Exit Planning as a Business Strategy

April 25, 2017

Generation change in the business needs to be prepared early and strategically, otherwise it can become a problem not only in the particular company, but also as a macroeconomic problem. This exact conclusion was expressed in “Prudentia” and “Nasdaq Riga” organized morning debates (part of “TOP 101 of Latvia’s Most Valuable Enterprises” project) “Exit Planning as a business strategy”.

Owner’s change in Latvian companies is becoming a topical question. One reason is connected with the fact that since the restoration of independence 25 years have passed and many businessmen, who at that time founded their companies, have reached the age for going into recreation. The second reason is a necessity for additional resources, if the company has ambitions to develop further.

Change of the generation

In the discussion UPB holding founder Uldis Pīlēns acknowledged that in his company the change of generation has taken place successfully, because this issue has always been taken care of and the new manager generation has been nurtured. Even though in the year after the old management team stepped out a fall was observable, now it can be said that the company is developing with a new swing.

However, the appearance of a new generation in the business management can be a significant challenge. U. Pīlēns mentions some German studies, which show that many businesses are unable to find their successors. The biggest problems are for small and specialized companies, which are often also a family businesses. Furthermore, each of these companies is also an employer and taxpayer, therefore, if the closure of these companies will become a mass phenomenon, it can also lead to job losses. In addition, if in 2011 those wishing to engage in corporate governance were more than the market needed, now the situation is reversed.

"One must try to start ringing alarm bells for generation replacement. The first generation businessmen gradually leave business and it can lead to major structural changes," emphasizes U. Pīlēns. Though he agreed that the situation in Latvia cannot be directly compared to Germany, but this is an issue which must be touched upon also in Latvia.

To whom leave the business?

Usually every businessman’s dream is to leave self-established business for their children. Unfortunately, this cannot always be realized. In the discussion businessmen acknowledged that not everyone has the entrepreneurial gene, mentioning both 8% and only 4% of the entire society. It is therefore not necessarily that the fact that a parent is a successful businessman, will guarantee that the managing of business will suit their children. One of the "Prudentia" founders Ģirts Rungainis recalled a proverb, that from scraps until scraps there are three generations. Namely, if the first generation earns capital, the second generation usually only manages it, but the third one prostrates it completely.

Therefore, one of the exits is the creation of their substitution with company’s young and talented working people to whom leave the company's management at time when its creator will be willing to resign from active work. Unfortunately, it is often disturbed by the reluctance of the same founders to share control reins.

U. Pīlēns mentioned that business starters psychologically differs from those arriving in already working company. Typically, business starters have to undergo four psychological levels. The first is to start business from scratch, when decisions must be taken completely independently. In the second level company's team is already appearing and its creator must be able to reduce self-ego and take into consideration others. In the third level company managers appear who indulge themselves in full control of the processes, and the company’s manager main function becomes to retain together these functions. While in the fourth level a collective creativity appears in the company and the founder’s only function has become to work with people. U. Pīlēns said that problems arise because the companies that are not clearly focused on the development stuck in the first or second level, and dominate there by authoritarian management style. Most often these companies miss those moments when organic change of generation must take place.

"They do not need people who make decisions, they need people who are executing orders," this kind of management style in the discussion was described by the former Ukrainian Economic Development and Trade minister and investment banker Aivaras Abromavičius. At the same time he stressed that the change of generations in business is necessary because as a person becomes older his risk appetite decreases.

High expectations for the new generation

The truth is that also the new generation waits a completely different kind of challenge than their predecessors. Ģ. Rungainis acknowledged that 25 years ago starting a business everyone made mistakes and paid for them too. However, early stage companies were relatively small and therefore the cost of errors - small. But now every mistake already costs much more expensive - both in terms of money and the effect on company’s employee lives.

"Good managers do not lay on the streets," said Ģ. Rungainis, adding that this can be understood as the so-called older generation of businessmen are not in a hurry to entrust their business to the younger generation before being convinced of their ability.

Searching for cash

Not only those who want to leave the active business think about changes, but also those who want to expand the company's operations, but the available resources are already exhausted. Recently, "Madara Cosmetics" announced their desire to be publicly listed. Company’s co-owner Uldis Iltners told that initially five people invested in the company, who were also each in charge of a certain area of development. Then private investments were attracted from a private investor, but now it's the moment when further development is unlikely without a significant funding. U. Iltners explained that the stock exchange model is selected, because firstly the company wants to attract investment from private individuals - people who are "Madara Cosmetics" product users and believe in the company's further growth.

"Our experience is the following: do not be afraid of the fact that you will own less shares. The key is the development of the company. But in order to grow faster, with own resources is often not enough," said U. Iltners.

Company's "Pure Chocolate" co-owner Aivars Žimants who once created and then sold a food company that is now known as the "Puratos Latvia" admitted that it was psychologically very difficult decision. But from a business point of view it was the only possible option for the company to continue its development and achieve new operational capacities. Therefore, the current owners should be able to decide what is most important for them, and if it is the company's growth, then do not be afraid to give up control.

To whom pay attention

"Prudentia" managing partner Kārlis Krastiņš stressed that the change of ownership is a careful planning process, which lasts from 6 to 12 months. During the planning process one must to think about mergers and acquisitions activity in a particular sector, company's value creation, financial planning, contracts and customer base, assurance of company’s continuity ensured by main employees and personal aspects, such as the question: what will I do afterwards?

Planning attention should be paid to the set of potential buyers, how stable is the company's turnover and cash flow, what is the growth potential and uniqueness, market position, etc.

At the same time K. Krastiņš stressed that Europe’s family business association federations and KPMG survey, where family companies from 23 European countries took part in last year, shows that most want their business to leave in the hands of the next generation, either entrusting its management or transfer of ownership. Next year, 18% of surveyed businesses plan to transfer the company's management to the next generation, but a transfer of ownership - 8%. While 10% are hoping to attract managers not related to owners, but retain ownership. Another 8% are hoping to sell the business within a year, but 1% are thinking about getting listed in the stock exchange.

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