Exit Planning Tools for Business Owners

business brokerage

Exiting a “Time and Place” Business

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“The purpose of middlemen in the marketplace is to provide time and place utility.” I remember the light bulb going on in Economics 101 when my professor said that.  Suddenly, I understood the concept of added value. Someone had to get the product to the customer.

“After all,” the professor continued, “The footwear manufacturer in Massachusetts can’t sell a pair of shoes directly to someone in California. They can’t manufacture and handle thousands of customers. It would be a nightmare, and completely unprofitable.”

The fact that Massachusetts was still known for shoe manufacturing gives you some idea of how long ago this took place. So long ago, in fact, that Zappos wasn’t even a word yet.

The independent shoe retailer gave way to the department stores. In turn their shoe business was decimated by the specialty chain retailers. In fact, most shoe departments in Macy’s and others are actually chain operations within the store. Shoe sales moved into sporting goods stores and discounters. While the industry shifted multiple times, they all still provided time and place utility.

Then came the Internet. Now the manufacturer can sell directly to consumers. In fact, they can eliminate several layers of middlemen, along with the mark-ups.

Lately my area has been swamped with billboards saying “Mattress Dealers are Greedy. TN.com.” TN.com turns out to be Tuft and Needle, a direct selling (via Internet) manufacturer of mattresses. Their pitch is based on eliminating the middlemen. They have diagrams for their supply chain (From us to you.) on the website, along with a list of the markups in the “other guys” logistic chains.

Providing time and place convenience to consumers is challenging when your competitor’s time offering is 24 x 7 x 365 and the place where they purchase is their own home. Even when you need something “right away” online vendors will deliver in as little as two hours.

Last December my wife went out early on a Sunday morning to, “Pick up a few last gifts in time to ship them.” She returned an hour later, empty-handed. “This is ridiculous,” she said. “I’m going to finish my shopping on the Internet, and have all the gifts shipped for me.”

There’s an additional issue when it comes to selling time and place businesses. Many of the new generation of business buyers, the Millennials, value their personal freedom above financial opportunity. They have little interest in coming in early to open up, or staying late to close. Skipping the Thanksgiving family dinner to prep the store for Black Friday is a non-starter.

If you are hoping that I will reveal the secret sauce for perpetuating a time and place business, I’m afraid I’ll disappoint you. There is no magic formula aside from the age-old wisdom of differentiation and service.

Beating Time and Place

My friends at Digital Pro Lab in San Antonio are an excellent example of adjusting to change. What could be more outdated than a drive-up 30 minute film developing shop? What was formerly an epitome of time and place convenience (pictures in a half hour without getting out of your car), has become almost a caricature of “old school.”

Technology has shifted from celluloid film to digital. “Developing” now consists of uploading the files from your phone to a mega-printer who mails 8×10 prints overnight for less than Digital Pro’s cost. The photo chains, Ritz Camera, Fox Photo, and Wolf Photo are all gone, crushed by those “mail order, ” or perhaps more properly “email order” houses.

Digital Pro has survived (and thrives) by their differentiation and service. The large, bright showroom is full of computers where they can show customers the effect of adjusting color balance or editing. They can print your lifetime memories on almost anything, from a key chain to a large metal panel. They can still give you prints made with permanent liquid ink, not the water soluble powder used by most printers.

In addition, they can do all of this online because they’ve invested in the technology necessary to keep up with the “convenience-based” competitors.

As the cost of digital printers fell, professional photographers invested in their own machines. Digital Pro Lab has replaced their business with consumers who want to discuss their special moments, choose how to preserve them, and hold the results in their hands before they pay.

In an industry where the number of time and place based outlets has fallen by over 90% in the last decade, Digital Pro Lab has beaten the big boys with product differentiation and service. When the time comes for planning an exit, they will have options.

Do you know a business owner who will be exiting in the next ten years? Please share Awake at 2 o’clock!

A Transition to Exit Planning

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It is time for a new direction. This marks my 400th posting to this site. I’ve enjoyed writing weekly about the daily issues and opportunities of business owners for almost ten years, but it is time for a change.

Awake at 2 o’clock has a new look and new navigation, although we decided to keep the title, logo and banner. More about that in a bit. First the why behind the change.

Regular readers may have noticed that, over the last year, I have been turning more frequently to exit planning subjects. That reflects my own career progress.

