Exit Planning Tools for Business Owners

Exit Planning

What is a Certified Business Valuation and When Do I Need One?

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A Certified Business Valuation is a comprehensive assessment conducted by a qualified professional to determine the fair market value of a business. It involves a systematic analysis of various factors such as financial statements, industry trends, market conditions, company assets, intellectual property, customer base, and other relevant aspects to estimate the worth of a business.

You may need a Certified Business Valuation in several situations, including:

Selling or Buying a Business: When you’re involved in a business sale or acquisition, a valuation helps determine a fair asking price or offer, ensuring both parties understand the business’s value.

Obtaining Financing: When seeking a loan or financing for your business, lenders often require a valuation to assess the value of the company and its ability to generate cash flow to repay the loan.

Partnership Dissolution: If you’re part of a dissolving business partnership, a valuation is essential to determine the fair value of each partner’s share and facilitate a smooth division of assets.

Estate Planning: Business valuations are necessary when planning for estate taxes or distributing business assets as part of an inheritance. A valuation helps establish the value of the business for tax purposes and ensures a fair distribution among beneficiaries.

Shareholder Disputes: In case of disagreements among shareholders, a valuation can be conducted to determine the value of shares or ownership interests, aiding in resolving disputes or facilitating a buyout.

Financial Reporting: Valuations may be required for financial reporting purposes, such as complying with accounting standards or fulfilling regulatory requirements.

Litigation or Dispute Resolution: During legal proceedings like divorce settlements, bankruptcy, or insurance claims, a certified valuation can provide an objective assessment of the business’s value, serving as evidence in court.

It’s important to note that the specific circumstances and requirements for a Certified Business Valuation may vary based on jurisdiction and the purpose for which it is being conducted. Consulting with a qualified business valuator or professional accountant can help you determine when and how to obtain a valuation tailored to your needs.

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.

Delegation and Depth – Company Readiness for Exit

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Delegation and depth are critical when presenting your business as a buying opportunity. For many business owners, exit planning means getting the company ready for sale to a third party. There are a number of approaches to enhancing preparedness for a third-party sale.

Assessing Readiness

Some planning software products begin with a comprehensive survey of the owner’s impressions of readiness. Note that we say “impressions.” A Likert scale questionnaire that asks a client to rate their understanding of a statement and its possible implications with questions like “How confident are you that you know the value of your business?” and a ranking from “no understanding” to “extremely well” often creates more questions than answers.

If an owner chooses “Fairly well,” for instance, does that mean he knows the value, or that he is fairly confident that he thinks he knows the value, or that he is really confident that he knows an approximate value? Nonetheless, some advisors will begin to build a plan around such subjective answers.

In fact, many systems take these subjective answers and use them to produce a score and a subsequent evaluation with a dollar figure for the presumed worth of the business. Regardless of the accuracy of the owner’s responses, they have created a line in the sand regarding value.

Keeping “Score”

The next step is often to assess different areas of operations. Depending on the expertise of the advisor, this may focus on operating efficiencies, sales processes, marketing approaches, financial record keeping or product and customer mix. Then the advisor runs a second evaluation, presuming that these areas have a higher score.

All this is intended to lead to one question. “Would you rather sell your business for $7,000,000 or for $12,000,000?” I know very few owners who would have the temerity to choose the first option, whether they have personal enthusiasm for embarking on a reorganization of their business or not.

The methodology is legitimate. There is ample evidence that improved operations and greater profitability lead to a higher selling price. It may, however, create a scenario where the owner is boxed into the strategy that works best for the advisor, regardless of whether it matches the client’s objectives (“Get out as soon as possible,” for example) or the company’s capabilities.

Delegation and Depth

The first issue, an owner’s objectives, should be addressed by deeper discovery. That is what we preach and teach with our ExitMap® tools. The second, company readiness, is more a matter of delegation and depth.

delegation and depthNo business can embark on a comprehensive improvement process without a management team to implement it. That’s why we address Owner Centricity™ as the only area of company readiness that matters in the discovery phase of every engagement. If the client is already overwhelmed with personal responsibilities, new initiatives will just add more to an already over-full agenda. That’s a recipe for failure.

We map out the management team starting with the owner’s responsibilities. Then we add those employees who are next in line for those duties, along with a 1, 2 or 3 score. One indicates that the employee is fully ready to assume the day-to-day activities of the job. A two means that the employee is generally familiar with the area, but not ready to assume primary responsibility. A three indicates that there is no knowledge or capability for this area. A 3 is also used when there just isn’t anyone available to train.

Company Readiness

Diagramming the management team in such a depth chart permits a far more comprehensive look at which improvements are possible now, and which will require additional training or recruiting. It also gives the advisor a better understanding of the areas the owner will have to delegate to make the business more saleable.

In operational analysis, the capabilities of the management team are the principal determinant of the company’s readiness to grow.

The owner’s willingness to discuss such delegation is by far the best indicator of his or her preparedness for any value enhancement efforts. 

