Exit Planning Tools for Business Owners

Exit Options

“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.

Family Succession Planning: Who Gets the Office?

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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.

Prepared for 2023 – Is This the Year to Exit?

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What does being prepared for 2023 mean for business owners who are approaching, at, or already beyond normal retirement age?

It’s become fashionable to pontificate about the “inevitable” recession in the coming year. There is an argument for not talking ourselves into making it happen. Unfortunately, there are indisputable reasons why it is going to occur regardless of whether we discuss it or not.

Inflationary stimulus (including $6 trillion of ”quantitative easing”) in the US, combined with over-dependency on Russian gas supply in Europe and falling industrial production from COVID lockdowns in China have created the proverbial slow-motion car wreck for the world economy. All three will come home to roost for the world’s major markets in 2023.

What will happen?
Just as the result of these failures in leadership is eminently predictable, the impact on businesses in transition is equally plain.

Company valuations will decline. Inflated multiples fueled by low interest rates for leveraged buyouts have already disappeared. If you are planning your retirement around the value of a year or two ago, it is time to reassess.

A corollary to declining multiples will be a lack of financing. Market conditions directly impact the availability of acquisition funding. Already, Wall Street has seen a 90% drop in IPOs.

Running a business will get tougher for some time. The ”Great Resignation” is actually only half driven by increasing worker mobility. The other half is from Boomer retirements. As employees seek a counterbalance to inflation, staffing will be an even bigger issue than sales volume.

Many owners will look back at 2022 as the year they finally decided that enough is enough. Owners overcame the dot-com crash, 9/11, and the Great Recession. Now a combination of resurgent inflation, supply chain headaches and a lack of qualified workers will tip the scales toward developing an exit strategy.

What can an owner do?
Lower valuations call for creativity in structuring transactions. Employee buyouts and ESOPs that maximize the benefits of sustainable cash flow can provide owners with income that wouldn’t be available from a hard-negotiated third-party sale.

Seller financing or installment sales may offer flexibility that brings more qualified buyers to the table. Stretching out proceeds as recurring income can help a seller wind up with more in his or her pocket, albeit over a longer time period.

Retaining your top talent will be more important than ever, especially if wages continue to rise. Structured equity sales can act as both an incentive and “golden handcuffs” to ensure that a company’s best employees, and consequently its enterprise value, remain intact through dips in revenue.

Prepared for 2023
Many owners were lulled into a false sense of security by frequent calls from business brokers and private equity groups. They may have postponed their planning in the belief that a transition could always happen whenever they felt the urge.

When the phone stops ringing, they will need cooler heads to help them understand that there are options besides a fire sale. Equity can be retained, and retirement can be secured. Work with an advisor who understands the alternatives to “List it and they will come.”

Companies will still be sold in the coming year. Prices may be lower, but are only falling from the unrealistic high driven by cheap money. It may feel like you are getting less than market value, but multiples have only receded to their historical mean.

If this is the year for you to begin your “second act,” it’s still the same approach as it was before. Being prepared for 2023 is a matter of researching the market, planning the process, and hiring qualified professionals.

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.

Entreprenuers Don’t Use Rearview Mirrors

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All business owners are goal oriented. From the day you founded or assumed control of your company, you set targets and achieved them. That is why you are successful. You know how to define a goal and make it happen.

If I asked you to tell me the best thing that you did in the business three years ago, you’d likely respond with, “I have no idea.” or “Why would I know that?” or “Who cares?” You are busy looking forward.

I’ve even had some owners get angry. They feel some obligation to know the answer, and that they are somehow failing a test if they don’t. The fact is, no entrepreneur has ever been able to give me a cogent answer about his or her accomplishments in the past.

If I ask, “What do you plan to do in the coming year?” you will share plans to increase sales, hire new employees, or enter into a new area of business. Whether or not you have a formal strategic planning process, you have a pretty good idea of the changes and improvements you want to implement in the future.

Looking Past the Rearview Mirrors

An entrepreneur’s vision of “What’s next?” is frequently the most neglected aspect of their exit planning. They may term their goals for exiting in measurable, concrete terms. “I want to retire in five years with ten million dollars in the bank,” is an archetypical example. Others will couch their vision in terms of people. “I want financial security for my family, and continuing employment for my staff.”

All too often, their vision for the future deemphasizes or completely neglects their own individual needs. When pressed to enunciate more personal goals, they’ll often respond with something like, “I guess I’ll just play a lot of golf.”

Playing a lot of golf isn’t a retirement plan.

In a recent survey from PwC, they reported that 75% of business owners have regrets a year after they leave the business. The Exit Planning Institute did a survey ten years ago with the same result. According to Riley Moines, author of The Ten Lessons: How You Too Can Squeeze All The “Juice” Out of Retirement, six months to a year is the typical initial “vacation” period when a retiree catches up on travel and recreational activities.

After that first year, the reason so many ex-owners are unhappy is because they didn’t have a clear vision for their life after the business. Their expectations simply did not take into account the reality of what would happen when they were no longer spending the majority of their time working.

Leaping into the Void

When I ask about their plans for next year, some owners are more specific than others. But none of them ever say, “I don’t know. We may make money, or we may lose money. We may grow, or we may shrink. Whatever happens, happens. It doesn’t matter.”

Why would anyone expect that an entrepreneur who has driven towards goals for their whole life will suddenly be happy without purpose, without identity, and without a plan? It isn’t surprising that so many owners are reluctant to discuss exit planning at all. Life without the daily challenges and decisions that come with running a business seems unattractive. Their vision of the future is unclear.

The success of an exit strategy depends less on the amount of money your transfer generates than it does on your personal satisfaction. Unless you can identify a vision for a “next act” that is more appealing than what you are doing now, business ownership will never be in your rearview mirrors.

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.

Die at Your Desk or Go Golfing?

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male playing golf

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.