Exit Planning Tools for Business Owners

Life After

Owners are a Minority

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When it comes to careers, business owners are a minority of the population. In conversations this week, I mentioned the statistics several times, and each owner I was discussing it with was surprised that they had so few peers.

According to the Small Business Administration (SBA), there are over 33,000,000 businesses in the US. Let’s discount those with zero employees. Many are shell companies or real estate holding entities. Also, those with fewer than 5 employees, true “Mom and Pop” businesses, are hard to distinguish from a job.

The North American Industry Classification System (NAICS) Association, lists businesses with 5 to 99 employees at about 3,300,000, and 123,000 have 100 to 500 employees (the SBA’s largest “small business” classification.)

Overall, that means about 1% of the country are private employers. Owners are a small minority, a very small minority, of the population. Even if we only count working adults (161,000,000) business owners represent only a little more than 2% of that population.

So What?

Where am I going with this, and how does it relate to our recent discussions of purpose in business exit planning? It’s an important issue to consider when discussing an owner’s identity after transition.

Whether or not individual owners know the statistics of their “rare species” status in society, they instinctively understand that they are different. They are identified with their owner status in every aspect of their business and personal life.

At a social event, when asked “What do you do?” they will often respond “I own a business.” It’s an immediate differentiator from describing a job. “I am a carpenter.” or “I work in systems engineering,” describes a function. “I am a business owner” describes a life role.

When asked for further information, the owner frequently replies in the Imperial first person plural. “We build multi-family housing,” is never mistaken for a personal role in the company. No one takes that answer to mean that the speaker swings a hammer all day.

Owners are a Minority

We process much of our information subconsciously. If a man enters a business gathering, for example, and the others in the room are 75% female, he will know instinctively, without consciously counting, that this business meeting or organization is different from others he attends.

Similarly, business owners accept their minority status without thinking about it. They expect that the vast majority of the people they meet socially, who attend their church, or who have kids that play sports with theirs, work for someone else.

There are places where owners congregate, but otherwise, they don’t expect to meet many other owners in the normal course of daily activity. This can be an issue after they exit the business.

You see, telling people “I’m retired” has no distinction. Roughly 98% of the other people who say that never built an organization. They didn’t take the same risks. Others didn’t deal with the same broad variety of issues and challenges. Most didn’t have to personally live with the impact of every daily decision they made, or watch others suffer the consequences of their bad calls.

That is why so many former owners suffer from a lack of identity after they leave. Subconsciously, they expect to stand out from the other 98%. “I’m retired” carries no such distinction.

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.

Personal Vision – Life After the Sale Part 2

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In our last article about life after the sale we discussed identity. Even when business owners are comfortable with who they are, however, there is still the nuts and bolts issue of activity.

A business owner spends 20, 30, or (not uncommonly with Boomers,) 40 years focused on running a business. Unless they’ve built a substantial organization that is run by employees, it likely remains their biggest single time commitment right up until they leave. That commitment is frequently a lot more than 40 hours.

Even if the time “in the office” or “on the job” is less than 40 hours, there are the emails before and after hours, the texts, phone calls from unhappy customers or from employees who aren’t going to make it to work, and just thinking about what comes next, frequently at 2 o’clock in the morning.

Extended Vacation

When asked about activities to fill their week, many owners will say “I’ll have plenty to do!” That isn’t enough. “Plenty” requires some planning if it is really going to occupy the bulk of their work week.

After exiting a business, most owners bask in their newfound freedom. If we presume a selling price that’s substantial enough to allow them a wide range of choices, their first reactions typically include a few lengthy trips. These may range from a long-promised European vacation with the spouse to purchasing an RV to tour the National Parks.

This extended vacation period usually ranges from six months to a year. After that, most owners are looking for something to do. Their grandchildren (and their grandchildren’s parents) are less enthusiastic about having Grandpa and Grandma around too frequently. Travel is too tiring to keep it up indefinitely. Friends are rarely in the same position. Either they are still working and lack the leisure time, or they’ve progressed beyond the extended vacation period and settled down into their own retirement routine.

And as astounding as it may sound to enthusiasts, I’ve heard “I never thought I could play too much golf,” any number of times.

Life After the Sale…and After the Vacation

We use an exercise that brings home just how much the business has dominated an owner’s life. It starts by asking the owner to think a year ahead.

We start with the owner’s “average” work week. Let’s say 50 hours for this example. Then we begin deducting those activities that comprise their impression of “plenty to do,” putting an hourly commitment to each activity.

Regular travel, either for relatives or recreation, still comes close to the top of the list. We ask “How about two weeks away every quarter?” The response is that eight weeks a year is a lot, but could be enjoyable. Then we do the math: 8 weeks x 50 hours= 400 hours of vacation, divided by 52 weeks = 7.7 hours a week. A good start, but we still have 42 hours to fill to replace the business.

How about fitness? Getting into shape is often a goal, but working out every weekday only absorbs another 5 hours.

Working for a cause such as serving lunch at the local homeless shelter a few days a week, can use up another 10-12 hours. We still have 25 hours to go, or about half the time currently spent working.

We can still fit in 18 holes twice a week. That’s 8 more hours. At this point, many owners run out of ideas. That still leaves 17 hours a week, or two full “normal” work days.

The objective isn’t to merely fill up the time slots. It’s to illustrate just how big a void needs to be filled to replace the business. Whether your exit is planned for a year from now or ten, it is time to begin thinking about life after the sale.

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.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

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John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “saleable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

o Transaction and professional fees.
o An asset sale was negotiated and there was income tax on some asset depreciation recapture.
o $1 million in business debt needed to be repaid.
o Capital gains and affordable care act taxes.
o Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a saleable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

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.

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.

What’s Your Purpose in Retirement?