Before 2007 I sold businesses as a certified business broker, and helped numerous owners through transition as an executive coach. That year I wrote my first exit-related article (titled “Boomer Bust?”) for the business journal.

My research for that piece convinced me that there was a seismic event on the way in the retirement of the Boomers. I also learned why they were the most entrepreneurial and competitive generation in history. I hadn’t yet heard the term “exit planning”, but I was already thinking about the advisory help I knew would be needed.

I certified as an Exit Planner (CExP) in 2011, and gave up my Business Brokerage practice in the same year. In 2012 I published a new edition of my first book 11 Things You Absolutely Need to Know about Selling Your Business, and began speaking about “Beating the Boomer Bust” to audiences nationally.

In 2013 I published the award-winning book, Hunting in a Farmer’s World, which looks at the psyche of business owners, including their challenges when leaving their businesses.

I also developed an online product, The ExitMap®, to help owners and their advisors begin conversations about exit planning. It is based on my coaching experience with hundreds of owners and fills a gap left by the more technical/financial assessments that currently dominate the market. We’ve built a national network of professionals, experts in multiple disciplines, who are committed to exiting owners’ need for skilled and experienced help.

Finally, in 2016 I chose not to renew my 20-year franchise with The Alternative Board® in order to concentrate on helping owners leave their businesses. In the last decade I’ve progressed from not fully understanding the term “exit planning” to practicing it full time.

This year I will publish my new book, Your Exit Map: Navigating the Boomer Bust, which is accompanied by an online library of resources for business owners at www.yourexitmap.com . It has turned into more than a consulting skill. The millions of transitioning Boomers who need assistance have become my calling.

People ask me all the time, “Why is your blog called Awake at 2 o’clock?” Most business owners understand the reference to those nights when you can’t sleep because you are thinking about the business. It seems appropriate to keep the title when considering the biggest single financial transaction in most owners’ careers; the sale of their businesses.

We have a new tag line: Plan…Build…Exit…Enjoy. It describes both the path to a successful transition as well as the four topic areas we will discuss in this space.

Plan

Exit Strategies. These articles will focus on the big picture. What do you need to know in order to prepare well and successfully implement a lucrative transfer of the business? What do the acquisition markets look like? How do current events impact your time frame or financial objectives?

Build

Improving Value. Enhancing the value of your business takes on new importance when you are looking at cashing out. How do you secure employees and customers? How do systems and processes affect your sale price? What specific areas of improvement will make your business more attractive?

Exit

Exit Options. Should you be targeting a specific segment of the buyer market? How can that be accomplished? What technical issues will you face with taxation, negotiation and contract structure? The specific and unique challenges of Family, Employee and Third-Party sales.

Enjoy

Exit PlanningLife After the Business. The purpose of exit planning is to…EXIT! In collecting reader recommendations for my latest book, the most frequently submitted suggestion was to include discussions of the ways people enjoy their post-ownership lives (or don’t.) We’ll collect real-life stories and share them.

I plan to mix up my approach a little more. Instead of merely relating my observations and experience about ownership, I will invite guest bloggers, review new books on exiting, and interview entrepreneurs about their own experiences. If it will help business owners who are planning the next stage of life, it belongs here.

I will post when I have something worthwhile to share. Since the subject matter is more focused, I will no longer have the flexibility to post every week on whatever topic appeals to me. A little discipline never hurt.

Finally, in a world where content is paramount, we aren’t discarding the 200,000 or so words already cached on this site. You can still search by topic for any past posts.

I know that some subscribers are not planning their exits right now, but I encourage you to stick around. Sooner or later every owner leaves his or her business. Expanding your knowledge about the process now will prove handy down the road. Your exit planning objectives should be influencing how you run your company today.

I am very excited about this new direction and plan to continue writing with the same passion and enjoyment that has fueled this column since 2008. As always, thank you for reading!

John F. Dini, CMBA, CExP

Exit Planning in a New Political Environment

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What does a new political environment mean for business owners who are planning to transition their businesses? Should you accelerate your plans, or slow them down?

As I’ve said many times in this space and elsewhere, the biggest single factor in successfully selling a company is the current condition of the financial markets. Since the Great Recession, the Federal Reserve has poured new cash into the system at very low interest rates. This “cheap money” has trickled down to fund a wave of leveraged buyouts by financial professionals seeking a better return than that from more traditional investments.

