Exit Planning Tools for Business Owners

John Dini

Personal Vision – Life After the Sale Part I

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Life after the sale is often both the most important and most neglected factor in exit planning. Although (according to two different surveys in 2013 and 2022,) 75% of owners report regrets or unhappiness a year after the transition, exit plans continue to be constructed primarily around financial targets. In the event you haven’t heard this since you were five years old, “Money doesn’t fix everything.”

Superficial Planning

To be fair, most advisors include some conversation about “life after” in their planning conversations. Unfortunately, they are often satisfied with the features associated with an abundance of free time. Visiting the family, RV’ing through the country, playing 72 holes of golf a week, or seeing the great capitals of Europe can all be accomplished in the first year after ownership.

When they attempt to broach the idea of longer-term activity, the client’s answer is often “Let’s get the money. Then I’ll worry about what to do with it.” It’s challenging to push beyond the client’s desire to focus on the most obvious goal, especially when it seems to enable everything that follows. Nonetheless, owners who are unhappy because they didn’t get enough money failed either to understand the realities of their transactions or the future cost of their life plans. That certainly isn’t 75% of planning clients.

We are discussing the far greater number who have sufficient funds, but after their initial splurge of free time are unsure of what to do next.

Emotional Preparation

The first issue an exited owner faces is identity. “I used to own a company” quickly wears thin, and increasingly fades as years pass. “I’m retired” is a nebulous identity, and lumps them into a group with every wage earner who says the same. That’s a class they’ve proudly differentiated from for most of their lives.

Some mental health professionals have compared the emotional reaction to missing ownership identity to post-partum depression. Their world has changed overnight. The principal subject of their interest is gone, and they aren’t sure what replaces it. Post-partum is characterized as including “a feeling of guilt, worthlessness, hopelessness or helplessness.”

As an owner, there was always something else that needed their attention. Now there isn’t. Distress from discussing the daily news (which they now watch more frequently) used to be countered by a requirement to attend to the business. Now there is no business to attend to. The feeling of “What I do is important to a lot of people” has gone.

Identity in Life After the Sale

We encourage clients to at least mentally design their next business card. Handing someone your card is a shorthand version of declaring your identity. The first attempt by many is jocular but meaningless. “Part-time Philanthropist, Bon Vivant and Man About Town” is funny, but only once. “Grandparent, Outdoorsman and Classic Car Mechanic” is better. At least it describes real activities for further conversation.

“Business Counselor and Chairman of the Board of (Charity Name)” describes an identity, ongoing contribution to something or someone, and a role of importance. It doesn’t have to be true today (we aren’t printing the business cards yet,) but it’s at least aspirational.

Building a plan for life after the sale begins with establishing a future identity. There are several other components that we will cover in the next two articles.

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 Planning – Lifestyle and Legacy

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Lifestyle and Legacy are two very different types of owner transition objectives.

When we ask a client “What do you expect as a result of our exit planning?” the answer may be about the money, the time frame, or the impact on people. No matter how it is phrased, the response will break down into one of two major categories. It’s either about the owner’s future lifestyle, or the legacy that is left behind.

Lifestyle Objectives

Many clients want to exit to an enjoyable retirement. Usually, their primary concern is financial security. They want enough money to live comfortably, and to take care of their family. This is the reason many start their process by consulting with a financial planner, but lifestyle objectives can extend well beyond their bank account.

A separate but related objective is time. It may be the time to travel without being chained to a laptop. The time to explore new things outside the business might result in formal education or training. Undertaking a new wellness regimen requires time, as does exploring a new hobby.

Time might be used to engage in community service. An issue that is increasing in the Baby Boomer generation is the time to care for older family members.

Another lifestyle issue is the ability to relocate. Moving to a place for favored activities, a better climate or to be closer to children (and grandchildren) often requires separation from the activities of the business.

Legacy Objectives

Some owners run their businesses for other than purely financial reasons. In these cases, they may be more concerned with how the business continues than the proceeds to be realized from a sale.

Of course, a chief motivation for putting legacy at the top of the list is family succession. It might be a sense of obligation in a company that has already passed through multiple generations, or just a desire to provide future generations with the benefits of ownership.

The role of the business in the community is also a legacy concern. The company could be a key employer in a small town, or a primary sponsor of a school or Little League. The owner’s name on the door or the preservation of long-standing business relationships can often affect the desirability of a buyer in the seller’s eyes.

Environment, Social, or Governance (ESG) concerns have become increasingly important to some sellers. They want to make certain that the importance they place on these issues is shared by future ownership.

Finally, the future growth and success of the business can be considered a legacy issue. An owner could have concern for the opportunities such growth provides to loyal employees, or whether innovations and proprietary processes will be expanded beyond their current limits.

Lifestyle and Legacy

Every owner’s objectives will have some combination of lifestyle and legacy concerns. They don’t necessarily conflict, but they involve differing perspectives.

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.

Stakeholders in Exit Planning

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When preparing for the transfer of a business, there are many stakeholders who can impact your plan. Some have direct authority or decision-making capability over the transaction, but others may have substantial influence. In general, it’s best to presume that anyone who has a relationship with the owner or the business will have some impact on his or her decisions.

Internal Stakeholders

Of primary importance are partners and shareholders. Even when an owner has a voting majority, minority partners may have an official or unofficial veto. “Official” comes in the form of supermajority rights. Unofficial may be in the form of a threat to terminate employment, which in some cases may make the business unsaleable. If the minority holders are the intended recipients of the equity, they will function as both key components of the company’s value, and negotiators of the price to be paid for that value.

Employees are the other major internal stakeholders. Could they be a flight risk in the owner’s absence? Are they in danger of losing special status or privilege under new management? What is the plan for informing and updating them before and after a deal is struck?

Family

With most business owners, their equity in the business is 50% or more of their personal net worth. That makes future ownership, sale price and coordination with the estate plan items of great interest to spouses and children. In today’s serial family relationships, that can also involve step-siblings, former spouses, and their new partners’ families.

If there are children in the business, their future is inextricably tied to the company. If some children are in the business and some outside of it, the entitlements and expectations grow even more complicated.

Business Relationships

Customers may be transactional, as in retail, or strategic partners whose own business depends on what the company supplies. In such cases, or when customers are government entities, they may have contractual rights to approve a change in ownership.

In any case, the valuation of the business is going to depend at least partially on the retention of customers.

Suppliers have similar interests. We recently saw a distribution arrangement canceled simply because the supplier was insulted by not being informed about the company’s merger negotiations. The fact that they were conducted under a confidentiality agreement didn’t appease the supplier.

Creditors and lenders who hold personal guarantees are bound to be concerned about ownership changes. Be proactive in letting them know how their security interests will be preserved.

Public Stakeholders

StakeholderGovernment entities, especially any with regulatory responsibility over the industry, should also be approached proactively. Waiting for them to recognize a change may seem like “discretion as the better part of valor,” but untimely intervention could derail a transaction.

If the company is an important employer, a candidate for relocation, or a fixture in the community, some outreach to elected officials may be advisable.

Finally, consider the media. Plenty of business owners have complained about interviews that were slanted, reported inaccurately, or “just plain wrong.” If the transaction is newsworthy (and even if it isn’t,) prepare a professional announcement and a list of where it should be distributed. Refer to it, word for word if necessary, whenever someone calls for comment.

Thinking in advance about the impact of an exit plan on the various stakeholders can save advisors and their clients a lot of headaches when a deal is signed.

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 – 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.

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.