Exit Planning Tools for Business Owners

Exit Planning

What are the Critical Elements in Training My Business Successor?

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Training your Business Successor is crucial in ensuring a smooth transition of ownership and leadership. The following are critical elements to consider when preparing your Business Successor:

Knowledge Transfer:

  • Identify the knowledge and skills necessary to run the business effectively.
  • Document and share critical information, processes, and best practices with your successor. This includes financial management, sales and marketing strategies, operational procedures, customer relationships, vendor management, and industry-specific knowledge.

Mentoring and Shadowing:

  • Provide your successor with hands-on experience by allowing them to shadow you and observe your day-to-day activities.
  • Encourage them to ask questions, participate in decision-making, and gradually take on more responsibilities.
  • Act as a mentor, providing guidance and sharing insights from your experience.

Delegation and Autonomy:

  • Gradually delegate tasks and responsibilities to your successor, allowing them to practice decision-making and leadership skills.
  • Start with smaller tasks and gradually increase their level of autonomy as their competence and confidence grow. This will help them develop their management style and take ownership of their role.

Communication and Collaboration:

  • Foster open and transparent communication with your successor.
  • Encourage them to share their ideas, concerns, and observations about the business.
  • Establish regular meetings or check-ins to discuss progress, challenges, and future plans.
  • Involve them in important meetings with key stakeholders, such as clients, suppliers, and employees, to develop relationships and gain a broader understanding of the business ecosystem.

Strategic Thinking:

  • Provide exposure to strategic decision-making by involving your successor in developing business plans, goal setting, and long-term strategies.
  • Discuss market trends, competitive analysis, and growth opportunities.
  • Encourage them to think critically and creatively about the future of the business and how to adapt to changing circumstances.

Building Relationships:

  • Introduce your successor to essential stakeholders in the business, such as key clients, suppliers, and industry contacts.
  • Help them establish and maintain relationships, as these connections can be valuable for the business’s future success.
  • Encourage networking and participation in industry events and associations to expand their professional network.

Emotional Intelligence and Leadership Development:

  • Focus on developing your successor’s emotional intelligence and leadership skills.
  • Help them understand the importance of effective communication, empathy, conflict resolution, and team management.
  • Provide opportunities for leadership development through training programs, workshops, or executive coaching.

Continual Learning and Adaptability: Encourage your successor to embrace continuous learning and adaptability. The business landscape is ever-changing, and staying updated on industry trends, technological advancements, and best practices is essential. Encourage them to attend relevant seminars, conferences, and workshops and engage in professional development activities.

Remember that the training process should be tailored to your successor’s specific needs and capabilities. It’s essential to be patient and supportive and allow for a gradual transition of responsibilities. By investing time and effort in training your successor, you increase the likelihood of a successful handover and the long-term sustainability of your business.

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

Exit Strategies – The Road Less Traveled

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The road less traveled is often a misimpression when considering a transition from business ownership. Surveys show that roughly 85% of owners expect their exit to happen via a sale of the business to a third party.

A third-party sale is certainly attractive. The idea of monetizing decades of work in one lump-sum payoff seems equitable. Years of sacrificing to “invest in the business” is supposed to generate a return. “He (or she) sold the company” when applied to someone who is clearly enjoying a comfortable lifestyle in retirement acts as an advertisement for the benefits of cashing out.

Unfortunately, that isn’t only less frequent than assumed, but it’s so infrequent as to be close to a rarity.

The Numbers Don’t Lie

Baby Boomers owned businesses at about twice the rate of previous or succeeding generations. Franchising and an overcrowded job market for corporate careers drove about 6% of Boomers into entrepreneurship, where the traditional average for business ownership is closer to 3% of the population.

A decade ago, according to the SBA, about two-thirds of all businesses between 5 and 500 employees were owned by persons 48 years old or older. Today, just over half are owned by folks over the age of 58. That makes it pretty safe to extrapolate that around 4% of that age group still own businesses.

Census data puts the number of persons turning 65 years old at 10,000 a day, so it’s a decent guess to say that 400 of those, on average, probably own a business. That’s 2,800 a week, or about 140,000 a year. Not everyone exits when they hit 65, and almost 90% of those businesses employ fewer than 20 people.

For exit planning discussions, let’s divide the under and over-20 employee companies into two groups, which we will call “Main Street” and “Mid-market.” (Note- this is not a valid market definition of those two terms. For further explanation see the Afterword in my most recent work The Exit Planning Coach Handbook.”)

Main Street companies would then be 90% of our 140,000 owner population. That’s 126,000 businesses. According to the IBBA, Business Brokers sell about 8,000 Main Street companies annually, or about 20% of those they list. That leaves 92% of Main Street owners to find another way.

