Exit Planning Tools for Business Owners

Building Value

Manage Activities; Lead for Results

by

A few weeks ago I posted a comment in the Business Journals Leadership Trust Forum about a life lesson I learned. The difference between effort and outcomes – Manage Activities; Lead for Results.

They reached out and asked if I could expand my comments a bit. Those of you who know me won’t find it surprising that it grew into an article.

You can find it here. I hope you enjoy it. Remember, lead for results.

 
Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

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

Is Google Making Us Stoopid?

by

As an Exit Planner, most of my engagements involve assessing a management team. They may be the intended buyers of the company, or else they are key factors in the saleability of the business.

The biggest and most frequent complaint I hear about managers is that they don’t know how to THINK. Business owners lament the inability of employees to discern critical paths, assess alternatives, or analyze complex problems.

Examples of Thinking Shortfalls

A CPA is doing a final review of a client’s tax returns, as prepared by an associate. As with many business owners, the client has two related entities, one acting as the management company for the other.

The reviewing partner notices the income from management fees in one entity, but no corresponding expense deduction in the other. The associate explains that the client’s books didn’t show the offsetting expense, so he ignored it.

The owner of an IT services company receives an irate call from a client. His technician has just spent two billable hours on the client’s PC, and it still won’t print his documents.

When the employee is asked for an explanation, he points out that the client said he needed updates to his printer drivers, and that is exactly what he (the technician) did. At no point did he try to determine whether updating the drivers would solve the customer’s problem, or even what that problem was.

The customer made a request, and the technician complied. He didn’t perceive the customer’s lack of technical knowledge as a factor.

As the adage goes, “When someone asks you for a drill, what he really wants is a hole.” If you are in any business where the customer expects you to be more knowledgeable than him (and why would he hire you otherwise?) thinking is a core competency.

I Can Look Up the Answer

Numerous educators and managers have related to me the effect of the Internet. Students resist rote learning. Employees refuse to train in procedures. Their answer is ubiquitous; “Why do I have to know that? I can look it up whenever I need it.”

In some circles, gaining “knowledge” is a game of speed and skill. Participants in a conversation whip out their electronic lozenges upon any reference to a historical fact, person or thing name, geography question, et al, ad infinitum. (Don’t know Latin? No problem. Google it.)

What is eroding is the concept that an answer may not be the best answer, or even a good answer. It’s just an answer.

Life isn’t “Fill In the Blanks”

Getting an answer doesn’t mean you’ve solved a problem. What we are losing is the ability for critical thinking. For saying “Wait a minute. That is one approach, but might there be others? Is there a better answer?”

We used to have to work through that step by step in our brains. Now we are becoming conditioned to accepting the answer on a little screen as the final word.  It’s great for learning how to change a faucet, but maybe not so hot for solving a customer complaint.

Your management team is the most important factor in realizing value for your business.  If you are planning a fully controlled (time, method, and proceeds) internal transition, they are your buyers and the guarantors of any financing you may underwrite. If you are selling to an external buyer, he or she wants to see a business capable of running (and making good decisions) without you.

Either way, you need to teach them how to think.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

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

Exit Planning: Controlling Your Choices

by

Many owners are reluctant to plan for their departure from the business. In some cases it’s because they are too comfortable with ambiguity (see my previous post.) For others it is because they fear losing control. They believe that setting a final date for their departure, even tentatively, starts a process that will take on a life of its own.

The tag line of this column is “Control the most important financial event of your life.” Control is the key. Refusing to deal with the realities of an eventual transition from the business is surrendering control. Sooner or later, something will happen that requires a transfer of the business. Then it is too late to exercise the options you have now.

Exit planning three, five or ten years before your anticipated transition gives you a clearer picture of the direction your company needs to take if it is going to serve your personal objectives.

All business owners want to grow their companies, make more money and work a bit less, but few things are more disappointing than finding out that the work you put in won’t result in the outcome you expected.

