John Dini Archives - Your ExitMap

What is an Exit Plan?

January 27, 2025 by John F. Dini

“What is an Exit Plan” is an article I wrote ten years ago. It was just brought to my attention and I realized I never posted it to Awake for some reason. Here, with some updating, we celebrate its 10th anniversary.

Exit planning is the buzzword for those who consult to Baby Boomer business owners. Business brokers, wealth managers and other professionals are adding “exit planning” to their marketing messages. It’s a logical reaction when over 5,000,000 Baby Boomers (about 3,000,000 in 2024) are preparing to leave their businesses.

Not surprisingly, when a business broker creates an “exit plan,” it usually involves listing the business for sale to a third party. An attorney’s planning focuses on the legal documents that allow the transition of the assets of a company to new ownership. An accountant or financial planner will look closely at tax and inheritance issues, and an insurance broker offers products that reduce the risk of interruption or disaster.

All these are important to the successful implementation of a plan, but each professional focuses on his or her specific skill set. If your shoulder hurts, you could go to an orthopedic surgeon, a neurologist, a general internist, a chiropractor, or a physical therapist. Each will have a treatment approach for a painful shoulder. Each will be different, based on his or her specialty. Each will reduce the pain at least somewhat, although some of them may or may not address the underlying cause.

Similarly, there are many professionals who claim competence in exit planning. Each has a different area of expertise, and what they term exit planning tends to focus on those areas. A comprehensive exit strategy encompasses legal, tax, and risk management issues, but it also examines the operational issues of the company whose value is the underlying driver for everything else.

Why do an Exit Plan?

Before drafting the first document or embarking on a plan to spend the money from a sale, the business must first realize the proceeds of a transaction. That means it must find a buyer who will pay for it. That buyer could be a third party, but it might also be an employee, an employee group, or family members.

Any third party considering the purchase of a business will do extensive due diligence. Their willingness to pay a premium for a company will depend on its track record of revenue growth, the stability of its margins, and how well-established its systems and customers are. If the company is larger than about twenty employees, they will look for supervisory and management talent who will stay after the sale.

Regardless of size, a business that is highly dependent on the owner for revenue or making all key decisions will be deeply discounted or even impossible to sell. An exit plan should look at these factors and help to make the adjustments needed to realize full value.

Selling to employees or family is often an attractive option because it allows the owner to choose a retirement date, and price is less of an issue than financing terms. Unless you are willing to accept a promissory note for most of the price and feel secure that your successors can maintain payments over a long period, a plan for this kind of exit should begin at least three, and preferably five to eight years before the planned transfer date.

What is an Exit Planner?

An exit plan needs legal, tax, risk and wealth management expertise to be successful, but it also requires a practical examination of the operational strengths of your business. Selecting one professional to manage the efforts of everyone, and to help keep you on track, is a wise investment.

In America, the average small business owner has nearly 75% of his or her net worth in the company (still true in 2024). The single biggest financial transaction of your life deserves special attention.

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.

Purpose – Life After the Sale Part 3

January 3, 2025 by John F. Dini

The third component of life after the sale is Purpose – “Having as one’s intention or objective.”

Many exit planning advisors discuss the three legs of the exit planning stool – business readiness, financial readiness, and personal readiness. In our previous two articles, we focused on two of the “big three” components of a successful life after the sale, activity and identity. The third is purpose.

So many advisors point to the 75% of former owners who “profoundly regret” their transition, and say it’s because they didn’t make enough money. To quote Mr. Bernstein in the great film Citizen Kane, “Well, it’s no trick to make a lot of money…if all you want is to make a lot of money.”

I’ve interviewed hundreds of business founders. When asked why they started their companies, by far the most common answers are about providing for their families and having control of their future. Only a very small percentage say “I wanted to make a lot of money.”

Decades of Purpose

So what kept them working long hours and pushing the envelope after they had reached primary, secondary, and even tertiary financial goals? Sure, non-owners may chalk it up to greed, but Maslov’s hierarchy of needs drifts away from material rewards after the first two levels. Belonging, Self-Esteem and Self-Actualization may all have a financial component, but money isn’t the driver.

For most owners, the driving motivation is this thing they’ve built. The company has a life of its own, but it’s a life they bestowed. They talk about the business’s growing pains and maturity. Owners are acutely aware of the multiplier effect the success of the company has on employees and their families. In a few cases, that multiplier extends to entire towns.

That’s the purpose. To nurture and expand. In so many cases every process in the business was the founder’s creation. He or she picked out the furniture and designed the first logo. This aggregation of people breathes and succeeds on what the owner built.

That’s why so many owners still put in 50 or more hours a week, long after there is any real need for their presence. This thing they created is their purpose.

Life After the Sale

Unsurprisingly, so many owners find that 36 holes of golf each week, or 54, or 72, still isn’t enough to feel fulfilled. You can get incrementally better, but it doesn’t really affect anyone but you. Building a beautiful table or catching a trophy fish brings pride and some sense of accomplishment. Still, it never matches the feeling of creating something that impacts dozens, scores, or hundreds of other human beings.

