Exit Planning Tools for Business Owners

Baby Boomers

Avoiding Financial Anxiety

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Financial anxiety
Seek help and avoid financial anxiety
Everyone has financial anxiety to some extent. Whether you have a little money or a lot of money does not make a difference. However, when it comes to asking for help, many people avoid seeking financial advice until necessary.
 
As financial decisions become more complicated, it is far easier to make a mistake. Today more and more people procrastinate on making financial decisions. Procrastination to make financial decisions can ultimately lead to anxiety, delay, or indifference.
 
In this article, I provide three keys to seek out and accept financial advice from a professional advisor. If you recognize the need for help, whether you are a millennial, a baby boomer, or someone in between, you can increase the odds of making beneficial financial decisions. You can avoid making predictable financial mistakes.
 
One may ask, “Why can’t I do all of this on my own?” To which, I would respond, “You don’t know what you don’t know!” An experienced financial planner has many clients that are at different stages of their financial lives. They can use their experience of what has worked and what has not worked to help you arrive at a better outcome. Financial success is not only contributed to by the earnings over a lifetime, but it is also the avoidance of predictable financial mistakes.
 

Who to turn to for Financial Advice?

Let us start with some definitions: A Financial Planner is a professional who helps individuals create a plan to meet long-term and short-term financial goals. A Financial Advisor is a broad term for those who manage money, including investments and insurance products. A Wealth Manager is a financial advisor who utilizes the spectrum of financial disciplines available such as financial and investment advice, legal or estate planning, accounting and tax services, and retirement planning to manage an affluent client’s wealth. Let us place all these labels under the heading of Financial Coaching.
 
You can decide to work with a Financial Coach based on the financial complexity and after an initial meeting without obligation. This initial contact can take place via an introductory phone call or in-person meeting without obligation. At that time, expect to learn about the financial coach’s value proposition. If financial advice is what you seek, a comprehensive planning process should include: assessing your financial needs, educating you on your financial life choices, recommendations, and a timeline for ongoing review of your financial plan.
 

Choosing the right Financial Coach

If comprehensive financial decision-making is what you seek, start by looking for a professional with CFP credentials. The CFP credential stands for “Certified Financial Planner” and is the gold standard for financial professionals engaged in financial planning. In addition, look for senior financial planners who have 10+ years of experience with a support team around them. This team might consist of a client relationship manager and an associate financial advisor who is always available to the client for follow-up and execution of action items. The senior financial planner’s job is to get to know your unique financial needs and manage the overall strategy to achieve your financial goals. This process covers important concepts around economic assessment, risk management, and education related to your unique circumstances.

Accepting Financial Advice

Today, everyone faces increasingly complex financial decision-making. In addition, financial information has become readily available to anyone who searches the internet. However, this information is useless without the wisdom to know how to use it. Is it any wonder we fear making financial decisions? It is often difficult to distinguish good financial choices from bad. As a result, many people make financial decisions without knowing the negative impact they will have on other areas of their financial lives until it is too late to correct them.

Seek out a qualified and experienced financial coach/planner to assist you in making your financial decisions. The results may lead to reducing your anxiety around making financial decisions and ultimately improve your overall fiscal well-being.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Legacy Planning Partners, LLC or CES Insurance Agency.

Jan Graybill is a Certified Financial Planner® (CFP), and holds the Certified Exit Planning Advisor® (CEPA), Chartered Financial Consultant® (ChFC) and Chartered Life Underwriter® (CLU) professional designations. He is a Managing Partner and CEO of Legacy Planning Partners.

The Dismal Ds and Exit Planning

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The “Dismal Ds” is an inside joke in exit planning. Every industry and profession has them. In some, it’s “You can have it done well, done fast, or done cheaply. Pick any two.” In planning it’s “Sooner or later, every owner exits his or her business… 100% guaranteed.”

Clearly, that refers to the unplanned but inevitable departure from the biggest D – Death. That isn’t the only D, however. There are others, NONE of which lead to a controlled, lucrative, or enjoyable transition. Most start with dis- defined as “dis– 1. a Latin prefix meaning “apart,” “asunder,” “away,” “utterly,” or having a privative, negative, or reversing force.”

