Exit Planning Tools for Business Owners

Exit Options

Succession Planning or Exit Planning? Small Business Owners Need Both!

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4 business persons with the words succession planningOne of the questions we often hear from business owners is, “What is the difference between Succession Planning and Exit Planning?  Aren’t they the same thing?”  Surprisingly, they are not.  The next question usually is, “Which one do I need?” The answer is simple.  Whether the business is small or large, family-owned or not, astute business owners always need both.

succession planNearly $10 trillion dollars in business assets will be transferred globally in the next decade, according to Forbes Magazine.  Baby Boomers selling privately owned businesses or transferring them to family members will comprise much of that $10 trillion dollar transfer.  As the market becomes crowded with owners ready to sell, the advantage will go to those owners who have done their due diligence, considered all of their options, and planned for unexpected contingencies.

Succession Planning

Succession Planning focuses solely on transferring leadership inside the business from one generation to the next.  Succession plans identify key individuals within the organization who can be trained and mentored to someday take over as the existing business leaders exit.  Succession Planning is just one necessary aspect of a more comprehensive exit plan.

Exit Planning

Exit Planning incorporates succession planning with strategies for building transferrable value, reducing tax liability, preparing for unexpected contingencies, minimizing family stresses, and increasing the likelihood of a successful business transfer.  Exit plans also incorporate the personal and financial goals of the business owner, their spouse, and their family.  A prudent exit plan starts and ends with the long term business and personal objectives of the owner.

Plan Ahead for A Successful Exit

Succession plans and exit plans so share an important characteristic – neither should wait.  Business owners who eventually want to sell for top dollar with the least amount of trouble must start the planning process early enough to give it the thought and consideration it requires.   With the proper plans in place, you, the business owner, gains the ability to make critical long-term decisions that will significantly increase the likelihood of selling or transferring the business when you want, to whom you want, and for the price you want.

Pat Ennis is the President of ENNIS Legacy Partners (ennislp.com). The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Exit Planning in a Crisis

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Why would you be exit planning in a  crisis? At the height of the economic expansion (a few months ago in late 2019) I was reviewing a company’s financial statements. Their sales were stagnant, and profits were minimal. When I asked the owner why his business hadn’t grown, he responded, “Well, the Great Recession hit our industry pretty hard, you know.”

planning in a crisisTake note that it wasn’t his fault. He was in a hard-hit industry, and the economy dealt him a bad hand. He ignored the thousands of businesses just like his that had grown and prospered in the last ten years.

Once you hunker down behind “It’s not my fault,” it’s easy to stay there too long. First you are glad that you survived. Then you are glad to be making a little bit of money again. Then you wait for the same conditions that made you successful before. If they don’t come, it’s not your fault.

In the meantime, others are coming out of the downturn firing on all cylinders. They used the slow time to get ready; to plan what comes next. When the door of opportunity opened again, they were ready.

Baby Boomers’ Double Whammy

The coronavirus is especially lethal in senior citizens. Many of those are Baby Boomer business owners. They have also suffered a double financial hit. Their retirement account balances are lower, and their businesses, whether closed or just slow, are worth less then they were a few months ago.

Many owners will try to kick the can down the road. “I’ll spend a few years building the business back up, then I’ll sell it.” For some, that was their plan after the recession. Unless you have something new up your sleeve, you may be waiting a long time for the right buyer to come along. In the next economic cycle, you may wait too long. You can only kick that can so far.

If you are a Baby Boomer, the time to be planning your exit is now. That goes double if you are sitting in your house wondering what comes next. Most entrepreneurs started a business because they wanted control over their lives. When there’s an event that takes away that control, your best response is to get it back.

Exit Planning in a Crisis

Your exit plan starts with some basic questions.

