Exit Planning Tools for Business Owners

John Dini

EBITDAC : What is Your Business Worth Now?

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Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Exit Planning in a Crisis

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Why would you be exit planning in a  crisis? At the height of the economic expansion (a few months ago in late 2019) I was reviewing a company’s financial statements. Their sales were stagnant, and profits were minimal. When I asked the owner why his business hadn’t grown, he responded, “Well, the Great Recession hit our industry pretty hard, you know.”

planning in a crisisTake note that it wasn’t his fault. He was in a hard-hit industry, and the economy dealt him a bad hand. He ignored the thousands of businesses just like his that had grown and prospered in the last ten years.

Once you hunker down behind “It’s not my fault,” it’s easy to stay there too long. First you are glad that you survived. Then you are glad to be making a little bit of money again. Then you wait for the same conditions that made you successful before. If they don’t come, it’s not your fault.

In the meantime, others are coming out of the downturn firing on all cylinders. They used the slow time to get ready; to plan what comes next. When the door of opportunity opened again, they were ready.

Baby Boomers’ Double Whammy

The coronavirus is especially lethal in senior citizens. Many of those are Baby Boomer business owners. They have also suffered a double financial hit. Their retirement account balances are lower, and their businesses, whether closed or just slow, are worth less then they were a few months ago.

Many owners will try to kick the can down the road. “I’ll spend a few years building the business back up, then I’ll sell it.” For some, that was their plan after the recession. Unless you have something new up your sleeve, you may be waiting a long time for the right buyer to come along. In the next economic cycle, you may wait too long. You can only kick that can so far.

If you are a Baby Boomer, the time to be planning your exit is now. That goes double if you are sitting in your house wondering what comes next. Most entrepreneurs started a business because they wanted control over their lives. When there’s an event that takes away that control, your best response is to get it back.

Exit Planning in a Crisis

Your exit plan starts with some basic questions.

  1. Do I know how much I need to retire, with a professional analysis of my living expenses, life expectancy and inflation assumptions?
  2. Do I know how much my company is really worth, and who is most likely to pay me that amount?
  3. If #2 doesn’t meet the needs of #1, do I know how long, and what it would take, to get my business there?
  4. Do I know all the options for monetizing my business, including a sale to employees, another entrepreneur or professional acquirers?

If you are a Baby Boomer, unless you are exit planning in a crisis, you risk a discussion in 2025, or 2028, or 2031 that starts with “Well. the coronavirus hit our industry pretty hard, you know.”

There is a network of advisors in the USA and Canada who specialize in a reasonably priced, 90-day planning process for small business owners, and who use a suite of online tools to help you work through all these questions remotely. They can help get you started right now.

For a listing of these advisors, go here.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Quarterbacking is Not Exit Planning

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Quarterbacking is a popular term when exit planners are talking to clients. It’s supposed to invoke a vision of someone who is in control. Think about a Tom Brady, Aaron Rodgers or Patrick Mahomes standing tall in the pocket, surveying the offense and defense unfolding before him.

There is a real problem with using “Quarterbacking” when referring to your exit planning professional team. The quarterback calls the plays. The job of the rest of the team is to run them as instructed.  I’ve yet to meet a CPA or attorney who thinks that is the best way to develop a client’s exit plan.

Teamwork

Exit planning, like no other form of professional consulting, is a team sport. When I am engaged by a client, I have the responsibility of defending his or her long-term objectives. The other advisors, who may include an insurance agent, financial planner, or appraiser, all have experience to lend to the process.

We can modify a plan multiple times and in many ways. The accountant may have some excellent restructuring ideas to save taxes. The attorney can add terms to a buy/sell agreement to protect the owners from having their equity unfairly valued by the IRS, or from having it pass to parties outside the company.

The insurance agent can mitigate the risk of illness or death derailing the timely transfer of the business, or of the surviving family being left destitute. The appraiser can develop valuations that take advantage of the discounts permitted under IRS guidelines.

Each of these professionals has a role, and should be able to add their skills to the process, with only one exception. They should not be permitted to do anything that interferes with the owner’s objectives. That’s the responsibility of the exit planner.

The Alternative to Quarterbacking

I prefer to think of the exit planner’s role as analogous to that of an orchestra conductor.

quarterbackingThe exit planner may not be as skilled in any specific discipline as the others on the team. He may know something about tax planning, or legal structuring or insurance. She probably knows a bit about valuation and even more about contracts.

But, like the conductor, he or she doesn’t know more about any of those subjects than the advisor who spends full-time in that area.

No one expects the conductor to step off the podium for a violin solo, or to fill in for the French Horn.  In fact, you don’t even want the conductor to tap the triangle for that one little note in the pause. If he did, he would be distracted from his primary role of keeping all the musicians on the same page.

Having one advisor coordinate the contributions of others greatly improves the overall result. Expecting him or her to dictate details outside his area of expertise is foolish. Expect your exit planner to lead without quarterbacking.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Baby Boomers’ Influence – Still Strong

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There is ample evidence in the marketplace that Baby Boomers’ influence is still powerful. From walk-in tubs to stand-up bikes, and from pharmaceutical commercials to river cruises, Boomer tastes are catered to in every market.

