Exit Planning Tools for Business Owners

Corby Megorden

A Hazy Crystal Ball is Better than a Rearview Mirror

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Car side mirror with a rear view of a clear road and a sunset in the mirror.Several years ago, I did a cross-country trip with my family. We laid out a rough plan of what we wanted to see, how long it’d take, and most importantly, what we wanted to eat!

When we hit the road, I did not drive looking primarily in the rearview mirror, with an occasional glance at the gas gauge and the road signs. I looked ahead and tweaked the plan. Yet, that is often how business owners run their businesses. Often, this year’s business planning consists of, “let’s do what we did last year – just more of it.” We look at whether we have cash in the bank, check our financial statements, and compare how we fare against last year. Although this is a common practice we should run our businesses with an eye on the future.

No one has a crystal ball that provides perfect clarity on the future. A million factors and forces affect our business and most of them are not within our control. Forecasting and planning require looking ahead a taking our best (hopefully educated) guess on what the future holds. I want to convince you that a rough, hazy plan is better than no plan at all!

If you do not know where to start, here are some practical pointers.

MAKE THE PLAN

Every forecast needs to answer the following questions:

  1. Where am I? Assess your revenue, profitability, operations, market position and see how you are doing. What is working well and what isn’t?
  2. Where do I want to be in the future? Lookout 3 to 5 years and write down goals. How much revenue growth, how much net income growth, what improvements are necessary for the business?
  3. HOW do I get there? This is most critical. Identify actions/investments you could take/make to attain your goals. These might include:

    4. • Establishing new markets
    • Creating new products
    • Adding key staff
    • Improving processes

  4. What is most important? Prioritize your improvements and plan them over 3 to 5 years. Tackle 2-3 goals per year.
  5. The end result should be:

• How much will my revenue grow in the next few years?
• What improvement do I need to make?
• How much will my bottom line grow in the next few years?
• Who do I need to hire/get on the bus?
• How much will this cost?

WORK THE PLAN

Once the plan is created, establish a consistent review and adjust as needed. This may include:

  1. Review your monthly financial performance against the plan. Include revenue, cost of goods, overhead, net income, and other appropriate key metrics. This implies a monthly budget.
  2. Conduct a monthly review of strategic projects. Routinely assess whether you are making progress on your major goals. Are you ahead? On track? Behind? Dead-in-the-water?
  3. Adjust course. If you are not “on the plan,” why? What are the causes of the variance and what do you need to do to get back on track?
  4. Modify the plan as needed. The “crystal ball” is hazy and there is no perfect plan. As you adjust you will learn your capacity for change and identify ways to improve.

Start Now and Keep It Simple

In planning our road trip, we identified key sights to see along the way and saw most of them. We paced ourselves and enjoyed the trip. You may not know how to forecast, but you DO know your business! Trust your experience and make a “road trip” plan to identify the following, at a minimum:

  • Revenue goals for next 5 years
  • Net Income goals for the next 5 years
  • New Critical Hires & the cost
  • Major projects & the cost

When you shift your gaze out, you are more able to see the business as an asset, rather than a job. The team knows where you are going and will often get on board to help you stay on track. Looking ahead allows you to see the potholes in the road before you hit them and it helps the journey become more predictable. Hopefully, you will start to enjoy the business more. Proven ability to grow is a key value driver when selling a company but, it may also help you build the company you want to KEEP!

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Die at Your Desk or Go Golfing?

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Die at Your Desk or Go Golfing?

The truth of the matter is, every small business owner will eventually transition from the business. While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.

Whether you love your work so much that you would be happy to die at your desk, or you would like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit. And planning has significant benefits.

The Business Enterprise Institute defines three major objectives that a business owner should consider before reaching that point where they must exit the business.

    Timing of your exit – When do you want to leave?
    Financial needs after exit – how will you support the post-exit lifestyle you desire?
    Who’s going to take care of your baby and run the business when you are not there?

When do you want to leave the business?