This wave of cash enables some 7,000 private equity groups (PEGs) to seek targets in almost every industry. Those targets, however, are typically among the 20,000 or so privately held companies with over $1,000,000 in pre-tax profit.

That leaves out some 9 million employers on Main Street (those that sell for less than $3,000,000.) Of those, about 5 million are owned by Baby Boomers who are, or should be, thinking about life after business ownership.

Most of the owners I talk to are at a loss to predict the climate of the next few years. They hope that a pro-business administration will reduce bureaucracy and pull back some of the regulatory burden on business owners. On the other hand, they are concerned that trade wars, rescission of treaties or diplomatic snafus will drive the US, or the world, into another economic trough.

A very few claim that they know exactly what President Trump and the Republican Congress will do. In the words of Prussian General Helmut von Moltke, “No battle plan survives contact with the enemy.” People may think they know what is coming, but it would be foolish to bet the ranch on any single outcome.

What does this mean for exiting business owners? At the risk of sounding too pat, it means exit planning is more important now than ever before.

Why Start Exit Planning Now?

Here are some reasons why an exit plan is valuable in uncertain times:

  • If your planned exit is more than five years from now, the landscape will likely change again before you transition. A plan will give you the tools to track key components of a successful exit, and improve your ability to respond to changes.
  • If your intention is to preserve the legacy of your company by selling it to employees or family members, starting the transfer now can put you in a position to accelerate or delay the final transfer according to current conditions.
  • If the stated intention of the new administration (a return to 4% GDP growth) is successful, a plan to maximize your value to a third-party buyer will leverage higher pricing multiples.
  • If the economy winds up in the tank, a plan is only a plan. It can always be put on hold until conditions improve.

An exit plan is, by definition, a strategic plan with the addition of a completion date. Some owners fear that by stating a deadline, they are committing to it regardless of circumstances. Of course that isn’t true.

Planning your exit and actually exiting are two different activities. It only makes sense that the political environment should be one of the factors that affect your final decision.

Would you like free excerpt from my new book Your Exit Map: Navigating the Boomer Bust?

Just register here. We’ll send you short pieces every few weeks until its publication in the Spring.

Exit Planning: Telling Secrets

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Planning your exit from a business is a process of telling secrets. For many owners, it is the most terrifying part of selling.

A rancher in South Texas once said to me, “I’m going to tell you a secret, and you have to solemnly swear not to tell anyone. When you do, you have to make them swear the same thing.”

Most business owners are very cautious about with whom they share their exit plans. The logic is intuitive. The more the information is shared, the bigger the chance is that someone will use the knowledge against you.

telling-secretsCompetitors will tell customers, insinuating that your company will no longer be a dependable supplier. Employees might begin looking for greater security in other jobs. Vendors may seek another distribution channel. Your bank could start tightening your credit.

Yet your buyer wants to verify due diligence information. He wants to talk to key employees and customers. Lines of supply and the solidity of relationships have to be confirmed.

Some owners are unduly afraid of letting anyone know their plans. Sooner or later everyone will know, but when they should be informed is an important part of your planning. Controlling the distribution of information might have dramatic impact on the value of your business.

Those who should know about your plans can be placed in three groups.

Round One

Key employees: Whether they are slated to be the next generation of owners or not, key employees should be the earliest group informed of your plans. Of course if you are contemplating an internal sale, their willingness and ability to buy the company requires disclosure. If you are planning an external sale, their cooperation in preparing the company for a buyer’s due diligence will be critical.

Consider having the employees sign a new non-disclosure agreement. Even if you have confidentiality provisions in your employment contracts or policy manual, it serves to emphasize the sensitive nature of exit planning information.

Round Two

Going outside your trusted inner circle is a big step, but you should consider it once you have a solid buyer in place. Sharing earlier, rather than later, makes due diligence easier.

General Employees: Employees can usually be informed fairly early in the sale process. Explain that the transition of the company is a normal part of its lifecycle, and that you are taking steps to ensure that it is done with an eye to their continued  employment. That will go a long way to making them feel more secure. If you treat it like a dark secret, they will have greater concerns about the inevitable rumors.

That’s why I suggest you inform the employees before you tell vendors and competitors, from whom they are likely to hear it anyway. Bringing them “in the know” will also help forestall any hiring attempts by other businesses. Inertia is a powerful force. Usually after a few weeks with no major disruption, the employees just accept your exit planning as a fact of life.

