Exit Planning Tools for Business Owners

Exit Strategies

What are the Critical Elements in Training My Business Successor?

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Business training flat icon with businessmen in office and speaker making presentation vector illustrationTraining 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.

“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.