The other Dismal Ds include:

  • Disease – the critical illness of the owner or an irreplaceable employee.
  • Dissension – between partners, shareholders, or family members
  • Disaster – Fire, flood, storm, or accident
  • Disability – An owner’s inability to oversee operations
  • Disinterest – of the founder or next-generation ownership
  • Distraction – When an owner’s focus is elsewhere. (frequently love or bar ownership)
  • Disarray – More simply, bad management
  • Dishonor – financial fraud or other skulduggery
  • Disenchantment – A fancy word for burnout
  • Divorce – a bitter fight over the business asset or its value
  • Debt – Leverage taken on in good times but no longer sustainable
  • Depression – Economic malaise (think hospitality in 2020.)
  • Defection– The poaching or bolting of a key employee, frequently in sales
  • Defenestration – Getting thrown from a window

(Okay, I may have gone too far with that last one, but I couldn’t resist.)

Planning – The Cure for the Dismal Ds

The point is, there are many ways of a forced exit from your business due to circumstances. Some might be beyond your control, but most can be avoided.

  • Disease – Have solid business continuity instructions in place
  • Dissension – Start with a good buy/sell or shareholders’ agreement that makes it plain how disagreements will be handled
  • Disaster – Fire, flood, storm, or accidents can be insured, including for loss of revenue.
  • Disability – Business continuity instructions again
  • Disinterest – Start implementing an exit plan before your business shows the effect. For example, in brokerage, we used to say “Show me an owner who says he is burned out, and I’ll show you financial statements that evidenced the problem three years ago.”
  • Distraction – Don’t buy a bar. Don’t buy another business. Don’t have an affair.
  • Disarray – Get help. Consulting, coaching and peer groups all work.
  • Dishonor – Have an outside party check your systems and security.
  • Disenchantment – See Disinterest
  • Divorce – Settle the value of the business first, preferably before the lawyers do it for you.
  • Debt – Limit your debt to half what your current cash flow can service.
  • Depression – If you have to cut expenses, do so deeply and quickly.
  • Defection– Two words- employment agreements
  • Defenestration – Stay away from the Departed, or Irish, Italian, and Jewish mobsters in general. Alternatively, live where there are only low-rise buildings.

Dismal DsI obviously have my tongue firmly planted in cheek for this column, but my point should be clear. Your business is probably the most valuable asset in your life. Losing it to unplanned events hurts. So even if you are no longer in the picture, you have some responsibility to your family, employees and customers.

A good exit plan, whether it’s for implementation now or years down the road, should take many, if not all of the Dismal Ds into account. All entrepreneurs want control over their future. That is why they are entrepreneurs. Planning isn’t merely an intellectual exercise. It’s all about control.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the author of Your Exit Map: Navigating the Boomer Bust, and two other books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at MPNInc.com/ExitMap. 

 

When Kids Don’t Cut It

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Many owners want to see their children inherit the business, but what happens when the kids don’t cut it?

Some years ago I worked with a business owner whose exit plan was to sell into one of the private equity roll-ups that were active in his industry. His son was finishing college, where he studied for a career in wildlife management. The son’s ambition was to spend his life in the great outdoors.

One day my client was beaming when I walked into his office. “Guess what?” he said. “My son called. He wants to take over my business!” After a few minutes, it was pretty clear that we weren’t going to have a conversation about experience or qualifications. This owner had a whole new exit plan.

Fortunately, that plan worked out. There was strong management in place, and the son paid his dues in sales and management training before the transition. Not all such shifts work out that way.

When kids don’t cut it

when the kids don't cut itThere was another prospect who gave me my “assignment” for proposing. “My son has been in the business for the last ten years. He seldom shows up. He is nominally in charge of a department, but we do little or no business in that area. He’s abusive when he is here, and all the employees hate him.”

“We (his mother and I) want to sell him the business, and we need him to perform well to fund our retirement. How much will you charge to straighten him out and get him to run the business right so he can pay us?”

I wanted to answer “Infinity,” but chose instead to politely decline the engagement.

I’ve written many times about the attachment a founder has for his or her business. Of course, parents (hopefully) have an even stronger bond with their children. Watching the first client’s face light up when he made the announcement was the best illustration of how important legacy preservation can be to an owner.

Yet, keeping the business in the family isn’t always the best idea. It involves a number of stakeholders, including employees and other children.

