Exit Planning Tools for Business Owners

Building Value

What is a Certified Business Valuation and When Do I Need One?

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A Certified Business Valuation is a comprehensive assessment conducted by a qualified professional to determine the fair market value of a business. It involves a systematic analysis of various factors such as financial statements, industry trends, market conditions, company assets, intellectual property, customer base, and other relevant aspects to estimate the worth of a business.

You may need a Certified Business Valuation in several situations, including:

Selling or Buying a Business: When you’re involved in a business sale or acquisition, a valuation helps determine a fair asking price or offer, ensuring both parties understand the business’s value.

Obtaining Financing: When seeking a loan or financing for your business, lenders often require a valuation to assess the value of the company and its ability to generate cash flow to repay the loan.

Partnership Dissolution: If you’re part of a dissolving business partnership, a valuation is essential to determine the fair value of each partner’s share and facilitate a smooth division of assets.

Estate Planning: Business valuations are necessary when planning for estate taxes or distributing business assets as part of an inheritance. A valuation helps establish the value of the business for tax purposes and ensures a fair distribution among beneficiaries.

Shareholder Disputes: In case of disagreements among shareholders, a valuation can be conducted to determine the value of shares or ownership interests, aiding in resolving disputes or facilitating a buyout.

Financial Reporting: Valuations may be required for financial reporting purposes, such as complying with accounting standards or fulfilling regulatory requirements.

Litigation or Dispute Resolution: During legal proceedings like divorce settlements, bankruptcy, or insurance claims, a certified valuation can provide an objective assessment of the business’s value, serving as evidence in court.

It’s important to note that the specific circumstances and requirements for a Certified Business Valuation may vary based on jurisdiction and the purpose for which it is being conducted. Consulting with a qualified business valuator or professional accountant can help you determine when and how to obtain a valuation tailored to your needs.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Impressions of Value in Exit Planning

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Business owners, advisors, and buyers frequently have widely different impressions of value when it comes to a business.

The Pepperdine Private Capital Markets Survey canvasses intermediaries who sell privately held Main Street and mid-market companies. One question is about the obstacles that prevented the sale of a business. The number one response is “Owners’ unreasonable expectations of value.”

That may be self-serving or an excuse. Nonetheless, valuation is a sensitive subject. Many owners have worked in the business for 30 or 40 years. They assume it will fund their next 20 years of retirement. Their target price is set only by their desired lifestyle after the business.

Different Values for the Same Business

Unfortunately, many owners have an opinion about the value of their business that is grounded in the multiples of public companies. Others are based on conversations with colleagues, salespeople, and articles in their trade publications.

Impressions of valueEven those who have professional appraisals of their business may not understand that the purpose for getting your valuation may skew the results. Valuations that are done for estate planning or internal transfers of equity often have little resemblance to a company’s fair market value.

Various people including H.L. Hunt and Ted Turner have said “Money is just a way of keeping score.” For many owners, the emotional tie between the perceived value of their company and their self-image of success is closely connected.

Some advisors skirt this issue by recommending that their clients get a professional opinion of the fair market value of the business. While this is certainly a safe approach, it can take substantial time. It also requires considerable assembly of the underlying data for the appraiser. This can slow down any consulting project considerably and may derail it entirely.

Impressions of Value

A coaching approach helps the owner understand the practical boundaries surrounding the value of the company without either dictating to him or taking the project in a tangential direction. We do that by helping the client model “lendable value.”

We start by explaining that most businesses are valued by their cash flow. There are certainly many areas where value can be enhanced. These include intellectual property, exclusive rights to a product, protected sales territory or long-term contracts. Owner Centricity™ or customer concentration can also reduce the fair market pricing of your business. In the final analysis, however, cash flow to pay an acquisition loan is of principal concern to a lender.

SBA minimums for financing include a cash-to-debt service ratio (1.25 to 1) and required owner compensation – usually $75,000 a year for acquisitions under $500,000 and twice that for larger deals. While not all lenders follow SBA guidelines, they are a useful national baseline for looking at your value.

The company may well be worth what you think it is, but finding a lender to finance it is a different problem. Understanding a lender’s impression of value before starting sale negotiations can save you considerable time and negotiation down the road.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

“Work From Anywhere” Comes Full Circle

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Work from anywhere has been a necessity, an epithet, an obstacle, and an opportunity over the last 3 years. To paraphrase Aristotle’s axiom about Nature (“Horror Vacui”), business abhors a vacuum. Where one occurs, it is quickly filled.

Work from anywhere started as a COVID-induced necessity. During the lockdowns of 2020-2021 (and longer in some places) we all had a crash course in video calling, VPNs, and virtual meetings.

Employees quickly expanded the definition of anywhere. They tired of shunting the children off to a bedroom during conference calls, or using office-like backdrops to hide their kitchen cabinets. Soon they began changing their backgrounds to something more aspirational, like a mountain cabin or a scenic lake.

From there it wasn’t much of a leap to make the mental shift from a make-believe environment to a physical one. Pretty soon employees were calling in from real mountain cabins. In many cases, they shifted to someplace where the cost of living was much lower than in their former metropolitan workspace.

