Exit Planning Tools for Business Owners

building business value

Purpose After the Sale

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Purpose after the sale is one of the biggest challenges for an exiting owner.

Purpose – “Having as one’s intention or objective.”

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

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

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

Decades of Purpose

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

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

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

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

Purpose After the Sale

It’s no surprise that so many owners find that 36 holes of golf each week, or 54, or 72, still isn’t enough to feel fulfilled. You can get incrementally better, but it doesn’t really affect anyone but you. Building a beautiful table or catching a trophy fish brings pride and some sense of accomplishment. Still, it never matches the feeling of creating something that impacts dozens, scores or hundreds of other human beings.

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

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

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.

Impressions of Value in Exit Planning

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Business owners, advisors, and buyers frequently have widely different impressions of value when it comes to a business.

The Pepperdine Private Capital Markets Survey canvasses intermediaries who sell privately held Main Street and mid-market companies. One question is about the obstacles that prevented the sale of a business. The number one response is “Owners’ unreasonable expectations of value.”

That may be self-serving or an excuse. Nonetheless, valuation is a sensitive subject. Many owners have worked in the business for 30 or 40 years. They assume it will fund their next 20 years of retirement. Their target price is set only by their desired lifestyle after the business.

Different Values for the Same Business

Unfortunately, many owners have an opinion about the value of their business that is grounded in the multiples of public companies. Others are based on conversations with colleagues, salespeople, and articles in their trade publications.

Impressions of valueEven those who have professional appraisals of their business may not understand that the purpose for getting your valuation may skew the results. Valuations that are done for estate planning or internal transfers of equity often have little resemblance to a company’s fair market value.

Various people including H.L. Hunt and Ted Turner have said “Money is just a way of keeping score.” For many owners, the emotional tie between the perceived value of their company and their self-image of success is closely connected.

Some advisors skirt this issue by recommending that their clients get a professional opinion of the fair market value of the business. While this is certainly a safe approach, it can take substantial time. It also requires considerable assembly of the underlying data for the appraiser. This can slow down any consulting project considerably and may derail it entirely.

Impressions of Value

A coaching approach helps the owner understand the practical boundaries surrounding the value of the company without either dictating to him or taking the project in a tangential direction. We do that by helping the client model “lendable value.”

We start by explaining that most businesses are valued by their cash flow. There are certainly many areas where value can be enhanced. These include intellectual property, exclusive rights to a product, protected sales territory or long-term contracts. Owner Centricity™ or customer concentration can also reduce the fair market pricing of your business. In the final analysis, however, cash flow to pay an acquisition loan is of principal concern to a lender.

SBA minimums for financing include a cash-to-debt service ratio (1.25 to 1) and required owner compensation – usually $75,000 a year for acquisitions under $500,000 and twice that for larger deals. While not all lenders follow SBA guidelines, they are a useful national baseline for looking at your value.

The company may well be worth what you think it is, but finding a lender to finance it is a different problem. Understanding a lender’s impression of value before starting sale negotiations can save you considerable time and negotiation down the road.

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.

How to Separate Yourself From Your Business – Why It’s So Important

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When you run your own business, oftentimes one of the most confusing aspects of the job, especially if you are new to the experience, is understanding how to separate yourself from your business. And this issue can show up in so many ways, from achieving a work/life balance and managing your time to how you get paid and even how much taxes you owe.

With this in mind, here we will offer a big-picture overview of this issue, and in future articles, we’ll drill down to some of the finer details of keeping your business and personal assets separate. Although it might not seem overly complicated or important, separating yourself from your business is a serious issue for every business owner.

You & Your Business Are Separate Entities

The first thing to keep in mind is this: you are not your business, you are not your heart project, your are not your work in the world or even the services you offer. Your business, heart project, work, service, and/or product may feel like it’s one and the same as you, or even as if it’s your baby. But one day, just like the little ones you give birth to, you may want your business to grow up and go on to live on its own without you. Or you may not want that—it’s all a matter of preference, and your decision on this point may even evolve over time.