Of the 14,000 or so that we are classifying as Mid-Market, Private Equity activity accounts for about 6,000 transactions annually, many of which are handled by brokers. (So there is an unknown amount of double counting here.) The last two years saw a spike of about 50% in acquisitions due to low interest rates, but it is safe to say that at least a third of these presumably very desirable middle-market businesses have to find an alternative exit plan.

Advisors Ignore the Numbers

With these statistics, why do owners and their advisors continue to focus on exit strategies that only work for a small minority? The higher visibility of transactions is part of the bias, as are the higher professional fees that they generate, but the biggest issue is a lack of advisor education.

Advisors who work with owners approaching a transaction have an obligation to inform them of their options. Unfortunately, this is not always the case. We survey the exit planning industry annually. Only between 5,000 and 6,000 advisors claim exit planning as an offered service. That’s an advisor-to-owner ratio of 23:1 each year. If we consider the entire remaining population of Boomer-owned employers, that ratio is five hundred to one.

Most owners have 50% of more of their personal net worth in the business. Yet we continue to see financial planners who base their clients’ retirement calculations on an unconfirmed estimate of what the company will contribute via a third-party sale, when such a sale may be the least likely outcome. A financial plan for a business owner cannot be holistic if it doesn’t consider 50% of his assets.

Attorneys and accountants frequently report that the first time they interact with a client about exiting is when a purchase offer is already on the table. Proactive discussions about eventual transfer or succession are usually brief, and cease when the client says “I’m not ready yet.” They let their clients postpone the discussion until circumstance or happenstance intervenes.

Business Brokers, of course, only talk to clients who have already decided on their preferred course of action. As a former Certified Business Intermediary, I can say from experience that unfortunately, most have no alternative for the 80% of listings they can’t sell.

The Road Less Traveled

The truth is, despite popular conceptions to the contrary, sales to third parties are the road less traveled. Certainly, many lifestyle businesses are really jobs and have to close when the founder/owner/CEO retires. Many others, however, could recoup the owner’s investment with a structured transfer to employees.

road less traveledGiven a few years, most owners could hire and train a suitable buyer. That usually requires support, since few have experience in recruiting and teaching someone to do what they do. There is also some education involved to help the owner understand how investing in a top-flight employee today can pay huge dividends in the future.

Additionally, there is the issue of owners who believe that they have to keep any rumor of their impending retirement from others in their industry. Customers, vendors and competitors are a fertile market for acquirers. A good advisor can act to maintain confidentiality when putting out feelers.

Advisors need to be more proactive in approaching clients about their objectives and their options. Initiating a structured conversation around both is in the best interest of the client and the advisor. They may choose to avoid the road less traveled.

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.

The Build vs. Buy Equation

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If you’re wondering what your business might be worth to an acquirer, there is a simple calculation you can use.

Let’s call it “The Build vs. Buy Equation”.

At some point, every acquirer does the maths and calculates how much it would cost to re-create what you’ve built. If an acquirer figures they could buy your business for less than they would spend on both the hard and soft costs of re-deploying their employees to build a competitive product, then they will be inclined to acquire yours. If they think it would be less costly to create it themselves, they are likely to choose to compete instead.

The key to ensuring that what you have is difficult to replicate is focusing on a single product or service and building on your competitive point of differentiation. When you create a product or service that is unique and pour all of your resources into continuing to differentiate it from the pack, you can dictate terms, because re-creating your business becomes harder the more you focus on one thing.

The worst strategy is to offer a wide range of services and products only loosely differentiated from others on the market. Any acquirer will rightly assume they can set up shop to compete with you by simply undercutting your prices for a period of time and driving you out of business.

C-Labs Focuses On Building An Irresistible Product

Chris Muench started C-Labs in 2008 to go after the burgeoning opportunities presented by the Internet-of-Things (IOT). He began by writing custom software applications that allowed one machine to talk to another. In 2014, he got the industrial giant TRUMPF International to acquire 30% of C-Labs, which gave him the cash to transform his service offering into a single product.

By the end of 2016, Muench’s product was showing early signs of gaining traction but C-Labs was running out of money.

In the end, TRUMPF acquired C-Labs in a seven-figure deal that could stretch to eight figures if Muench is successful in hitting his future targets. Why would a large, sophisticated company like TRUMPF acquire an early-stage business like C-Labs? Because they knew that re-creating Muench’s technology would cost much more than simply writing a seven-figure cheque to buy it outright.

In other words, TRUMPF used The Build vs. Buy Equation and realized that buying C-Labs was cheaper than trying to reproduce it.

Selling too many undifferentiated products or services is a recipe for building a business that—if it is sellable at all—will trade at a discount to its industry peers. By contrast, the trick to getting a premium for your business is having a product or service that is irresistible to an acquirer, yet difficult for them to replicate.

