Exit Planning Tools for Business Owners

Exit Options

20 Red Flags to Look Out for When Buying a Business

by

Buying a business is an opportunity to skip the growing pains of launching a startup. It’s a chance to start with a proven model with customers and cashflow. How can you tell if the prospective business is a genuine investment opportunity or a disguised escape route for a burnt-out owner?

The following is a list of the top five things to consider when prospecting a business purchase – and some red flags for each category so you can recognize trouble a long way away. This list is no way exhaustive and there are many other issues to consider when buying a business. However, nailing these will tip the odds of success in your favor. Here are 20 red flags for buying a business you should look out for.

1. Why the Business is For Sale

Before you fall in love with a business, make sure you understand why it’s for sale. You’ll want to interview the owner about their experience with ups and downs, their efforts to course-correct, and what tactics have been most successful.

Above all, you should be checking to see if you have what it takes to take the business to the next level and why hasn’t the previous ownership attempted this course. It’s not just about if the company could be a profitable investment– it’s about verifying the fit with your skills and resources.

Red flags:


The owner is burnt out or seems to be filling multiple roles
A toxic culture and/or high employee turnover
A poor business plan that can’t compete with costs or competition
An industry that is contracting or being disrupted by technology.

2. Perform Due Diligence

Due diligence will occur after your Letter of Intent has been accepted. It’s a comprehensive process, taking anywhere from 45 days to 9 months. This is the most critical step in the acquisition process. This is your chance to get “under the hood” and see how the business operates and to validate what you have heard from the owner in the prior discussions.

Due diligence includes:

Verification of sales and cashflow
Key employees
Concentration risk – clients and key suppliers
Financial/Tax Review
Asset Consideration
Legal Review
Operational Efficiency
Company debt
Real Estate status – lease expiring, property owned by the owner.
Inventory – obsolescence, turnover
Environment Concerns

Red flags:


Findings are significantly different than similar companies
The business model is overly complicated
Report results seem unlikely
Cultural concerns

3. Financial Review

Although briefly discussed in the previous section on due diligence, this is where you will determine what the financial opportunity of acquiring this business will be. It’s critical to partner with an independent and qualified CPA / financial professional to ensure that the story the numbers are telling are accurate. It is your responsibility to verify the results being provided to you.

You’ll want to dig into:

Profit and Loss (P&L) Statements
Balance Sheet
Cash Flow Statements
Tax Returns
Accounts Payable
Accounts Receivable
Sales history

Red flags:


The owner claims that the company makes more than the books reflect
Customer concentration
Equipment will need to be replaced soon (significant early expenses)
Account receivable and Accounts payable aged past 90 days Lack of budget and rolling 13 week cash forecast.

4. Get Clear About the Industry’s Future

You’ll also need to research the future of your new company. Is growth likely? What are the barriers to entry? Competitive landscape? Is the industry fading in relevance, being disrupted by technology, requiring significant product development to stay alive?

Access to industry research and speaking with industry experts is important. Talk with future competitors under the guise that your are considering becoming an investor in the industry. Seek out recent transactions and what the multiples are. How have the new owners faired post-acquisition.

Red flags:


The owner claims to have little competition
Inability to adequately explain declines in sales or margins
The owner reports having a hard time keeping up with established competitors
The owner mentions continuous new competition
The industry isn’t flexible to modern innovations

5. Reputation Matters

A good reputation isn’t just nice to have– its value is measured in dollars. Companies with a good reputation benefit from higher profits, free marketing, and better hiring ability.

Clean branding has never been more critical in an age of consumer determination to buy socially, ethically, and environmentally friendly. With social media and reviews in the driver’s seat, it’s crucial to work with intact brands.

Remember, brands don’t get a redo just because ownership changed.

Red flags:

Poor social media or news coverage
Significant poor reviews
Mistrust in target consumer base

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries. He is the Managing Member of Blue Sky Exit Planning Services.