Either way, this is a good thing to start thinking about now. Do you want what you are creating to live beyond you? If so, you’ll need to start thinking about it as an evolutionary entity that can grow separate from you. And whether you want it to live on beyond you or not, you want it to exist separately from you, because as you’ll learn, there are major tax and asset protection benefits for you by doing this properly.

Owning A Business vs. Being An Employee

To add perspective, let’s contrast what it’s like to run your own business with what happens when you are working as an employee.

The Employee Experience:

As an employee, you get paid via a paycheck, with taxes taken out and a W-2 issued to you at the end of the year. In this case, you and your money-earning vehicle are essentially one and the same.

You earn money, and you pay taxes on that money in the form of income taxes and payroll taxes. As an employee, what comes to you every pay period via your paycheck is yours to put into your personal financial accounts, so you can pay your bills, save, or invest. In that context, you are getting taxed on every dollar you earn.

There are some ways that you can save money tax free as an employee, such as by directing some of your pay into a 401(k), an IRA, or even a Health Savings Account, provided your employer offers such benefits. But for the most part, you are paying payroll taxes and income taxes—which are two separate types of taxes—on every dollar you make.

The Business Owner Experience:

In contrast, when you are earning money through a business entity that is under your control, money comes into your business, goes into your business accounts, and is first used to pay business expenses, which are deductible expenses to your business. When you deduct business expenses from the income of your business, you do not pay income taxes on that income. In this way, you can think of business expenses as a government-subsidized expenditure.

Here’s what I mean: if you can purchase a computer through your business and use it for business, you are paying for that computer with pre-tax dollars, which could save you up to 40% (or more depending on your state) on the cost of the computer, versus if you were to purchase that same computer with after-tax dollars. But this only works if you treat your business like a business, and properly separate your personal and business accounts.

To keep your business and personal expenses separate, your business entity needs its own bank account, its own credit cards, and it needs to pay you. You then always pay your personal expenses out of your personal accounts, never your business accounts. Whatever your business pays you will be subject to income tax and possibly payroll tax as well, though there are ways to significantly reduce your payroll tax obligation by choosing the right way to structure your business entity. Be sure to talk with us regarding how to structure your business for maximum tax savings, if you have not already gotten great guidance on that front.

To the extent that your business earns more money than what’s required to cover your basic needs, you may want to consider investing to hire experienced support staff (especially a skilled bookkeeper and administrative support) to free up your time and allow you to focus on generating more revenue, better serving your clients or customers, and growing your operation. Or you may choose to invest that money in additional education or training for yourself, so you can increase the value (and price) of your services. If you have excess cash flow, you’ll also want to know how to structure your profits, so you pay the smallest amount in taxes legally possible.

Don’t Mix Personal & Business Finances

Whatever you do, do not simply have one bank account that you pay both your personal and business expenses from, or you are going to get seriously confused, and you could even end up losing money or getting into legal or tax trouble, depending on your company’s entity structure.

If you have already paid business expenses out of a personal account, or by using personal credit cards, keep careful track and document exactly how much you paid out from those accounts to your business. This payment will either be an investment in your business that you will want to track for the future, or it will be a personal loan to your business that you will want to eventually have paid back.

Talk with your CPA regarding how best to structure investments in or as loans to your business, and then we can help you properly document your decisions. Or if you need strategic support on this issue, contact us, and ask about a LIFT Business Breakthrough Session, and we’ll look at all of your legal, insurance, financial, and tax strategic decisions together.

When you work with us, as your Family Business Lawyer™, we offer a number of systems and processes that make keeping your personal and business finances separate a snap. Not only that, but we offer additional services that make separating yourself from your business as easy and convenient as possible. Reach out to us to learn more.

Get Clear On Your Actual Financial Needs & Goals

One of the best ways to effectively manage your business and personal finances is to first get clear on what you need your business to pay you at a base level, so you can pay all of your bills and other personal expenses as well as meet your personal time and money goals. To get clear on this, we use a process called Money Mapping. If you haven’t worked with us on this yet, now is the time to finally get a solid understanding of how much money you actually need to reach your goals, rather than guessing or worrying about how much you need to earn to stay afloat.