Key Employee Issues

For brevity, we will start by presuming that you’ve never promised, indicated, discussed, or even hinted to key employees that they were going to own the company. If you have, that’s a whole different can of worms that we’ll deal with another time.

We also aren’t talking about a succession plan where the son or daughter has always been the heir apparent, and has trained for the position.

Commonly, it’s somewhere in between. The child holds a job in the company, but not the second-in-command position. He or she does it well enough, but isn’t a star. They are interested in ownership (another too-often ignored question,) but their ability to act as CEO in the foreseeable future is doubtful.

Even if key managers aren’t resentful, they are not chattels. Giving ownership to a child is a clear message that their career path has reached a stopping point. It may be an eye-opener, and almost certainly disposes them to look at other opportunities, even if they don’t do so actively. Remember, their loyalty is to you. It isn’t automatically transferrable.

One solution that’s often employed is the perpetuation of the founder/owner. He stays on in a consulting role long after normal retirement age. Often it works out, and it can lend tremendous experience to the company.

If you don’t want to stick around in the “answer man” role, however, you need to secure the continued commitment of the key managers. That should be done through conditional compensation, tied to the continued success of the company. If appropriate, it may also require reaching benchmarks for training the offspring to take the reins of the business.

Long-term compensation can be through virtual equity (Phantom Stock or Stock Appreciation Rights,)  direct profit participation, actual minority equity ownership, or supplemental retirement insurance. It needs to be more than just a salary, though. Someone else can always beat a salary.

Keep Thanksgiving Friendly

The other stakeholders who should be considered are the siblings who don’t work in the business. Often the owner wants to leave the business to the child who has worked in it. The owner’s spouse wants to divide it equally among all the children. Both ways are fraught with issues.

Leaving the entire income-producing capability of the family (the company) to one child can obviously create resentment. On the other hand, forcing that child into a lifetime of working for the benefit of his or her siblings is likely to end family Thanksgivings. No one wants to grow a business only to see a third, or half or three-quarters of the benefit go to bystanders.

Some owners choose to balance their estate with other assets outside the business. If that isn’t practical, we frequently recommend dividing the business equally, but with a valuation formula and documented agreement to sell the inherited shares to the active child or children. Everyone benefits from the parent’s work, but going forward the active child keeps any increase in profits (and also bears the risk of any decline.)

Passing the legacy of a successful enterprise to children can be one of the greatest thrills of a parent’s life. When the kids don’t cut it, however, it is wise to face facts and plan accordingly.  Glossing over the issues will inevitably lead to more pain down the road.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the author of Your Exit Map: Navigating the Boomer Bust, and two other books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at MPNInc.com/ExitMap. 

 

Your Exit Plan: The 3 Inarguable Reasons to Start NOW

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What is Your Exit Plan?

If you’ve ever done a business plan for the purpose of raising capital, one of the key questions is “What is your exit plan?” Many business owners think that question is self-serving, intended merely to let the venture capitalists figure when and how they will get their return on investment. In truth, however, that question is far more important.

An exit plan is a strategic plan with an end date. Putting a time frame on your plan, and defining the goals to be achieved by that date, creates a future-focused mindset for the owner. It controls and reduces your tendency to prioritize daily firefighting over long term thinking. It provides you with a yardstick to measure progress. Most importantly, it affects your thinking about almost everything in your business.

Here are the 3 inarguable reasons why you should start your exit plan now.

Reason #1: It’s Never Too Soon

your exit planIn my years of working with business owners, I’ve helped many transfer their businesses to family and employees. I’ve worked with others who sold their companies to a third party for tens of millions of dollars.

Surveys show that many owners have regrets afterward. Others happily move into the next phase of their lives or careers. A few have seller’s remorse. On the other end of the spectrum, some come to the realization that they hated their business owner lives for years. The majority feel that they received a reasonable reward for monetizing their work of decades.

None of them. NOT ONE of them, has ever said “I spent too much time planning.”

It’s likely that the sale of your business will be the most important financial event of your life. There are a few lucky owners who have wealth outside or beyond the value of their businesses, but for most of us monetizing those decades of effort is the culmination of our working careers.

If your exit plan is to transfer to family, you can choose vehicles like Grantor Retained Annuity Trusts (GRAT) or Self Cancelling Installment Notes (SCIN).  These may have to be in place for years to substantially reduce or eliminate taxable proceeds for you and/or your heirs.