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 Role of a Coach in Exit Planning

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Defining the role of a coach on your exit planning team doesn’t just happen. Like any other aspect of working with consultants, you need to set expectations upfront.

Many advisors like to characterize themselves as the “quarterback” of a transition planning team. I’ve always objected to that. We regard the business owner as the quarterback of the planning process. After all, the coach never gets sacked by a 300-pound defensive lineman. The advisor may want to win every bit as much as the business owner, but it’s the owner who actually has skin in the game.

A Coach’s Responsibilities

It’s one thing to say that you are a coach and another to act like it. Here are seven basic rules an owner should expect from the coach on a planning team.

  1. He (or she) speaks the truth always, even (or especially) if you don’t particularly want to hear it.
  2. He must act as a Fiduciary, putting your needs first.
  3. He should offer options and alternatives, especially when you have a fixed idea of how things need to be done.
  4. He acts as the defender of your objectives and points out when other advisors on the team are drifting from those objectives.
  5. He documents the progress of your engagement, as well as that of the other advisors.
  6. He respects the work of other advisors and solicits their input.
  7. He delivers your contributions on schedule, but respects your need to attend to business first.

role of a coachThese “rules” can be verbalized or set out in writing, but it is important that your expectations are discussed at the outset.

Let’s continue with the coaching analogy for a moment. The quarterback must not only accept the coach’s advice, but in his role as leader of the team he should be telling the position players that his plays are the ones they are going to use. The quarterback understands that the route assigned to the wide receiver is only part of the picture. There are other men that are going to protect him so he has time to throw, or occupy defenders so the receiver can get open. The pieces have to work together as a whole.

Leading a Team

Similarly, the business owner must make plain that the coach’s responsibility includes overseeing the other members of the advisory team. No receiver would dream of coming into the huddle and saying “Hey guys. I just thought up a different play. Here’s what I want you all to do.” Some advisors, however, seem to think that is OK.

But if the receiver comes to the quarterback while the offense is on the sidelines and says “They are using the same coverage on me every time. I think I have an opportunity down the sideline,” it’s the quarterback’s role (and obligation) to bring that to the coach. Then an appropriate play can be drawn up that involves the entire team. Similarly, you should be open to other advisors’ input, but bring it to the coach right away.

Every team needs a coach. It’s his or her responsibility to help them work together for a single outcome. It’s not your job as an owner. You have neither the experience nor the time to devote to the task. Defining the role of a coach leaves you, the quarterback, the ability to focus on winning the game.

 

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.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

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John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “saleable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

o Transaction and professional fees.
o An asset sale was negotiated and there was income tax on some asset depreciation recapture.
o $1 million in business debt needed to be repaid.
o Capital gains and affordable care act taxes.
o Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a saleable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

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.

Impressions of Value in Exit Planning

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Business owners, advisors, and buyers frequently have widely different impressions of value when it comes to a business.

The Pepperdine Private Capital Markets Survey canvasses intermediaries who sell privately held Main Street and mid-market companies. One question is about the obstacles that prevented the sale of a business. The number one response is “Owners’ unreasonable expectations of value.”

That may be self-serving or an excuse. Nonetheless, valuation is a sensitive subject. Many owners have worked in the business for 30 or 40 years. They assume it will fund their next 20 years of retirement. Their target price is set only by their desired lifestyle after the business.

Different Values for the Same Business

Unfortunately, many owners have an opinion about the value of their business that is grounded in the multiples of public companies. Others are based on conversations with colleagues, salespeople, and articles in their trade publications.

Impressions of valueEven those who have professional appraisals of their business may not understand that the purpose for getting your valuation may skew the results. Valuations that are done for estate planning or internal transfers of equity often have little resemblance to a company’s fair market value.

Various people including H.L. Hunt and Ted Turner have said “Money is just a way of keeping score.” For many owners, the emotional tie between the perceived value of their company and their self-image of success is closely connected.

Some advisors skirt this issue by recommending that their clients get a professional opinion of the fair market value of the business. While this is certainly a safe approach, it can take substantial time. It also requires considerable assembly of the underlying data for the appraiser. This can slow down any consulting project considerably and may derail it entirely.

Impressions of Value

A coaching approach helps the owner understand the practical boundaries surrounding the value of the company without either dictating to him or taking the project in a tangential direction. We do that by helping the client model “lendable value.”

We start by explaining that most businesses are valued by their cash flow. There are certainly many areas where value can be enhanced. These include intellectual property, exclusive rights to a product, protected sales territory or long-term contracts. Owner Centricity™ or customer concentration can also reduce the fair market pricing of your business. In the final analysis, however, cash flow to pay an acquisition loan is of principal concern to a lender.

SBA minimums for financing include a cash-to-debt service ratio (1.25 to 1) and required owner compensation – usually $75,000 a year for acquisitions under $500,000 and twice that for larger deals. While not all lenders follow SBA guidelines, they are a useful national baseline for looking at your value.

The company may well be worth what you think it is, but finding a lender to finance it is a different problem. Understanding a lender’s impression of value before starting sale negotiations can save you considerable time and negotiation down the road.

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.