Exit Planning Tools for Business Owners

business owners

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.

The House of Gucci Succession Plan

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By now, you may have seen the movie House of Gucci. Lady Gaga and Al Pacino star in the true depiction of the Gucci family.

The Gucci brand started with two brothers who own the family business equally. Each brother had a son, and each son was to inherit the empire. One of the sons was a ne’er-do-well, who always attracted and found trouble. Despite nobody ever giving him a chance, the viewer could tell his successor ownership was doomed. The other son married the woman who was played by Lady Gaga. The story progresses through time as one of the fathers die and the other goes to jail while the wife rises to power and greed. To complicate the succession plan, lavish lifestyles, poor business decisions, children and divorce ensue.

The Gucci brand has always been iconic, and it remains so today. The movie describes the struggle between the two brothers and their ideas on how to grow the brand. One brother wants to expand into shopping malls across the world, while the other brother believes the idea of having a Gucci store in a mall is despicable. The two brothers who have these opposing views show how difficult it is running a family business with 50-50 ownership.

The two sons are the on-again/off-again heir apparent to the fortune, and eventually they will run or have a hand in running Gucci. The ne’er-do-well son struggles and is really off-base with his ideas, which are very inconsistent with the brand, and he lacks any sense of training or sense of how to run a business. Subplots in the movie describe how the other stakeholders attempt to circumvent his ownership and ultimately the rest of the family.

The other brother is smart, but he has a blind spot in that he has never had to struggle financially. He has never had to know what it was like to lack resources. His approach to management and growth are flawed because of the company culture and his paradigm. The influence of his wife and others around him also taint the management and success of a family run business. He lives lavishly, incurring personal expenses that he funds through the company.

Subterfuge and infighting ultimately become the demise of the family. The business survived but it was sold off for pennies on the dollar and was turned into a publicly traded company and as a result, the family no longer owns the business.

Clearly, the Gucci’s would have benefited from a team of exit planning advisors to help them navigate these waters! Indeed, there was no training of the sons, there was no alignment by the brothers, there was no dealing with the other stakeholders in the family. There was no financial planning, nor personal planning. Other than the brand quality, there was no development of cultural consistency or business attractiveness. There was a lack of management succession, planning and delineation of who does what. Sadly, there are many family run businesses that much less well known, but who lack the kind of exit planning that is needed to successfully pass along the business to the next generation.

House of Gucci illustrates how important it is for families to pay attention to succession and exit planning. I give this movie two thumbs up for the entertainment value of the movie, but two thumbs down on exit planning!

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

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.

Do You Suffer From Decision Addiction?

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Do you suffer from decision addiction?

The typical business owner lives on dopamine.  According to WebMD:

Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That’s why it’s sometimes called a chemical messenger. Dopamine plays a role in how we feel pleasure. It’s a big part of our uniquely human ability to think and plan.

Feeling the Rush

That’s what business owners do; think and plan. Their lives are a chain of thought processes that go “What if I do this? How will it affect the business? Then what would I do next? What would be the effect of that?”

An owner’s brain is trained to generate dopamine. That “What if? What if? What if?” chain is pleasurable. It’s the same neurotransmitter that is triggered by nicotine and alcohol, and the craving for that dopamine rush is the driving force of addiction.

That is why so many owners complain that their employees can’t make decisions and can’t think critically. They understand consciously that their businesses would run better if they groomed decision-makers, but unconsciously they are addicted to making decisions.

decision addictionEvery time an employee asks, “What should I do about this, boss?” there is a little rush. It’s like an old cartoon. The good angel is sitting on one shoulder saying “Make them go through the thought process themselves.” The little horned devil is on the other shoulder saying “Go ahead. Tell him just this once. It’s faster, and it feels good.”

Answer given. Another challenge surmounted. Pop! The little rush.

When the Rush Gets in the Way

Advisors are frequently frustrated by a client’s reluctance to implement their advice. They spend time and effort developing a course of action, and more time and effort explaining it to the client. The business owner client listens, agrees, and then does…nothing.

“I’m too busy running the business,” is a frequent excuse. What is really happening is that the owner is too busy feeding his or her dopamine rush. Owners are more likely to take action on their own decisions. Implementing someone else’s idea is antithetical to why they became entrepreneurs in the first place.