In a sale to employees, developing the documentation that shows their assumption of managerial responsibilities over time is a basic qualification for SBA loan approval. That, plus developing their “down payment” equity, punches the ticket for you to walk away with your proceeds in pocket on the same day that you cede control of the company.

In a sale to third parties, the condition of the financial markets at your time of exit will decide the size of your multiple.  Preparing your business with due diligence in mind, and understanding the different classes of buyers, (see my post on identifying a buyer) allows you to better choose the time, method and proceeds of your transition.

Although it is difficult to time the stock market, shifts in acquisition multiples take much longer to develop.  Being prepared allows you to enter the market while prices are at a peak.

Five years is a reasonable planning time. Ten years is better. There is no time frame that’s “too far out” to be thinking about your exit.

Reason # 2: It Changes Your Thinking

It’s difficult to run a business without being reactive. Employee issues, customer problems, and vendor policies can shift your priorities on a daily basis.

When your exit plan is in place, you have a broader perspective. Every decision you make is now in the context of “Does this support my bigger picture?” There are numerous examples.

Hiring: If your exit plan is to pass the business on to your children, then hiring becomes a support function. You look for employees who can fill in areas where your offspring lack the necessary skills, or don’t have an interest.

If you plan to sell to employees, then you are looking for a Successor in Training (SIT). That is someone who shares many characteristics with you. If you are selling to a third party, you want a Second in Command (SIC). That is someone who compliments your strengths, and who can be contractually incented to stay on the job with a new owner. (See my piece on SIT vs. SIC here.) Securing a management team adds considerable value to any company.

Lease vs. Buy: If your plan calls for selling to someone who is likely to relocate the company, or who already has your production capabilities, you may want capital equipment to be easily disposable. A competitor or much larger acquirer may want to leave the equipment out of the transaction. In a Main Street business, you may choose to have a strong tangible asset base for an entrepreneurial owner to use when obtaining acquisition financing.

Real Estate: Should you own your building? Some buyers (say a publicly-traded acquirer) prefer to lease space. In that case, owning your building could provide a post-transition income stream in your retirement.

On the other hand, a relocated company could stick the owner/landlord with a special purpose building that requires significant remodeling to be rentable.

These are just a few of the decisions that are better made in the context of your long term plan. The decisions you are making in your business today all have lasting implications.

Reason #3: A Plan is not an Action

youe exit planIf you are taking a long trip, you likely determine the route before you start out. If it is complex, you may print out the directions. Nonetheless, you are still likely to use a wayfinding app to alert you to problems along the way, like traffic jams or construction.

But everyone understands that printing out the directions isn’t the same as beginning the journey. You might take that step days or even weeks before actually getting into your car.

It’s the same with your exit plan. Choosing your time frame and preferred method of transition isn’t the same as making it happen. Writing it down is a key component of preparation, but it shouldn’t be confused with implementation.

Starting Your Exit Plan

Venture capitalists ask an entrepreneur  “What is your exit plan?” because the answer shows that he or she has thought through the implications of their decisions. They have built the business with a purpose beyond merely growing or getting through the next cycle. It shows that the allocation of resources, the selection of personnel, and choices in product and service offerings are coordinated.

There will be obstacles along the way. Your strategy may shift to compensate for new technology or changing market tastes. As the company grows in your chosen direction, you could just be having too much fun to leave on your originally planned date.

But those changes will be conscious. You will see how new factors fit with your plan, and when they don’t. Course adjustments keep the goal in mind. Alternatively, you understand when the goals themselves have to change.

For years, clients have asked me “What should I do to increase the value of my business?” My answer is always the same. “Exactly the same things that you should be doing to improve your business every day.”

Stephen Covey coined the axiom “Begin with the end in mind.” Yogi Berra said “If you don’t know where you are going, you may wind up somewhere else.”

Your exit plan is the road map to your eventual financial security. It doesn’t have to be a huge undertaking. All plans begin with where you are now. You already have the company, the management team, the customers, and the products or services. You’ve likely thought about how you would like to finish. What’s left is just putting the two together.

The sooner you go through the exercise, the sooner your company will be a component of your exit plan, rather than a distraction from it.

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. If you want to see how prepared you are for transition, take the 15-minute Assessment at www.YourExitMap.com 

 

 

 

 

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.