That’s why we focus on purpose as the third leg of the personal vision. In the vast majority of cases, it involves impacting other people. Any owner spent a career learning how to teach and lead. Keeping those skills fresh and growing is a substantial part of the road to satisfaction.

Purpose in your life after the sale may involve church or a community service organization. It could be serving on a Board of Directors or consulting for other business owners. It might be writing or speaking. Purpose doesn’t require a 50-hour week, but it does require some level of commitment, and the ability to affect the lives of others.

Private Equity Reputation

December 2, 2024 by John F. Dini

We began this series by saying that Private Equity reputation is as the Great Satan to some, and a savior to others, depending on the personal experience of the speakers. In fact, both reputations are well deserved, but neither can be universally applied.

The “Great Satan” Private Equity Reputation

PEGs buy companies for the express purpose of improving their performance. That often comes with considerable pain for employees. A Searchfunder I know said recently “I’m looking at this acquisition because the owner thinks he is running an efficient company, where I see at least ten points that could be dropping to the bottom line.”

Efficiency is good, but too often it flies in the face of what made a company successful. In one example I recall, the PEG principals spoke to the assembled employees the day after closing on the business. They said “We bought this company for its culture and its people. Those are the most important assets to us.”

The cuts started coming the following Monday. Thanksgiving turkeys were “outdated.” Gone. All bonuses would be performance-based, so extra bonuses at Christmas would be discontinued. Season seats for the local sports franchise – gone. (Most of those went to customers.) Weekend overtime – gone. Schedules would be rearranged so that weekend workers were now scheduled for Saturdays and Sundays and got fewer hours during the week to make up for it.

Employee discounts on the company’s products – gone. Partial subsidies for family health insurance, well by now you are getting the gist. The flood of cuts was shocking and seemed unending. The flood of resignations started soon after.

By the way, the PEG missed its planned flip date (when they were supposed to sell to a bigger PEG) because of poor results and eventually took the company into Chapter 11.
I wish I could say that this type of result was unique, but it happens in far too many cases.

The “Savior” Private Equity Reputation

There is another reality. About 50% of all the privately held employers in the United States are Baby Boomers. The youngest of these are now turning 60. Many have built substantial enterprises whose value is far beyond what a younger entrepreneur can afford.

Private Equity has morphed into a many-headed creature, capable of acquiring almost any size business with value. It will never be for the mom-and-pop businesses that merely earn a living for the owner. As Doug Tatum says in No Man’s Land, they have grown to a level where they provide “wealth” to the owner equivalent to three salaries. Unfortunately, the owner must hold down three jobs for it to work.

But businesses with real cash flow, from a few hundred thousand dollars to a few hundred million, can find a tranche of PEGs who will consider their acquisition. Some specialize in minority ownership, or in funding the transition to a new generation of owners. Like it or not, these will be the saving of an entire generation who became successful by building a illiquid asset.

The latest estimate (from the Exit Planning Institute) is that these owners have $14 trillion dollars locked up in these illiquid assets – their companies. It that was an economy, it would be third in the world behind only the USA and China.

Reputation Counts

Many business owners are dazzled by the money a PEG has. With 17,000 of them out there, “We have money” is no longer as impressive as it once was. If a PEG comes calling, sellers (and their advisors) should carefully research their track record. If they lead with a guy “just like you” who owned a previous acquisition, be cautious. In most cases, he or she is compensated for adding to their portfolio.

Instead, talk to other owners who were acquired previously and are no longer active in the business. Look carefully into the acquirer’s experience in your industry. Unfortunately, “We have money” sometimes dazzles the PEG too. They begin to think financial manipulation is the only thing needed to make any business more successful.

Private Equity reputation is important. It will help you decide whether you should be discussing “show me the money” or “show me the future.”

Private Equity Leverage

November 11, 2024 by John F. Dini

Private equity leverage can dramatically increase ROI, but it can also be a trap. In our previous article, we discussed the general structure of Private Equity, how it works, and the types of Private Equity Groups (PEGs). They have grown rapidly as an alternative investment that produces far better returns than Treasury Bills or publicly traded equities.

The Power of OPM (Other People’s Money)

How do they provide these enviable 18% to 25% returns on an investment? The simple answer is leverage. An example most business owners can easily comprehend is a real estate mortgage. You put down $100,000 on a $500,000 building. The mortgage, especially in the first few years, is largely interest expense. You lease the building for a rental rate that covers your mortgage payment and expenses. Two years later you sell the building for $700,000. How much did you make?

The obvious answer is $200,000, but what is your Return on Investment (ROI)? If you said 40% you’d technically be correct. You made a $200,000 profit on a $500,000 investment. But what was your cash-on-cash return?

That is 200%. You actually invested $100,000 of your own money and used the building to secure a loan for the rest. Your profit was $200,000 on a $100,000 investment.