  1. Do I know how much I need to retire, with a professional analysis of my living expenses, life expectancy and inflation assumptions?
  2. Do I know how much my company is really worth, and who is most likely to pay me that amount?
  3. If #2 doesn’t meet the needs of #1, do I know how long, and what it would take, to get my business there?
  4. Do I know all the options for monetizing my business, including a sale to employees, another entrepreneur or professional acquirers?

If you are a Baby Boomer, unless you are exit planning in a crisis, you risk a discussion in 2025, or 2028, or 2031 that starts with “Well. the coronavirus hit our industry pretty hard, you know.”

There is a network of advisors in the USA and Canada who specialize in a reasonably priced, 90-day planning process for small business owners, and who use a suite of online tools to help you work through all these questions remotely. They can help get you started right now.

For a listing of these advisors, go here.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Quarterbacking is Not Exit Planning

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Quarterbacking is a popular term when exit planners are talking to clients. It’s supposed to invoke a vision of someone who is in control. Think about a Tom Brady, Aaron Rodgers or Patrick Mahomes standing tall in the pocket, surveying the offense and defense unfolding before him.

There is a real problem with using “Quarterbacking” when referring to your exit planning professional team. The quarterback calls the plays. The job of the rest of the team is to run them as instructed.  I’ve yet to meet a CPA or attorney who thinks that is the best way to develop a client’s exit plan.

Teamwork

Exit planning, like no other form of professional consulting, is a team sport. When I am engaged by a client, I have the responsibility of defending his or her long-term objectives. The other advisors, who may include an insurance agent, financial planner, or appraiser, all have experience to lend to the process.

We can modify a plan multiple times and in many ways. The accountant may have some excellent restructuring ideas to save taxes. The attorney can add terms to a buy/sell agreement to protect the owners from having their equity unfairly valued by the IRS, or from having it pass to parties outside the company.

The insurance agent can mitigate the risk of illness or death derailing the timely transfer of the business, or of the surviving family being left destitute. The appraiser can develop valuations that take advantage of the discounts permitted under IRS guidelines.

Each of these professionals has a role, and should be able to add their skills to the process, with only one exception. They should not be permitted to do anything that interferes with the owner’s objectives. That’s the responsibility of the exit planner.

The Alternative to Quarterbacking

I prefer to think of the exit planner’s role as analogous to that of an orchestra conductor.

quarterbackingThe exit planner may not be as skilled in any specific discipline as the others on the team. He may know something about tax planning, or legal structuring or insurance. She probably knows a bit about valuation and even more about contracts.

But, like the conductor, he or she doesn’t know more about any of those subjects than the advisor who spends full-time in that area.

No one expects the conductor to step off the podium for a violin solo, or to fill in for the French Horn.  In fact, you don’t even want the conductor to tap the triangle for that one little note in the pause. If he did, he would be distracted from his primary role of keeping all the musicians on the same page.

Having one advisor coordinate the contributions of others greatly improves the overall result. Expecting him or her to dictate details outside his area of expertise is foolish. Expect your exit planner to lead without quarterbacking.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Why Plan Now? Exit Planning for Small Business

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Owners ask all the time, “Why Plan Now?” “I’m not planning to leave my business for years. I feel good, and I still enjoy my business. I’m not sure what else I would do. Besides, if my company is only going to sell for two or three times earnings, I can make more than that by sticking around.”

All are valid arguments. Baby Boomers, the youngest of whom turned 55 this year, are working longer and are more active well into their 60s and often into their 70s. The term “next career” describes the growing portion of the population who are choosing another full-time activity after leaving their jobs or businesses.

Why Plan Now?

That said, there are good reasons why every Baby Boomer business owner should have a documented exit plan.

why plan now?

  1. A plan is not an action. As the late, great Yogi Berra said, “If you don’t know where you are going, you may wind up somewhere else.” The process of deciding what your ultimate outcome should be gets you mentally prepared, but implementation only starts when you say so.
  2. It will focus your efforts. Say, for example, you decide that ultimately you want to sell to your employees. Your investments in hiring and training will look very different than if you plan to sell to a large competitor who would shutter your operation.
  3. It will make you a better business owner. Thinking through the things that drive value in your business, (employees, products, and customers,) will inevitable highlight what could be improved. You will look at your business through a buyer’s eyes. That lends a whole new perspective.