We all know the sterotypes of the “typical” Boomer. Goal oriented, workaholic, spendthrift, and oriented towards accumulating material evidence of their achievements. They identify work and position with their value in society. We have also discussed often in this space the issues of employers who have to replace the corporate knowledge base of retiring Boomers.

Clearly, one way to keep the economy moving upwards is to encourage Boomers to work longer and accumulate more. The more they earn, and the more they spend, the better we all fare. (Except, of course, for the Gen Xers who are behind them in the promotion queue.)

Boomers Influence Legislation

One really obvious example of this is the SECURE (Setting Every Community Up For Retirement Enhancement) Act, which took effect on January 1, 2020. It was missed by many, gliding through as a budget attachement, and absent the histrionics that seem to accompany any legislation in Congress.

What could be so important and universally desirable that both parties would happily cooperate? Getting the Boomers to work longer. How do you accomplish that? Give them the opportunity to accumulate even more than the $17 Trillion (one year’s GDP) that they already hold in personal assets.

The SECURE Act is aptly (if somewhat elaborately) titled. Boomers who are more financially sound will be less of a burden on the public sector. That’s the Community benefit referred to in the title. In addition, as Social Security feels the pinch of paying back those who funded the first two generations of beneficiaries, it theoretically will reduce the outcry when benefits are reduced.

The New Terms of Retirement

The act doesn’t provide Boomers with additional benefits. Instead, it gives them the chance to pay more into the system. Here are the major changes.

  • The age at which you must start taking Required Minimum Benefits from your employer or individual retirement plans has been raised from 70 1/2 to 72 years old. (Social Security benefits, however, still max out at age 70- even though you would still have to make SS contributions.)
  • You can continue to pay into your retirement plan of any type for as long as you want- there is no longer a cutoff age for contributions.
  • Small business owners may now group together to offer retirement plans. Formerly, many were too small to bear the costs of having a 401K, for example.
  • Part time employees (read: semi-retired Boomers) can now participate in employer retirement plans.
  • Employer plans may now offer annuities for lifetime income among their options.
  • Inherited retirement accounts must be spent in ten years- they cannot be rolled to another generation.

Are you getting the message? We’d like you to to work longer, pay more in taxes, and (at least theoretically) leave more behind when you go.

Why is this indicative of the Boomers, influence? Because that’s exactly what we seek. With health care, exercise and nutrition so much better than for previous generations, we were saying that 60 is the new 40. Now we are saying that 70 is the new 50.

No one is forcing us to work longer. They are just recognizing that many of us want to. C’mon Boomers, you fueled the longest sustained expansion is US history (40 years from 1968-2008.) Can’t you do just a little bit more?

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Why Plan Now? Exit Planning for Small Business

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Owners ask all the time, “Why Plan Now?” “I’m not planning to leave my business for years. I feel good, and I still enjoy my business. I’m not sure what else I would do. Besides, if my company is only going to sell for two or three times earnings, I can make more than that by sticking around.”

All are valid arguments. Baby Boomers, the youngest of whom turned 55 this year, are working longer and are more active well into their 60s and often into their 70s. The term “next career” describes the growing portion of the population who are choosing another full-time activity after leaving their jobs or businesses.

Why Plan Now?

That said, there are good reasons why every Baby Boomer business owner should have a documented exit plan.

why plan now?

  1. A plan is not an action. As the late, great Yogi Berra said, “If you don’t know where you are going, you may wind up somewhere else.” The process of deciding what your ultimate outcome should be gets you mentally prepared, but implementation only starts when you say so.
  2. It will focus your efforts. Say, for example, you decide that ultimately you want to sell to your employees. Your investments in hiring and training will look very different than if you plan to sell to a large competitor who would shutter your operation.
  3. It will make you a better business owner. Thinking through the things that drive value in your business, (employees, products, and customers,) will inevitable highlight what could be improved. You will look at your business through a buyer’s eyes. That lends a whole new perspective.

The first four parts of this series dealt with various exit scenarios. This is about your timing.

How to Start

There’s a ton of resources both in past articles on this site (indexed by topic) and in our free library of planning tools and educational materials at www.YourExitMap.com. Many Financial Planners, Bankers and CPAs are getting one of the certifications in exit planning (Either the Certified Exit Planning Advisor – CEPA or the Certified Exit Planner- CExP.) That equips them to have a broader conversation that just focusing on their specialty.

Chapters are springing up of professionals who specialize in exit planning. Booth the Exit Planning Exchange (XPX) and the Exit Planning Institute (EPI) regularly offer seminars for owners considering their exit strategy, Between the two there are chapters in about 40 US cities.

Try putting the term “Exit Planning” in an Amazon book search. You’ll have a choice of about 25 titles.

Finally, there’s my standard (if somewhat cliched) answer to the question “Why plan now?”

Because sooner or later, every owner leaves his or her business, whether voluntarily or otherwise. It’s only the biggest financial event of your life.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He has authored three books on business ownership.