What if you work yourself to the point of exhaustion, only to find that you are too critical to the company’s success for anyone else to buy it without tying you into a long term employment agreement? What if you rapidly grow your revenues, but discover that your margins are too thin to attract a decent acquirer? What if you build a great management team, but they leave to start a competing business? What if you invest in new equipment  that looks great, but doesn’t add to the value of your company?

Understanding Your Choices

All these things would be addressed in a comprehensive exit plan. It’s not only about your life after the business, it’s about the life of the business after you. Exit planning requires that you look at your company through both the eyes of both a seller and of a buyer.

As a seller, you have certain goals for what you would accept as a successful exit. Usually those are financial, but other factors sometimes count for even more than the sale price. What future do you envision for your employees and customers following the sale? Is the company’s reputation, or it’s contribution to the community important to you? Answering these questions could have an impact on the type of buyer you will consider.

What are the intangible assets of your business? Are your employees able to make good business decisions without your oversight? Do they dependably execute their roles according to documented processes with consistently high levels of quality? The ability to duplicate your success is the single most important factor in a buyer’s calculation of value.

How sticky would your company’s relationship with key employees be in your absence? Are they committed to the company because of a sense of ownership, actual ownership, or long-term incentives? If their only tie is personal loyalty to you, the value proposition to a buyer is a lot riskier.

Controlling Your Choices

All these questions should be part of your planning. Yet most owners don’t ask them until they are on the brink of retiring. That is a mistake. Knowing what you want to accomplish, or in other words – where your finish line is, is critical to building your business in the right way, in the right direction.

Having an exit plan doesn’t mean that you have to implement it on a specific date. You can choose “wait and watch” from the options outlined in this short video on the Five Roads to a Business Exit.

If you know your destination, your choice of a pathway becomes much easier.

Ambiguity Kills Value

by

Ambiguity kills value. That was a key point in a white paper from Orange Kiwi that I read over the holidays. Taken from the PhD thesis of Dr. Allie Taylor, the paper describes the psychological profile of  entrepreneurs, and their historical reluctance to begin an exit planning process.

According to Dr. Taylor, entrepreneurs have five major behavioral traits; Risk Taking, Innovativeness, Need for Achievement, tolerance for Ambiguity and a locus for Control. This follows closely my description of the mind of an entrepreneur in Hunting in a Farmer’s World. In that book I discuss the traits of tenacious problem solving and the ability to navigate in the fog.

Ambiguity and Dopamine

That ability to choose a path where others don’t see a way forward is key to a business owner’s ability to stomach risk. What Dr. Taylor points out, however, is that some owners fall in love with their own tolerance for ambiguity. As Simon Sinek points out in Leaders Eat Last (and I also discuss in Hunting,) problem solving provides an owner with a little shot of Dopamine dozens, or even scores of times daily.

Dopamine is the same neurotransmitter that drives substance abuse. In very real terms, an owner’s need for regular dopamine titillations can make decision making addictive. Anticipating a life without the business can subconsciously create a fear of life without the business.  

That’s why owners are reluctant to discuss exit planning. Despite the obvious wisdom of controlling the most important financial event of a lifetime, the personal void that lies beyond ownership is scary. As with many other potentially unpleasant things, from going to the dentist to funeral prearrangements, it’s easy to deal with it…later.

Ambiguity Kills Value

The problem with embracing ambiguity too much is that it can damage your business. Management by firefighting is costly. As Abraham Lincoln said, “If I had eight hours to cut down a tree, I’d spend seven of those sharpening my saw,” Fixing problems almost always costs more than preventing them. Dealing with distractions reduces the time you have available for selling, creating or teaching.

Avoiding the uncomfortable task of exit planning leaves you much more likely to deal with it in response to one of the Dismal D’s. (Death, Disease, Disability, Divorce, Declining sales, Dissention among owners, Debt, Distraction, Disaster or Disinterest.) That’s when the value of your most important asset, a thriving business, starts to plummet.