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Retirement can be an exciting milestone. It’s also a major lifestyle change. Oftentimes, your daily workday tasks (professionally or if you run your own business) will likely no longer exist.

Transitioning into retirement for some is an easy process. Perhaps their profession is not their absolute passion, and they always had other pursuits and hobbies they are ready to explore once exiting from their day job. But for others, their profession or business is their passion. They put all their time and energy into it and are dedicated to their profession for many years. Now suddenly, retirement is on the horizon and work is coming to an end. Alternatively, some people have it in their blood to consistently be achieving something, striving to make an impact and difference.

Whichever the case for you, a meaningful life with purpose is a healthy human condition for life fulfillment and longevity. This perspective has been around for generations. Teddy Roosevelt wrote about it in his book, “The Strenuous Life,” written in 1899. To reference his perspective, here is a quote addressing how to live a fulfilling life:

“I wish to preach, not the doctrine of ignoble ease, but the doctrine of the strenuous life, the life of toil and effort, labor and strife; to preach that highest form of success which comes, not to the man who desires mere easy peace, but to the man who does not shrink from danger, from hardship, or bitter toil, and who out of these wins the splendid ultimate triumph. A life of slothful ease, a life of that peace which springs merely from lack either of desire or of power to strive after great things, is as little worthy of a nation as an individual.” – Theodore Roosevelt

Since we’re quoting Teddy Roosevelt about living a fulfilling life, here’s another excerpt from one of his writings titled “Into the Arena”:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

The reason I bring these quotes into this discussion of retirement is that it’s important to remember just because your time spent working up to this point is coming to an end, doesn’t mean you stop laboring or that you don’t need to put effort into new endeavors or into making a difference.

What Are You Going to Do in Retirement?

I was at a gathering recently and in a conversation with two close friends of mine were discussing retirement, and one said to the other, “It’s not whether you can retire, it’s ‘what are you going to do when you retire?’”. He’s right, in my opinion.

The book, “The Magic of Believing,” written by Claude M. Bristol in 1948, wrote of a man he knew: “One man I know who has many achievements to his credit, and who has passed the seventy mark, declared that most people fall by the wayside because they never start anything.

I make it a plan and have for years, to start something new – that is, new for me – at least once a week. It may be only the making of some simple gadget for use in the kitchen, an entirely new sales plan, or reading an unfamiliar book. I find in following this plan not only keeps my body and mind active but also puts to use a lot of imaginative qualities that otherwise might fall asleep and atrophy. This idea of a man retiring when he’s sixty is (in my option) a great mistake.

As soon as a man retires and quits being active mentally and physically, he’s on the way to his grave in short order. You have seen what happens to fire horses when they are retired. You know what happens to your automobile when you leave it outside unused and neglected: it starts to rust and is soon headed for the junkshop. Humans are the same: they deteriorate out or wither and die when they go on the shelf.”

We Need Purpose in Retirement

I have deliberately referenced writings published many, many years ago to point out that this dilemma is as old as time; the human struggle hasn’t changed. We all still need deep purpose in our lives and the ability to make a difference for ourselves and for others to have a fulfilling life. In the practice of helping business owners exit their business successfully, I have heard stories of owners when facing the day of finalizing the sale of their company, don’t show up for the signing. Why? Because all their self-identity and their purpose are in the company they started, grew, and made a great success. To them, parting from it represents an end to all of that and a loss of a sense of control. But exiting doesn’t have to be viewed as an end. But does take careful thought, reflection, consideration, planning, and time to develop a new purpose and consistent passions. For some this is simple, but for others, takes time and consideration. However, it’s a critical area to address. A person who says that finally I’ll have time to play golf will likely find that passion dissipates after a few months and begin to ask, “now what?”

Over the years, our firm has developed a client conversation exercise called “Purposeful Conversation.” Originally, it was developed from our practice of “family legacy development,” We developed our P.C. exercise as a systematized approach to have a deep discussion with a client on “what matters most” to them.

The exercise is broken into three sections: Concerns and Priorities, Commitments and Causes, and Pursuit of Happiness/Life Fulfillment. Each of these areas has nine to twelve potential subjects that a client can consider. We help determine, with the client, the subjects that are relevant and have a deep discussion about importance. This can help them visualize their future, determine their life’s passions during retirement, and help determine what matters most in life. We discuss what makes them happy, what will help them continue to grow, and what brings fulfillment and create a plan now to allow them to focus on and pursue what they desire later.

We also developed a customized workbook to help identify their individual and family values and tie it all into their changing lifestyle.

Pursure Passion in Retirement

Pursuing interests and passions can come in many forms and combinations. Once I took a Lyft from a downtown Denver hotel to the Denver Airport. The driver said that he had started a few tech companies in the past, sold them, and is now driving to meet and learn from other people. I also learned that he decided to learn all he could to master Neuro-Linguistics. This is the study of how verbal and non-verbal language is represented in the brain: that is, how and where our brains store our knowledge of the language that we speak, understand, read, and write. And what happens to our brains as we acquire that knowledge, and how we use it in our everyday lives. I describe it in detail because it’s quite involved! Nevertheless, this gentleman strived to master it and then apply it to his sales training and sales consulting. He told me he was, being hired by companies to facilitate training courses for their sales forces. Wow! Talk about pursuing something else with a passion. I am now connected with him on LinkedIn and learning from him.

You can make a new life in retirement, include whatever you desire, and in a way that brings you maximum fulfillment and meaning. Do whatever “floats your boat,” so to speak.

If you are approaching the runway to land into your retirement years, or the period of your life that transitions you from your profession to your passion, make sure to take time and plan for it. It will be well worth the effort.

I hope you find this article useful. If you have any questions on this subject, feel free to contact me at szeller@zellerkern.com.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com