We’ve Got Your Back

When it comes to separating yourself from your business and managing all of the different aspects involved with this process, you can count on us to provide you with the trusted support and guidance. With our help, you’ll learn how to do this in a way that not only ensures you are doing it right, but that actually adds value to your company and generates increased revenue. Sit down with us, your Family Business Lawyer™ to learn about all of the different ways we can support you in this area. Schedule your visit today.

This article is a service of Todd Jarvis, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business.

Will You Be Ready?

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Will you be ready when it is time to leave your company? A business owner needs to have a basic business strategy to monitor company financials regularly. Several owners consider this a strategy to prepare for exiting their businesses. However, monitoring company financials is like looking in the rearview mirror. What if you could incorporate a business strategy that looks forward and leads to accelerating profitability and increases business value? In addition, this strategy helps lead to less stress, more free time, and ultimately helps take control of a business exit?

The Active Strategy

The Business Strategy is called Exit Planning. John H. Brown, author of How to Run Your Business So You Can Leave it in Style, writes: “Exit Planning is a process that results in the creation and execution of a strategy allowing business owners to exit their businesses on their terms and conditions. It is an established process that creates a written road map, or Exit Plan, often involving efforts of several professionals, facilitated and led by an Exit Planning Advisor who ensures not only the plan creation but its timely execution.”

Unfortunately, most business owners do not employ this strategy. They are personally unprepared, and their business is not ready when it comes time for them to transition. Ultimately, there is less control over the timing of the exit and even less control over the value they receive when they do exit their business entirely.

What can you do?

Consider this when building an exit strategy:

1. Focus – Adhere to the niche the company serves. Buyers place a premium valuation on focused companies that do one thing very well, better than others. Do not stray from the niche because it destroys value.

2. Develop a Management Team & Reduce Owner Dependency – Ensure the management team can carry on without the business owner when the business sells. It is difficult for the business owner to disengage while they still actively manage. But this is precisely when the owner can create more value—because when the business is not exclusively dependent on the owner, it is worth more! Ask yourself, if I leave today for an extended length of time, will the success of my business be impaired? If your answer is yes, you have not created value. You have created a glorified job.

3. Assess Your Business – Prepare an objective assessment of the company’s current position and potential. A simple SWOT analysis is beneficial. Write down the Strengths, Weaknesses, Opportunities & Threats of the company.

4. Ensure the Business Has Adequate Capital – The lending markets are often more willing to lend in good times than in bad times. Are you maxing out your credit lines, or do you have a comfortable margin of credit? Are you happy with your current lending relationship? Evaluate alternatives and review your loan covenants regularly.

5. Clean Up the Balance Sheet – Collect past due accounts or write them off if uncollectable. Review customer credit policies. Clean up inventory and take it off the books if obsolete or unsellable. Diligently track personal expenses run through the business. And lastly, call in loans to shareholders and employees.

6. Obtain Financial Audit of Business – Frequently, the company’s accounting has not grown at the speed of the company’s growth. An audit prepared by an objective third-party accounting firm provides a high level of credibility to the business performance.

7. Protect Key Personnel – Obtain employment and non-compete agreements from key employees. The last thing you want is someone leaving just before you decide to exit. The buyer is looking for continuity of Key Personnel. If you have not already tied your integral people to the business, it may be far more expensive to do so at the time of sale.

8. Identify & Mitigate Legal & Environmental Risks – Working with your liability insurance advisor is essential. Unfortunately, until the buyer brings up the subject, this is often left undone.

9. Review Customer Concentration & Overall Operations – Are your vendor contracts assumable/transferable upon sale? Do you derive more than 20% of your revenue from one customer or client?

10. Build Your Team of Advisors – Establish a strong team of qualified accounting, tax, legal, financial, and investment banking professionals. Invite them together at one meeting to establish your expectations of collaboration around your personal & financial goals. Establish recurring management meetings to monitor progress.

While there are many competing needs for a business owner’s time, working on an exit strategy can result in less stress and more time to do the things you want to do instead of need to do. In addition, an exit planning strategy can also enhance profitability and business value, resulting in a win-win for the owner, the owner’s family, and the employees of the business.

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. For more information about Jan, click here.