We all like a bit of ambiguity. Our decision making abilities are what makes us successful owners. Exit planning should be a process of gathering information about your possible decisions, not a ticking clock controlling your future.

Embracing Your Options

Whether you plan to eventually sell your business to a third party, pass it on to family or create a transfer to employees, you still want to assess your financial performance compared to industry standards. Your management team needs to be able to run the company without you. Your processes should be well documented. Most importantly, you should be thinking about what you will do when those hits of decision-making dopamine stop coming.

Once you have the components in place, you can control the timing, proceeds and method of your transition. Until then, you are just waiting for ambiguity to bite you in the butt.

How prepared are you? Take the ExitMap® preparedness Assessment at www.YourExitMap.com

Four Basics of Exit Planning 1: Valuation

by

There are four basics an owner should address before beginning any exit, succession, or transition plan. They are Valuation, Distance to Goal, Prospective Buyers, and Professional Team.

First, my apologies for missing a tri-weekly post. Between trips to Denver for BEI’s National Exit Planning Conference, Dallas for a client, San Antonio for our own XPX Exit Planning Summit, Nashville for the national EPI Exit Planning Summit, and St. Louis for Archford’s Metro Business Owner Summit, I kind of lost track of my posting schedule.

Here is the first of the four basic requirements. I promise not to dally in posting the rest of the full set.

Understanding Valuation

Value is the starting point for all transition planning. Any decision, any business plan, and every retirement projection (either for time frames or finances) must start with the value of your business today.

Knowing the value of your business is different from thinking you know it. I talk to many owners who say “I met a guy at a trade show, and he told me that he knows a guy with a business just like mine who sold his company for five million dollars. I think I’m a little bigger than he was, so I know my business is worth at least six million.”

Sounds foolish? How about “My accountant says that all small business sells for about five times earnings.” Or “Everyone in my industry knows that all companies like ours sell for one and a half times revenue.”

Any valuation estimate that is in the same sentence as “all,” or “everyone” is a crock. Multiples may serve as guidelines, but the value of a specific business is always unique to that business.

How much is a manufacturer of disposable paper products worth? What if they specialize in paper straws? How much does that value change every time McDonald’s or Southwest Airlines announces that they are switching to paper straws? How much is it worth if it is the last paper straw manufacturer in the USA (like Aardvark® Straws?) If you understand the value, your mental estimate should have changed with each sentence.

Every change in the above paragraph described an intangible. Events and market conditions are as important, or in some cases more important, than last year’s numbers. Valuation starts with profitability and cash flow, but the real price that someone will pay for a business lies in the intangibles.

Intangibles

There are scores of intangible factors affecting business value. Most are related to customers, employees, or systems. Ask yourself these questions (although there are many more.)

  • Customers:
    • Do you get more than 20% of your sales from one customer?
    • Is your revenue recurring (by contract) or a series of one-time transactions?
    • Is your value proposition more than just “good service?”
    • Are steady or repeat customers increasing their purchases?
    • Can you forecast their purchasing accurately?
  • Employees:
    • Do you have managers that can run the day to day operations without you?
    • Are your key employees too close to retirement age?
    • Is turnover too high, or nonexistent?
    • Are important positions cross-trained via a formal process?
    • Do you have non-competes and/or long term retention incentives?
  • Systems
    • How accurate is your budgeting when compared to historical reality?
    • Are all processes documented and followed?
    • Is equipment carefully maintained?
    • Our proprietary systems and knowledge protected?
    • Do you track the effectiveness of sales and advertising expenses?

All valuations begin with profitability and cash flow. Most business appraisals take at least a cursory look at a few of the intangibles listed above. Buyers, however, will look at all of these factors and more.

Understanding the four basics of exit planning starts with valuation. If you don’t know where you are, it’s tough to plan where you are going.

For over twenty years, business owners have asked me “What can I do to increase the value of my company?” My answer is always the same.

“Exactly what you should be doing to improve it every day.”

Do you think you know the value of your business? Try the “Sellers Sanity Check,” a free tool at YourExitMap.com

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

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