Exit Planning Tools for Business Owners

Exit Options

Lifestyle vs. Legacy – Part 1

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There are three types of business owners. The first, which encompasses the vast majority of small businesses, is the one who simply wants to make a living from running his or her business. They dream of the day that they can take vacations without worrying about the impact on their companies. Sometimes the biggest goal is to go home at five, or just to sleep through the night without worrying about the next day (thus the name of this blog).

But if you are tenacious, if you execute on your plans and are able to groom good employees, eventually you will join the owners who can take a good living for granted. Then you have to determine whether you want a lifestyle or a legacy.

I work with both lifestyle and legacy owners. Either would be considered successful, in the sense that they have a comfortable lifestyle, expect to retire at a time of their choosing, and, barring mishaps, should be able to enjoy their retirement doing what they wish. They run their businesses very differently, however.

It doesn’t matter what type of business you own. I coach legacy builders in manufacturing, distribution and professional services. I also coach lifestyle owners in all industries. It has a lot to do with personal vision, but the legacy builders aren’t driven by merely a “bigger” vision. They see their companies and their lives as having a different objective.

The differences are pronounced and complex enough to warrant several columns on the subject, of which this is just the first.

First, let’s define wealth, since the perception of wealth is a substantial part (although not by any means all) of the difference. A few years ago my family was skiing at Deer Valley, Utah. For those of you who haven’t been there, Deer Valley is a beautiful resort. It’s one of those that was developed as a ski resort, not as a ski mountain that eventually generated other development nearby. That means, like a golf resort, prime home sites were incorporated near the ski runs for those who could pay a premium for the location.

As you go up the main lift, the homes along the lift line are lush, and some are breathtaking. Three and four stories, 15,000 feet or more, some with indoor pools on separate glassed-in floors that are integrated into the main structure. I can’t even estimate the prices, but they are astronomical.

My younger son, who was 14 or so at the time, gaped at some of the houses as we went up. He turned to me in the chair and said, “Dad, what is rich? Friends come to our house and say ‘Boy, you are rich!” but you say we aren’t. The people who own these houses (he first thought they were small hotels) are clearly rich. What is rich?”

I took a few hours to formulate a response. That night over dinner I replied. “Son, in your public high school you have many classmates whose parents work hard at a job just to provide the necessities. When they come to our house ( an older 5 bedroom on a suburban acre) it is much more than they have, so they think we are rich.”

“There are three kinds of rich. The first is well-to-do. That’s what we are. We go out to dinner in a restaurant not just for special occasions, but whenever we don’t feel like cooking. We take vacations to see other cities, or to do fun things like ski or swim. If we need a new car, or something big fixed around the house, we just do it and don’t have to worry too much about being able to pay for it. But your mother and I both have to work very hard in the business to afford our lifestyle.”

The second kind of rich we will call ‘wealthy.’ That’s when you can live like we do, but you don’t have to go to work every day to make it possible.”

“The third kind of rich we’ll call “escape velocity.” (I think that term was coined by Bill Gates, who is probably the epitome of it.) That’s when you can pretty much do anything you want every day, and when you go to sleep you still have more money than when you woke up.”

Lifestyle business owners have reached the second kind of rich, or are approaching it. Legacy builders are seeking much more, and it isn’t merely about money. (Escape velocity depends on factors that few business owners can control.)

Next, we will look at the lifestyle of a lifestyle owner, and what your business needs to make that possible.

Small Business can Sell in a Recession

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This was an article I had published in the San Antonio Express News yesterday.

Guest Voices: Small businesses can sell in recession

Many business owners think that the current recession has ruined their exit strategy. While the climate may be more daunting for budding entrepreneurs, there are still plenty of buyers around for small businesses.

For Main Street businesses (those selling for less than $3 million), buyers chiefly are driven by personal economics. They are seeking a business as a way to make a living. Their main objective is cash flow, the amount of discretionary income the business generates to cover bank debt and an owner’s salary.

In a recession, the most common economic buyer is an executive who has lost his or her corporate job. These buyers usually have good management skills and substantial savings, along with enough net worth to make a lender comfortable.

Be aware, however, that former corporate executives are also very cautious shoppers. The concept of going it alone can be terrifying enough in the best of times. As a buyer gets closer and closer to closing, the idea of working without a safety net looms larger.

In a giant organization, missing your budget means a poor performance review. In a small business, it could mean closing the doors. Executive buyers need extra assurance that they will succeed. If you are an entrepreneur who has risked it all for years, their concerns may generate little sympathy, but they are a fact you have to deal with.

Harsh economic times also bring out the bottom feeders. These are buyers who shop incessantly for companies that can be bought at bargain basement prices. They frequently will use the economy as an excuse to make a low-ball offer, claiming that your business will not be able to sustain its historical profitability going forward.

Unless you’re actually seeing a decline in revenues and profits, there is no reason to entertain an unfairly low offer for your company. Most small businesses have a minuscule market share and can thrive in any economy if they are careful and aggressive. Unless you are focused in an industry that is especially hard hit by the current downturn, there is no reason to think that general economic conditions will have a proportionate effect on your company.

Of course, your expectations of what constitutes a reasonable price are critical. When buyers are already nervous about financing and the future, an inflated price can scare them away quickly and permanently.

Many business owners price their companies beyond achievable expectations based upon multiples for public companies, industry rumors, their own financial needs or simple misunderstanding of the profitability measurements used in mergers and acquisitions.
There are several national databases that show actual sale prices of small businesses in relation to the profits and size of the company. Though the opinions of your accountant or attorney may be helpful, they may vary widely from the actual pricing that is being achieved in the marketplace.

Just because times are challenging, that is no reason to put your life plan on hold. Like every other aspect of owning a business, the sale of the company will be much more successful if you start with good information, plan carefully and have realistic expectations about the outcome.

John F. Dini is president of MPN Inc. He also operates the nation’s largest franchise of The Alternative Board. He can be contacted at jdini@mpninc.com.