It feels good to be needed; to be the one who knows. Unfortunately, the more you run your business based on owner centricity™ the harder it is to sell, and the less it is worth. Like any addiction, it’s a tough habit to break

Breaking Decision Addiction

This is where I should offer a twelve-step program for breaking yourself of decision addiction. That’s pushing the analogy just a bit too far. I can. however, offer one tip that can get you started on the road to a more valuable company and more peace of mind for you.

Offer an enticing incentive for anyone making a decision for you. It should be instant, and worth a little effort. One possibility is to keep a stock of ten or twenty dollar bills in your desk. Anyone who comes to you with an issue and a proposed answer gets a bill.

The answer had to be sensible and practical. You could require it to be SMART (Specific, Measurable, Attainable, Resourced and Timely,) or you could set your standards. You will, of course, have to retain the final say over what qualifies. No one should earn a ten-spot for deciding whether to make the background on a flyer blue or yellow.

An answer doesn’t have to be the answer, but if it is unworkable, at least you have the opportunity to communicate your thought process, and at least the employee tried. He or she should still get the incentive for an honest effort.

Try it. You may be surprised at how much better it feels than that little bit of decision addiction.

This is an excerpt from my upcoming book The Exit Planning Coach’s Handbook, coming this fall. 

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.

A Hazy Crystal Ball is Better than a Rearview Mirror

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Car side mirror with a rear view of a clear road and a sunset in the mirror.Several years ago, I did a cross-country trip with my family. We laid out a rough plan of what we wanted to see, how long it’d take, and most importantly, what we wanted to eat!

When we hit the road, I did not drive looking primarily in the rearview mirror, with an occasional glance at the gas gauge and the road signs. I looked ahead and tweaked the plan. Yet, that is often how business owners run their businesses. Often, this year’s business planning consists of, “let’s do what we did last year – just more of it.” We look at whether we have cash in the bank, check our financial statements, and compare how we fare against last year. Although this is a common practice we should run our businesses with an eye on the future.

No one has a crystal ball that provides perfect clarity on the future. A million factors and forces affect our business and most of them are not within our control. Forecasting and planning require looking ahead a taking our best (hopefully educated) guess on what the future holds. I want to convince you that a rough, hazy plan is better than no plan at all!

If you do not know where to start, here are some practical pointers.

MAKE THE PLAN

Every forecast needs to answer the following questions:

  1. Where am I? Assess your revenue, profitability, operations, market position and see how you are doing. What is working well and what isn’t?
  2. Where do I want to be in the future? Lookout 3 to 5 years and write down goals. How much revenue growth, how much net income growth, what improvements are necessary for the business?
  3. HOW do I get there? This is most critical. Identify actions/investments you could take/make to attain your goals. These might include:

    4. • Establishing new markets
    • Creating new products
    • Adding key staff
    • Improving processes

  4. What is most important? Prioritize your improvements and plan them over 3 to 5 years. Tackle 2-3 goals per year.
  5. The end result should be:

• How much will my revenue grow in the next few years?
• What improvement do I need to make?
• How much will my bottom line grow in the next few years?
• Who do I need to hire/get on the bus?
• How much will this cost?

WORK THE PLAN

Once the plan is created, establish a consistent review and adjust as needed. This may include:

  1. Review your monthly financial performance against the plan. Include revenue, cost of goods, overhead, net income, and other appropriate key metrics. This implies a monthly budget.
  2. Conduct a monthly review of strategic projects. Routinely assess whether you are making progress on your major goals. Are you ahead? On track? Behind? Dead-in-the-water?
  3. Adjust course. If you are not “on the plan,” why? What are the causes of the variance and what do you need to do to get back on track?
  4. Modify the plan as needed. The “crystal ball” is hazy and there is no perfect plan. As you adjust you will learn your capacity for change and identify ways to improve.

Start Now and Keep It Simple

In planning our road trip, we identified key sights to see along the way and saw most of them. We paced ourselves and enjoyed the trip. You may not know how to forecast, but you DO know your business! Trust your experience and make a “road trip” plan to identify the following, at a minimum:

  • Revenue goals for next 5 years
  • Net Income goals for the next 5 years
  • New Critical Hires & the cost
  • Major projects & the cost

When you shift your gaze out, you are more able to see the business as an asset, rather than a job. The team knows where you are going and will often get on board to help you stay on track. Looking ahead allows you to see the potholes in the road before you hit them and it helps the journey become more predictable. Hopefully, you will start to enjoy the business more. Proven ability to grow is a key value driver when selling a company but, it may also help you build the company you want to KEEP!

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.