what price would the founder and his COO potentially be willing to sell the business — and what financial terms associated with the deal would be acceptable?
PS: Surely I missed a few other variables. Feel free to post a comment or email me key scenarios I failed to cover (Joe@AfterNines.com).
CPA Strategies and More
While many MSPs and IT services providers are struggling to navigate owner retirements/transitions, it might be wise to steal a few ideas from the Certified Public Accountant (CPA) sector.
For decades now, many CPA firms have had financial plans that transition owners/partners out of the business. The idea is to properly pay the exiting partner over time — without draining the day-to-day business of its financial needs.
In terms of our own business here with ChannelE2E and parent company After Nines Inc., my business partner (Amy Katz) and I have a pretty straightforward 50-50 ownership agreement. One of our top priorities each year is funding our respective SEP-IRAs. We’ve also discussed scenarios where the business moves forward after our respective retirements. But frankly, those scenarios seem so distant. I’m certainly aging. But hopefully, not that quickly…
Joe Panettieri (@JoePanettieri) is co-founder and executive VP of After Nines Inc. and its IT media platforms — ChannelE2E and MSSP Alert. His great grandfather arrived to the United States from Italy around 1917, charting the way for three generations of entrepreneurs.