Kerry Boulton, CEPA is Australia’s most respected exit strategy advisor. With over 20 years in business as an entrepreneur, transformative coach, consultant, sought after speaker and talented facilitator, Kerry has been helping business owners like you to overcome challenges while providing the steps needed to ensure that you find the financial freedom you deserve.

Is there an AI role in Exit Planning?

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The media is packed with stories about Artificial Intelligence. According to the stories, because a smart search engine (which is essentially what a Learning Language Model [LLM] is) can pass a Bar exam, it threatens all kinds of white-collar careers.

And in case you were wondering, no – I’m not writing this on ChapGPT. That “surprise” trope has been so overdone on every local television station that I hope I never see it again. Also, if you thought this column would be about how to write letters, proposals, and social media posts using AI, you’ll have to look elsewhere.

At ExitMap® we launched our AI upgrade in May. It does all the things I mentioned in the previous paragraph, but it can also be a useful tool for owners within its limitations. Writing a few hundred prompts (They used to be called “queries,” I don’t know the difference) has given us some insight into how it works, and where it doesn’t.

Using AI for research

What works for advisors also works for business owners. If you want to begin exploring our exit planning options using the free application of ChatGPT, here are some guidelines.

First, don’t ask AI for advice. Just about any prompt that begins with a first-person pronoun (I or we) will generate a disclaimer something like “As an AI, I don’t know the individual circumstances of the situation.” If you regenerate the response it will often drop the disclaimer. What follows is usually along the lines of “But here are some of the typical actions in such a situation,” which can be useful.

It’s worth it to ask things in different ways. For example, ask “What kind of incentives can help with employee retention after a sale?” The response will be more generic, like “a good culture, opportunity for advancement, job security, recognition, and stay bonuses.” If you add “structured financial” in front of incentives the response will include descriptions of stay bonuses, equity participation, performance bonuses, golden handcuffs, and phantom stock plans.

If you aren’t an attorney, you still know that a business with multiple owners should have a buy/sell agreement. Some owners say “Why? We’ve made it for 25 years without one.” Prompting AI for reasons to have a buy/sell agreement will generate comments on Succession Planning, Valuation. Preventing Unwanted Owners, Stability and Continuity, Funding Mechanisms, Conflict Resolution, and Tax Planning with an explanation of applicable situations for each.

I have clients who are already using AI to read X-rays, score Customer Service calls, and write employee satisfaction surveys. I work with one owner who creates orientation and training videos using an AI-generated animation of himself that reads AI-generated scripts.

The AI role in exit planning

What is the AI role in Exit Planning? Considering that exit planning as an activity involves multiple specialty advisors, you can save a lot of time and money by asking questions in various areas. Here are ten examples to start you off.

  • List the different exit planning options available to business owners
  • What is the difference between a certified valuation and a calculation of value?
  • What performance metrics can be used to assess a management team’s readiness for succession?
  • What situations indicate a need for a company to upgrade or revamp its purchasing systems?
  • Describe the differences between Core Values, a Mission statement, and Company Vision.
  • Explain the potential tax benefits of an ESOP for the company, owner, and employees.
  • How does owner centricity impact the Fair Market Value of a business?
  • List key components of a Business Continuity Plan.
  • What are common strategies that buyers use to finance a purchase?
  • How do you balance the needs of family employees and family stakeholders outside of the business?

Every business is different, and every owner is unique. No query can possibly take into consideration all of the variables inherent in every transition. That’s why we still need advisors.

The AI role in exit planning helps an owner to better prepare when talking to an advisor. It helps owners be better able to explore other options than the ones that are most obvious.

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.

Exit Strategies for Small Business Owners: A Summary Guide

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There comes a time for everyone to move on from the business they’ve created– some happier reasons than others. But even if you’re just starting, having an exit strategy for your business will help prime you for success, rather than leaving value on the table when the time comes.

This guide will walk you through the signs to sell, the basics of valuation, options for selling your business, and tips on adjusting to life after the sale.

Before you are ready to sell, it’s important to walk through this process with an experienced exit planner. This will best prepare you, not just for selling your business, but ensuring your personal finances are in order and preparing for life afterwards as well.

Step 1: Signs it’s Time to Sell Your Small Business

It’s essential to be aware of the signs it may be time to sell your business long before it happens. Selling something you’ve created from the ground up can be emotionally and mentally draining. By preparing yourself for the signs it’s almost time to move on, you can save yourself undue stress and time wasted and be prepared for the exit journey.

You no longer enjoy going to work.
Running a business is deeply involved work, taking up a lot of emotional, physical, and mental space. That’s alright as long as you typically enjoy the work you’re doing– but if most days bring dread, you should evaluate your position.

Ask yourself, if you could walk away from your business and be financially stable would you? If the answer is yes, you might be looking to sell.

You feel you are no longer a good match for the company’s future.
Companies evolve, and you may find that you are no longer equipped to be the visionary. In rapidly changing industries, keeping up with the latest innovations can be exhausting. The investment required to stay technologically competitive can be daunting, and a risk you may not want to take later in life.