The first four parts of this series dealt with various exit scenarios. This is about your timing.

How to Start

There’s a ton of resources both in past articles on this site (indexed by topic) and in our free library of planning tools and educational materials at www.YourExitMap.com. Many Financial Planners, Bankers and CPAs are getting one of the certifications in exit planning (Either the Certified Exit Planning Advisor – CEPA or the Certified Exit Planner- CExP.) That equips them to have a broader conversation that just focusing on their specialty.

Chapters are springing up of professionals who specialize in exit planning. Booth the Exit Planning Exchange (XPX) and the Exit Planning Institute (EPI) regularly offer seminars for owners considering their exit strategy, Between the two there are chapters in about 40 US cities.

Try putting the term “Exit Planning” in an Amazon book search. You’ll have a choice of about 25 titles.

Finally, there’s my standard (if somewhat cliched) answer to the question “Why plan now?”

Because sooner or later, every owner leaves his or her business, whether voluntarily or otherwise. It’s only the biggest financial event of your life.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He has authored three books on business ownership.

Selling to Employees: Exit Planning for Small Business Part 4

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Selling to employees is one method of transition that is growing rapidly in popularity. Usually the  driving motivation is a desire to help the people who got you this far enjoy some of the benefits of ownership, but there is a substantial list of other benefits.

  1. Pricing is agreed at the start, not in adversarial negotiations.
  2. Valuation is flexible. The business can be sold for more or less than its Fair Market Value, as long as both sides agree and cash flow supports it.
  3. The legacy of the business lives on in the community.
  4. Where there are substantial challenges to an outside buyer, such as industries whpiere work goes to the lowest bidder, employees are more confident that they can succeed in the system.
  5. Financing is built into the transition plan.

(By the way, if you are just picking up this series now, prior topics included strategies that aren’t suited to small business, selling to a third party, and selling to family.)

“But they have no money!”

That’s the most frequent objection when we suggest an employee sale, but it is easily remedied by time. In fact, time and risk are corollaries. The more time you have, the less risk you’ll take. Faster is riskier.

At one end of the spectrum we’ll say you want to exit the business in the next thirty to sixty days. That’s probably enough time to draw up a purchase agreement and transfer ownership. The payment for the business would be entirely in an installment note from your workers. Rapid exit, but maximum probability that you will never see the entire purchase price.

On the other hand, what if you have five to ten years for selling to employees?  You could sell stock for a note, and let employees pay for their shares with bonuses based on increasing profitability. They are motivated to grow the company, while you continue to receive all the profits you were due anyway.

As they increase their ownership, they can qualify for lender financing to purchase your equity. Done well, and with enough time, you can realize the full value of the business and increase your short-term income along the way. Time gives you lower risk, and the potential for higher reward.

Are they qualified?

That is another question entirely and one that depends largely on you. If you’ve hired the right people and trained them well, selling to employees is a breeze. If you are the center of everything that happens in your business, it could be a problem.

Remember, the more you work in your business the less it is worth. To see how dependent your business is on you, take the quiz at www.ownercentricity.com.

What if they are willing and able, but not ready? Or perhaps you have a few key managers, but they lack some critical skill sets? Again, time gives you the flexibility to deal with those issues.

You may not have anyone who could ever run the business. Again, with suffcient time, you can “hire your buyer.” I’ve seen businesses where an owner used the promise of ownership to recruit someone whom he’d never attract otherwise.

Selling to employees is the ultimate exit plan in your level of control over the process, determining how much you want from the transaction, and choosing your date of departure. If you haven’t considered it in your list of options, you might want to think again.

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