Private Equity Leverage(Other People’s Money)

Extend this example to buying a business. The business makes about $2,000,000 a year. (For the sake of simplicity, we won’t discuss here the differences between cash flow and profit.) The agreed-upon acquisition price is $10,000,000, or five times the profits. The PEG contributes $2,000,000 as a downpayment and finances the remaining $8,000,000. The cash flow of the business must cover the loan payments and leave enough working capital for operations.

A 5% loan amortized over 20 years requires a payment of about $53,000 a month or $636,000 a year. The remaining cash flow ($1,364,000) produces a return of 68% annually on the purchase.

Of course, the Limited Partner investors don’t get all 68%. Some must be kept as working capital for expanding operations. The PEG receives substantial fees for creating the deal and overseeing the investment.

In fact, the 25% return to the investors is only part of the story. If the PEG can double the company to a $4,000,000 profit level, even the exact same 5x multiple on exit could produce a $20,000,000 sale, or an $18,000,000 return on the original $2,000,000 cash outlay. That’s a 900% ROI.

Leveraging the Leverage

Buying a middle-market business with the structure outlined above would be lucrative enough, but of course, as professionals, the PEG would like to maximize their return. They frequently cut expenses dramatically upon acquisition (more on this in the next article.)

Often, they will line up a secondary loan, using the company’s cash flow to reduce or eliminate their downpayment exposure.

Private equity leverageDuring the low-interest environment of the last decade, PEGs could negotiate even more favorable terms. If you replace the 5% loan with a 2.5% loan, the annual cost is reduced to $509,000 annually, leaving a 75% return to work with.

Traditionally, most of the loan terms in private equity purchases reset after a few years. Refinancing at 9% raises the loan cost to about $865,000. Still, a 57% ROI is acceptable, if the business is thriving and the other expenses are kept under control. If the cash flow is covering a secondary loan at an even higher rate to replace the downpayment, or it’s been pledged to cover other debt outside the business, the picture might not be as rosy.

Private Equity and Privately Held Businesses

October 28, 2024 by John F. Dini

Depending on who you are talking to, Private Equity is either the Great Satan or the savior of small and mid-market companies in the United States. The stories depend a lot on the personal experience of the speakers.

Once a vehicle for high-risk investment plays in corporate takeovers (see Bryan Burrough’s Barbarians at the Gate,) Private Equity has morphed into tranches where specialists seek opportunities in everything from a Main Street entrepreneurship to multi-billion-dollar entities.

What is Private Equity?

The term itself is relatively generic. According to Pitchbook, there are currently 17,000 Private Equity Groups (or PEGs) operating in the US. The accepted business model for our purposes is a limited partnership that raises money to invest in closely held companies. The purpose is plain. Well-run private businesses typically produce a better return on investment than publicly traded entities.

The current Price to Earnings (or PE – just to be a little more confusing) ratio of the S&P 500 is about 27.5. This is after a long bull market has raised stock prices considerably. The ratio is up 11.5% in the last year. That means the average stock currently returns 3.6% profit on its price. Of course, the profits are not usually distributed to the shareholders in their entirety.

Compare that to the 18% to 25% return many PEGs promise their investors. It’s easy to see why they are a favorite of high net worth individuals, hedge funds and family offices. As the Private Equity industry has matured and diversified, they have even drawn investment from the usually more conservative government and union pension funds.

Private Equity Types

Among those 17,000 PEGs the types range from those who have billions in “dry powder” (investable capital,) to some who claim to know of investors who would probably put money into a good deal if asked. Of course, which type of PEG you are dealing with is important information for an owner considering an offer.

The “typical” PEG as most people know it has a fund for acquisitions. It may be their first, or it may be the latest of many funds they’ve raised. This fund invests in privately held businesses. Traditionally PEGs in the middle market space would only consider companies with a free cash flow of $1,000,000 or greater. That left a plethora of smaller businesses out of the game.

For a dozen years I’ve been writing about the pending flood of exiting Boomers faced with a lack of willing and able buyers. I should have known better. Business abhors a vacuum.

Searchfunders

Faced with an overabundance of sellers and a dearth of capable buyers, Private Equity spawned a new model to take advantage of the market, the Searchfunders. These are typically younger individuals, many of whom graduated from one of the “EBA” (Entrepreneurship By Acquisition) programs now offered by almost two dozen business schools.

These programs teach would-be entrepreneurs how to seek out capital, structure deals, and conduct due diligence. Some Searchfunders are “funded”, meaning they have investors putting up a stipend for their expenses. Others are “self-funded.” They find a deal, and then negotiate with investment funds to back them financially.

Both PEGs and Searchfunders seek “platform” companies, those that have experienced management or sufficiently strong operational systems to absorb “add-on” or “tuck-in” acquisitions. The costs of a transaction have bumped many seasoned PEGs into $2,000,000 and up as a cash flow requirement. Searchfunders have happily moved into the $500,000 to $2,000,000 market.

In the next article we’ll discuss how PEGs can promise returns that are far beyond the profitability of the businesses they buy.