If you no longer feel Like you can keep up with the demands your business needs to stay relevant, it might be time to sell.

You are bored.
On the other hand, you may find that you’ve learned your business so well that it is no longer stretching you. Your industry has been the same for decades and it will continue to be the same for decades to come.

If you’re someone who needs to be challenged to be fulfilled, selling your business and moving onto another venture might be the solution.

The industry is in decline.
Industries ebb and flow, and many booming fields have died. So it’s critical to have an accurate pulse on the future of your industry so you can ride out profitably rather than leave a business no one wants to buy a few years too late.

Businesses in declining industries still remain profitable for years to come, but it’s important to understand the right time to leave.

There are more exciting opportunities available.
Opportunities are everywhere for both you and your company. Perhaps you are ready for your next venture, or your company has the chance to leap ahead through a merger or acquisition.

Your business is failing.
While not ideal, sometimes it’s time to sell a business because it’s simply not working out. There is nothing wrong with selling a business that isn’t turning a profit. There are a variety of factors that impact the success of a business.

Lack of industry experience, lack of funds, among other aspects that are out of your control can hinder a business ability to succeed.

In this case, selling your business to someone who can fill the gaps can see that business thrive in a way that you might not have been able to.

Step 2: Getting a Business Evaluation Before Selling

Once you’ve determined you need to sell your business, it’s time to get your affairs in order and determine a fair price or outcome. Whether you’re selling for a buyout, merger, IPO, or another method, it’s critical to know what the business is worth.

Seller’s Discretionary Earnings (SDE)
Most small businesses will value their business using SDE rather than EBITDA because small business owners often have a more personal stake in their company’s finances. Like EBITDA, SDE represents the company’s net profit with a lens for the future owner to understand how they will benefit from the sale.

Organize Finances and Reports
It is important to make sure your books are kept up to date and closed regularly. Keeping your books on a tax basis will not help you when it comes time to sell. It is a good idea to have an independent CPA firm “review” your financials for the 3 years prior to when you plan to sell. An independent accountants review gives the buyer more confidence in the numbers.

Compare Other Businesses in Your Industry
Before meeting with potential buyers, know what your business is worth by industry standards. Intangibles like a promising future (or a declining industry) can significantly impact the real value of your business.

Boost Your Business Value to Maximize Returns
Before selling, there might be gaps in your business that need to be addressed. Depending on the issue, negative aspects of your business can impact the overall return you will receive. Boosting sales, updating equipment, having solid management in place, and key employees under agreements after you leave are all initiatives that will increase the value of your business in the eyes of a buyer.

Step 3: Looking at Your Selling Options

Now it’s time to consider the methods of sale available to you. Some offer you an opportunity to keep a hand involved with the business, while others allow for a clean break. Pick your strategy carefully based on your values for life after the sale.

Merger or Acquisition: Sale to another company. This route offers price negotiation, but is a slow process with only 20% of deals close on average.
Sell Stake to Partner or Outside Investor: Choose your successor through a buyout of shares from someone internal (can be great for a smooth leadership transition and culture) or an outside investor (excellent for bringing in seasoned talent and disrupting an unhealthy company culture).
Create an initial public offering (IPO): a potentially high payout, but is an expensive and complex process. Most small businesses never achieve the required scale for a successful IPO.
Pass business to family members: Create a legacy that continues to provide for your family while giving you a chance to move to the next big thing. Tax laws will vary for inheritance, trusts, and other methods.
Liquidate: Officially dissolve the business. This is unlikely to be a profitable route.

Step 4: Adjusting to Life After Selling Your Business

Many business owners feel a sense of “now what?” after selling their business. Those who do not have their next adventure in mind are at risk of feeling depressed or directionless. So while it’s difficult to move on, begin fostering new ideas before the final sale so you can avoid feeling that loss.

Prepare for change in income stream.
Your finances will likely change significantly with the sale of your business. Most business owners underestimate how much the business “supports” their lifestyle. It is imperative that you work with a Financial Planner and have clear visibility into your financial future.

Give time for reflection and potential grief.
The sale of your business is a natural time for reflection on a significant era of your life. Give yourself time to process the lessons you’ve learned, the hard times you navigated, and the successes you built. Even with a profitable sale, you may experience symptoms of grief.

Spend time with friends and family.
Many business owners work far more than 40 hours a week. Set aside time to reconnect with friends and family while you don’t have anything on your plate.

Be a “whole person.”
Remember that “business owner” is simply one aspect of who you are and what you have to offer. Keep hobbies and relationships alive, explore new things, and reflect on your values of a good life.

Start the next venture.
Whether you’re on to the next company, charitable ventures, or retirement, give yourself something to look forward to before you finalize the sale of your company.

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.