Exit Planning Tools for Business Owners

Exit Strategies

Lifestyle or Legacy – Part 4

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Last week a client told me “You are wrong. I have a lifestyle business that is ALSO a legacy business.” Sorry, but that doesn’t fly.

He has built a good company, and continues to improve it. Be he is not driving to make it into something that carries on beyond him. His objective is to (eventually) make it large enough to be acquired, and for enough money to live in luxury for the rest of his life.

That is a lifestyle business. It’s only purpose is to fund the financial aspirations of the owner. There is no larger purpose, no overarching vision of something beyond his quality of life. I’ll grant that his personal ambition extends beyond his current, very comfortable existence. But it only extends to a more comfortable existence. That is a matter of degree, not direction.

When I started to think about this series, the term “lifestyle” was easy. The second term was originally “entrepreneurship.” That didn’t communicate the concept well enough. Thinking through the topic, it reduced the definition of “lifestyle” to more of just making a good living, and of “entrepreneurship” to building something larger than merely a decent living.

What I am talking about encompasses ANY lifestyle you choose. Whether it is a nice house in the ‘burbs, or sailing around the world in a yacht, that is still lifestyle. We all have different targets.

Legacy is when it moves beyond you, when the company becomes a vehicle for accomplishing something larger than your personal quality of life. By that definition there are probably legacy businesses that don’t provide a luxurious lifestyle, but they satisfy the owner’s desired level of creature comforts and support that bigger vision. Perhaps something that allows an owner to go on missions to Africa for half of each year might qualify. For the most part, however, owners have to reach a pretty comfortable lifestyle before legacy comes into the picture.

Most legacy businesses were lifestyle businesses first. The owners scratched and pushed (or were incredibly lucky) to build a level of security and sustainability. Once they got here, however, they looked around and said “This isn’t enough. Mere wealth doesn’t fill the need I have inside of me.”

Another owner said to me ” I want a legacy business. I want to go visit my outlying offices and not fix problems. I’d fly in, give awards to the top performers, and take a major client out for golf.”

That is also a lifestyle business. The legacy owner wouldn’t be coming in to fix problems either. He or she might be looking for an acquisition in that market, or communicating new goals. He might be upgrading personnel; not because they were failing, but because he was constantly looking to do better. The numbers are still important, but they aren’t going towards improving his lifestyle, they are being used to build the legacy.

Before you start worrying about the lifestyle vs. legacy decision, let me make something plain. Some 80% of small businesses fail in their first few years. Of those that survive, probably 90% never achieve the lifestyle level of success. There are very, very few owners who reach a point where they can work as little as they want and make as much as they want.

Some do, and a few of those think “OK. Is that it?” Some of those can’t envision anything else. Some start building a legacy.

To quote Nancy Barcus: “The closer one gets to the top, the more one finds that there is no “top.”

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.