Unless you want to die at the desk, you will want to consider at what point you desire to make the transition. Pick a time frame and begin considering the implications of that time frame. When do you back out of the day-to-day operations? How long do you take to do this…years or months? Can I effectively transfer the company to whom I wish to transfer it within that period? How long will it take to train my successor or children to be owners? Will I be able to realize my financial goals within that time frame? Will market conditions lend toward a successful sale to a third party? The time frame you decide on is a key driver. And, it is essential to establish at least a target date, or you could end up on the perpetual “I’m going to leave in around five years…” merry-go-round.

What income do you need?

Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself. However, The large majority of owners require some type of income either from the business at the sale, or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity. As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.

Who’s going to watch over your company?

Hopefully, you have enjoyed working in your business and there is a sense of giving up “your baby” to someone else. Choice of a successor is a significant, and often an emotional decision. There’s the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company. Several options exist, from passing the business on two children, selling it to key employees, selling it to a trusted third party, or even an employee stock ownership program. So significant factors come into play here – the most critical being who has the skills, knowledge, and temperament to own and run the company as well as you have.

Should a business owner have family in the business, the above questions become even more significant. Taking the time to thoroughly discuss your goals and desires with your spouse, children in the business and children not in the business are all very significant. It’s often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family. Planning enables conversations to be had so everyone’s expectations are clearly understood before that day when the transition occurs.

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Exit Planning and Marathon Runners

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“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor. We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything. We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

What has this got to do with Exit planning?

Business owners know they should be taking steps to plan for the future, but all too often they don’t seem to get around to it. With each passing year comes the thought, “I’ll get to that.” But, like the good intentions for diet and exercise, the longer one waits, the harder it gets.

Exit Planners Help Businesses Get In Shape

Exit planners are a bit like personal trainers. What personal trainers do for fitness, exit planners do for businesses. They take a look at the shape a business is currently in, and develop plans to improve that business until it is in optimal condition, usually so that the business can be transferred or sold in such a way that the owner remains in control of the sale. A business in less than optimal condition often means that the owner will lose some of control of the sale to the whims of the buyer.

Dream Big

A middle-aged person who develops a dream to run a marathon soon finds that just reading about marathons is not enough to get in the race. Still, if they never dream the marathon dream the race has no chance of being run at all.

Business owners who intend to sell also should not hesitate to dream big, even if they do not plan to sell for five or ten years. Big dreams mean big accomplishments. Every business owner should dream big about two things:

1. The ultimate objectives (financial, personal, family, and/or philanthropic goals) for leaving the business.

2. The “transferable value,” of that business, which should ensure that the owner does not have to go with the business when it is sold.

Set Small, Achievable Goals

Like someday wanting to run a marathon, dreams are easy to write down, but need diligent daily work to achieve. They will not happen on their own. Whether you a baby boomer nearing retirement, in the middle of your career enjoying the excitement, or just at the very start of a venture, taking these simple steps will prepare you for the future:

1. Get help to develop a “workout plan.” Just as it can be helpful to get a personal trainer involved when you begin to exercise, the same is true for business planning. It’s a complex process that requires specific knowledge in certain areas (legal, financial, estate planning, human resources, etc.) to ensure your business gets in optimum shape.

2. Set simple goals – Simple goals when one begins exercising help to prevent accidental injury, and the same is true for exit planning. Three simple, easily achievable goals are:

     a. Determine how much money you need, or want, for retirement

     b. Decide when you want to leave your business

     c. Identify the person, or persons, to whom you want to transfer the business

3. Start slowly – you can’t rush getting into great physical conditioning, and you can’t rush the business planning process. Set realistic goals and act on them one by one.

4. Stay steady and consistent – sticking with the plan and taking small, consistent steps will pay off. Make time in your busy schedule to do the essential steps.

5. Measure progress – in order to ensure you’re making progress toward your goal you’ve got to measure it. Setting 90-day goals allows manageable progress and the ability to celebrate the small wins.

As you work hard in the business day-to-day, take the necessary time to prepare for tomorrow – starting your exit planning program now will maximize your quality of life in the future.

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

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.