Work from Anywhere as an epithet and an obstacle

As employees moved further afield from their office environment, bosses began to sound off. “We aren’t going to pay Los Angeles wages to someone who has a Boise cost of living,” was a commonly heard complaint.  Most put up with it because qualified help was getting harder to find. Hiring remotely was too hard a new skill to master.

The complaints of employers grew louder as they began to ask employees to return to their former location of working activity. They made arguments about deteriorating corporate culture or a lack of mentoring opportunities.

At the same time, stories surfaced about workers who were getting full-time paychecks from multiple employers, or who were “quiet quitting” by doing as little as possible. The “Great Resignation” forced many organizations to put up with it. If you wanted to keep employees, you needed to accommodate their demands.

Then the work-from-anywhere poaching started. If an employee could do the job from a thousand miles away, why not just hire people from a thousand miles away? Now recruiters could dangle Los Angeles wages at candidates from Boise. Many employers saw work from anywhere as a curse costing them their best talent.

Work from Anywhere as an Opportunity

But as I said at the outset, business abhors a vacuum. Every action has a reaction. When the job can be done from anywhere, does that mean anywhere?

work from anywhereIf the higher cost of living centers can fill their needs by hiring people who are accustomed to earning less, why shouldn’t employers look at those candidates before the local talent? The Internet allows almost-instant communication across countries, what about across oceans?

In the last few months, I’ve worked with employers who are hiring accountants in India, staffing recruiters in the Philippines, programmers in Argentina, support techs in Colombia, and screening nurses in Nicaragua.  None of these employers are multinationals. Each one fits the SBA’s definition of a small business.

Their new employees are educated, English speaking, have the same hours as the employer, and are thrilled for the opportunity. Some are hired directly through a local placement agency. Others work for an organization in their home country that makes them exclusive to the client and promises to replace them if needed.

Most of the wages appear to be about 50% more than the same job would pay in the country of residence, and roughly half of what the position in the U.S. would cost.

Business has once again filled a vacuum. I wonder what is next?
 
John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Contingency and Continuity Planning

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When business consultants talk about preparing for unforeseen problems, they frequently commingle the terms contingency and continuity. The terms are not synonymous, and there are important differences between them.

Contingency Planning

Contingency planning is generally accepted to mean how a business will respond in the event of a disaster. This could entail a building fire, severe weather, a strike of key service workers, civil unrest, or riots (depending on the audience.) Additionally, in the age of cybersecurity, ransomware or a denial of service attack, identity theft, and electronic fraud are all well qualified to be categorized as disasters.

Generally speaking, these are all insurable events. Contingency planning often recommends insurance as a major component of preparedness along with remote working capabilities or alternative production resources. In privately held businesses, however, contingency planning has one weakness.

It assumes that the owner of the company will be available to oversee the implementation of the plan.

What if the disaster is at the top of the pyramid? Most businesses need a continuity plan that addresses the sudden absence of the owner. We start the conversation with a simple scenario.

“What if you are hit by a bus on the way to work tomorrow? You are rushed to the hospital, and no one knows where you are. When they find out, it appears that you will be unable to respond to questions for weeks, if not months. How will the business operate for that time?

Continuity Planning

Exit Planning is presumably designed around a voluntary departure from the business, but what if it isn’t voluntary? Where contingency planning looks at a variety of financial risks, continuity planning is focused on the operational problems of an owner’s absence.

Continuity planning starts with the most elementary task-based assignments. We ask questions like, who opens the business? Who informs the employees, the customers, the vendors, and the bank? How are they told, (By email, phone call, personal meeting, or teleconference?) Who distributes funds, draws down the credit line, and signs contracts? Are there specific customers or vendors who will require special treatment?

Additionally, if employees are expected to step up to a higher level of responsibility, will they receive contingent compensation attached to their added duties? Many owners rightfully anticipate that employees will shoulder additional duties out of loyalty, but loyalty has a limit. What if they are in this position for months?

Are there limits on the employees’ decision-making authority? Can they decide on new capital investments, or enter into new vendor relationships? If there is a dollar limit, who has the authority to exceed it if necessary? Who are the key advisors they should consult if they have questions? Is there a compensation agreement with those advisors if they need to be closely involved or engaged for an extended time period?

Contingency and Continuity

These are just a few of the operational answers required on Day One. The owner’s extended or permanent absence will also involve decisions about credit facilities, family income, real estate, working capital, buy/sell agreements, licenses, cybersecurity, and the long-term disposition of the business.

We take a practical look at the issues of an owner’s absence from the business, whether it is planned or unplanned. Continuity planning is just one component of modeling “life after the business.” For the great majority of exit planning discussions, it is a useful but not urgent exercise. If a Continuity plan is needed, however, it may be the most important thing we’ve done for that client.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Key Employees: Build and Protect Business Value

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Key Employees

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

  • Makes a substantial business contribution
  • Possesses critical information or knowledge
  • Maintains and nourishes key contacts and relationships

Sellable Business

In helping clients plan to build a sellable business, and then eventually exit on their terms and conditions, we emphasize that “key people are a key value driver” in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

  • Building business value
  • Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that is aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners Beware

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as make up for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.