Personal Vision – Life After the Sale Part 2

by

In our last article about life after the sale we discussed identity. Even when business owners are comfortable with who they are, however, there is still the nuts and bolts issue of activity.

A business owner spends 20, 30, or (not uncommonly with Boomers,) 40 years focused on running a business. Unless they’ve built a substantial organization that is run by employees, it likely remains their biggest single time commitment right up until they leave. That commitment is frequently a lot more than 40 hours.

Even if the time “in the office” or “on the job” is less than 40 hours, there are the emails before and after hours, the texts, phone calls from unhappy customers or from employees who aren’t going to make it to work, and just thinking about what comes next, frequently at 2 o’clock in the morning.

Extended Vacation

When asked about activities to fill their week, many owners will say “I’ll have plenty to do!” That isn’t enough. “Plenty” requires some planning if it is really going to occupy the bulk of their work week.

After exiting a business, most owners bask in their newfound freedom. If we presume a selling price that’s substantial enough to allow them a wide range of choices, their first reactions typically include a few lengthy trips. These may range from a long-promised European vacation with the spouse to purchasing an RV to tour the National Parks.

This extended vacation period usually ranges from six months to a year. After that, most owners are looking for something to do. Their grandchildren (and their grandchildren’s parents) are less enthusiastic about having Grandpa and Grandma around too frequently. Travel is too tiring to keep it up indefinitely. Friends are rarely in the same position. Either they are still working and lack the leisure time, or they’ve progressed beyond the extended vacation period and settled down into their own retirement routine.

And as astounding as it may sound to enthusiasts, I’ve heard “I never thought I could play too much golf,” any number of times.

Life After the Sale…and After the Vacation

We use an exercise that brings home just how much the business has dominated an owner’s life. It starts by asking the owner to think a year ahead.

We start with the owner’s “average” work week. Let’s say 50 hours for this example. Then we begin deducting those activities that comprise their impression of “plenty to do,” putting an hourly commitment to each activity.

Regular travel, either for relatives or recreation, still comes close to the top of the list. We ask “How about two weeks away every quarter?” The response is that eight weeks a year is a lot, but could be enjoyable. Then we do the math: 8 weeks x 50 hours= 400 hours of vacation, divided by 52 weeks = 7.7 hours a week. A good start, but we still have 42 hours to fill to replace the business.

How about fitness? Getting into shape is often a goal, but working out every weekday only absorbs another 5 hours.

Working for a cause such as serving lunch at the local homeless shelter a few days a week, can use up another 10-12 hours. We still have 25 hours to go, or about half the time currently spent working.

We can still fit in 18 holes twice a week. That’s 8 more hours. At this point, many owners run out of ideas. That still leaves 17 hours a week, or two full “normal” work days.

The objective isn’t to merely fill up the time slots. It’s to illustrate just how big a void needs to be filled to replace the business. Whether your exit is planned for a year from now or ten, it is time to begin thinking about life after the sale.

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.

Personal Vision – Life After the Sale Part I

by

Life after the sale is often both the most important and most neglected factor in exit planning. Although (according to two different surveys in 2013 and 2022,) 75% of owners report regrets or unhappiness a year after the transition, exit plans continue to be constructed primarily around financial targets. In the event you haven’t heard this since you were five years old, “Money doesn’t fix everything.”

Superficial Planning

To be fair, most advisors include some conversation about “life after” in their planning conversations. Unfortunately, they are often satisfied with the features associated with an abundance of free time. Visiting the family, RV’ing through the country, playing 72 holes of golf a week, or seeing the great capitals of Europe can all be accomplished in the first year after ownership.

When they attempt to broach the idea of longer-term activity, the client’s answer is often “Let’s get the money. Then I’ll worry about what to do with it.” It’s challenging to push beyond the client’s desire to focus on the most obvious goal, especially when it seems to enable everything that follows. Nonetheless, owners who are unhappy because they didn’t get enough money failed either to understand the realities of their transactions or the future cost of their life plans. That certainly isn’t 75% of planning clients.