Critical vendors. If you have an exclusive distribution or supply relationship with some larger companies you may already be fielding requests for a documented succession plan. Many suppliers appreciate the forethought of exit planning because it ensures the stability of their distribution chain.

One area of caution. Watch out for a vendor’s loose lipped salespeople, who may regard news of your pending departure as hot gossip for the rest of their customers.

Round Three

Customers: Most customers should be told as late as possible before the transaction closes. If informed of a fait accompli, they are likely to stick with the relationship long enough to gain some experience with the new owners. If informed too far in advance, customers will logically begin to look for alternative sources of supply.

Lenders: While many bankers and other lenders will say that they ought to be informed as early as possible in the process, it is often not a great idea. They may seek the opportunity to finance a transaction, and certainly would like to begin a relationship with any new owner as soon as possible, but they also have a primary responsibility to protect the assets of their institution.

That means they have to worry about the security of your personal guarantees, and whether they see any risk to their capital in your business. Discussions with your bank should include details about the future of your banking relationship.

Due diligence is only one step in the process of telling secrets. Lots of other stakeholders will need to be informed. How and when you do that should be a formal part of your planning process.

yem-flat-cover-smallThank you for reading. If you would like to receive free, pre-publication excerpts of my next book, please register here.

Protecting Your Best Asset

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If you are planning your exit from the business, what is the best asset that you have to sell? Unless you have patented product, exclusive rights, or long-term customer contracts, you answer was likely “Our people.”

employees-in-officeEven if you have strategic differentiation like the ones above, “our people” was still likely a top-three answer. Proponents of Human Resource Accounting correctly point out that few businesses have a bigger investment. Hiring, training and developing talent is at the center of most successful organizations.

But people aren’t chattels. How can someone rationally consider paying top dollar for your successful business when its best asset might disappear the day after closing the sale?

Securing a great price for your company means paying attention to its value drivers. Those include documentation of reproducible processes and quality controls. Customer diversity, long term relationships and a clear marketing strategy are also important. All those pale, however, against the ability to assure a transition of your key people.

The Last Minute Bonus

There are numerous stories in the planning world about owners who neglected to protect their best asset. Some are certainly apocryphal, but they all go something liked this.

Bob was straightening up his desk in preparation to move to his smaller, temporary office. He kept pulling out his phone to check if his bank balance reflected the proceeds from the closing wire transfer. He wasn’t thrilled about spending a few months as an employee, but it was well worth it.

There was a quick knock on the door and Jack, the Director of Sales walked right in. Bob thought of how much that irked him, but he wouldn’t have to deal with it much longer. As usual, Jack got right to the point.

“Congratulations Boss. I know that you put many years into building this company, and from what the buyers just told me, you received a great price. I’ll miss working with you.”

Jack didn’t wait for a response. “That new owner, Carl, seems like a nice enough guy. You know, he told me that I was one of the main reasons they bought this business, and they have big plans for me in the future.”

Bob knew the other shoe was about to drop. “So I was thinking. Considering how important I am to a successful transition, how much of that big check were you planning to share with me?”

Bob thought of the escrow fund in the agreement, and how it required transfer of the company without major changes in personnel. He took a deep breath, wondering how much of it he should use for an opening offer.

Sooner Rather than Later

The time to negotiate a stay bonus is before you start the sale process, not after there is money on the table. Securing your best asset adds value to the business, and greatly lessens the chance that an employee will derail any deal.

Many owners hesitate because they fear telling key employees that the business may be sold. That is a rational concern, but the sooner you bring it up, the more inertia will be  on your side. When things don’t change right away, people tend to go back to what they were doing.

Explain that transitioning is a logical step for every business, and that once you start the process, it could take years. You want to recognize the employee’s contribution, but you also want to make sure that he or she gives any new owners a fair chance.

Stay bonuses very widely, but an additional half-year’s salary is reasonable in return for two years of post-transition service. In some cases, the bonus can involve a percentage of the sale proceeds placed in escrow and paid after the transition period. The benefit can also vest over time, strengthening your short-term retention.

One thing is certain. Protecting your best asset before starting an exit process will be cheaper than being forced to do it afterwards.

Thanks for Reading! Please share Awake at 2 o’clock with another business owner.