We are discussing the far greater number who have sufficient funds, but after their initial splurge of free time are unsure of what to do next.

Emotional Preparation

The first issue an exited owner faces is identity. “I used to own a company” quickly wears thin, and increasingly fades as years pass. “I’m retired” is a nebulous identity, and lumps them into a group with every wage earner who says the same. That’s a class they’ve proudly differentiated from for most of their lives.

Some mental health professionals have compared the emotional reaction to missing ownership identity to post-partum depression. Their world has changed overnight. The principal subject of their interest is gone, and they aren’t sure what replaces it. Post-partum is characterized as including “a feeling of guilt, worthlessness, hopelessness or helplessness.”

As an owner, there was always something else that needed their attention. Now there isn’t. Distress from discussing the daily news (which they now watch more frequently) used to be countered by a requirement to attend to the business. Now there is no business to attend to. The feeling of “What I do is important to a lot of people” has gone.

Identity in Life After the Sale

We encourage clients to at least mentally design their next business card. Handing someone your card is a shorthand version of declaring your identity. The first attempt by many is jocular but meaningless. “Part-time Philanthropist, Bon Vivant and Man About Town” is funny, but only once. “Grandparent, Outdoorsman and Classic Car Mechanic” is better. At least it describes real activities for further conversation.

“Business Counselor and Chairman of the Board of (Charity Name)” describes an identity, ongoing contribution to something or someone, and a role of importance. It doesn’t have to be true today (we aren’t printing the business cards yet,) but it’s at least aspirational.

Building a plan for life after the sale begins with establishing a future identity. There are several other components that we will cover in the next two articles.

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

by

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.

Family Succession Planning: Who Gets the Office?

by

 
Sometimes the most sensitive question in family succession planning is “Who gets the office?”

Dad’s (or Mom’s) office is usually perceived as the center of authority by the employees and other family members. That is where you got called on the carpet, where you were informed of promotions, or where you took an insolvable problem.

When a parent/CEO is handing off operating responsibility, there is often a lag, sometimes measured in years, between stepping back from the daily decisions and completely separating from the premises. There is great value in having that experience available for coaching, mentoring, or just to lend perspective on new problems, but where should they sit?

Family succession planning

Timing

The question of the appropriate timing for an owner to surrender his or her seat of power can be sensitive. The retiree often worries about becoming irrelevant. The fear of appearing irrelevant is just as strong. The boss’s office is a symbol. Often the owner who is stepping down would rather have no office at all rather than a smaller, less prestigious location.

I’ve seen owners elect to use the conference room as their “temporary” post. That can create other issues of its own. Are scheduled meetings now subject to last-minute relocation if the boss (who will always be the boss, regardless of title transfers) commandeers it for his own use? Equally distracting is when the conference room is scheduled as before. Then the boss arrives planning to do some work and winds up wandering through the offices looking for a place to camp out.

Perception

The situation is exacerbated when multiple children are assuming ownership. Who gets the office? Parents often have a vision of equality among their children. Ricky will handle sales, Peter does the accounting, and Ellie takes care of inventory and purchasing. The three will make business decisions jointly.

Regardless of voting rights, or any amount of explanation to the employees, one of the children will be perceived as functioning at a higher level of authority by assuming possession of the boss’s office. As in George Orwell’s Animal Farm, all are equal, but some are more equal than others.

Family Succession Planning

Settling who gets the boss’s office is an important part of any transfer. Too often it is treated lightly, only to be more seriously addressed after the issues are recognized. The symbolism of moving offices is strong, and sends a message to everyone. In some cases, remodeling to change the whole office configuration may be the best solution. New drywall is a cheaper fix than lingering resentment among shareholders or confusion in the ranks.

It’s often the little things in family succession planning that matter. One owner who was continuing in his office after his son was named President asked what he could do to make their shared space better reflect the change.

“Well Dad, “ the son responded, “maybe you could take down those pictures of our fishing trip when I was 11 years old.”

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.