Exit Planning Tools for Business Owners

business ownership

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. 

 

Succession Planning Starts with “What’s Next”

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Asking the Right Question

What makes a business successful? In many small businesses, the owner is the principal driver, particularly from a technical and sales aspect. They are the ones running around, coordinating sales, staying late to ensure that products get made. They are the ones working the relationships with clients to ensure that the orders continue to come in.

man driving carWith all that these individuals is doing, exit planners ask, “have they ever thought about what they want to do next?” Unfortunately, there is a good chance that one of the 5 D’s (Death, Divorce, Disability, Distress, and Disagreement) could affect their businesses. Let us hope that this does not happen. However, we all know what happens when we have hope on one hand and do something else on the other!

Consider this, a $10MM S-Corporation manufacturer, with a single owner. The owner’s best friend is diagnosed with cancer. Now the owner realizes that they want to sell their company because they want to spend more time with their kids and grandkids. Will this business be able to maximize value upon exit?

Three Areas of Focus

Most owners have the majority of their wealth tied into the business. One of the ways to get that wealth is to sell the company. A successful transition plan has three areas of focus:

1. Understanding and maximizing the value of the company
2. Understanding the owner’s future financial needs
3. Understanding what the owner wants to do after exit

The owner has an idea about one of those areas, but it is very vague. Working with owners to understand what they want to do upon exit helps with another area, the owner’s future financial needs. It is important to create a plan to understand how they want to spend their time with their grandkids. For example, the planner may ask, “Do you want to be able to pay for their future college needs, take them on nice vacations every year, or spend time skiing with them?”

Further understanding of what the owner wants to do next will help the financial planner develop an exit plan. They will be able to determine how much money that owner needs to achieve their desired lifestyle.

Once the future needs are determined, the owner can look at the current business value. The company should have a rough idea of business value. For example, it may be a function of EBITDA multiplied by a market multiple factors. While this seems simple, there are ways to improve the overall value of the company. Some of the factors may not be solely financially driven.

Succession Planning Starts With “What’s Next”

Developing a plan that addresses the owner’s exit ahead of time isn’t just good succession planning; it is good strategic business planning. By creating this plan, the owner can understand the context of what the company is worth. They will find ways to maximize business value and take into account their financial needs for the future. And finally, they can create a plan for how they will spend their time and lead to a successful exit from the company. As a result, the owner can enjoy their time instead of wondering, “Did I do something wrong? Could I have gotten more out of the sale? What am I going to do now?”

This article was first published on the Schneider Downs blog “Our Thoughts On.” John Kohler, CPA, CEPA has more than 15 years of experience in assisting clients in a variety of tax and accounting functions across numerous industries. He actively assists clients with business succession opportunities, helping them identify options for successful ownership transitions to families, third parties, and strategic partners.

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. 

 

An Often Neglected Means Of Protecting Business Value

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one glass half full, one glass empty

Protect The Business Most Valuable Asset

A compelling and common characteristic of successful business owners is optimism. The “glass is always half full” attitude results in the risk-taking, perseverance, and innovation it takes to build, grow, and protect a successful business. Like any personal strength, this optimism can quickly become a weakness when there is a need to plan for the gloomy business contingencies of death and disability. What happens to the business due to either of these less than optimistic events is the last thing an optimistic owner wants to think about.

Some might say that perhaps owners don’t care if the business fails due to their inconvenient incapacitation. However, our experience shows that most owners care about what happens to the business and its stakeholders. We also observe that the plan in place is often deficient. For example, one area most often overlooked is preparation for the owner’s potential permanent disability.

Is The Business Owner Protected?

It is fairly common for a business owner to have a level of life insurance protection (although often outdated or in need of review) to benefit their business as well as their family in the event of death. But it is not nearly as common to see the risk of permanent disability addressed adequately, if at all.

Becoming disabled for more than three months are greater than the chances of dying at every age:
     • Over one in four 20-year-olds will become disabled before reaching age 67. (1)
     • At Age 30 – the chances of disability are approximately 2.3 times greater than death
     • At Age 40 – the chances of disability are about twice that of death
     • And finally, at Age 50 – disability is 50 percent more likely than death (2)
     • Not only does the risk of disability rise as we get older, but the severity of any disability that is incurred also tends to increase with age (3)

Permanent disability (or death) and incapacitation would most likely have the same impact on your business as the loss of any key employee would have. All that you bring to the table makes the business a success. Experience, talents, knowledge, and relationships would all be tough to replace. There could also be additional challenges such as the loss of concerned stakeholders, weakening financial strength, bank financing re-examined, bonding capabilities interrupted, potential non-renewal of personally guaranteed leases, etc. All as a result of your not being able to work in the business.

Protect Business Value. Have a Plan.

The bottom line is, in the event of premature permanent disability or incapacitation, the value of the business could decrease significantly. All stakeholders are impacted. And the family, if dependent on the continual success of the business, is impacted similarly. Make sure to thoroughly thought through this risk with an insurance professional. Too often, it’s neglected entirely. Please note, you can contact us for any assistance needed.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Pat Ennis is the President of ENNIS Legacy Partners (ennislp.com). The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Endnotes:
(1) The Facts about Social Security’s Disability Program, Social Security Administration Publication No. 05-10570, January 2018.
(2) 1985 Commissioners’ Disability Individual Table A and 1980 Commissioners’ Standard Ordinary Mortality Table.
(3) Americans with Disabilities: 2010, U.S. Census Bureau, Current Population Reports, July 2012.

Succession Planning or Exit Planning? Small Business Owners Need Both!

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4 business persons with the words succession planningOne of the questions we often hear from business owners is, “What is the difference between Succession Planning and Exit Planning?  Aren’t they the same thing?”  Surprisingly, they are not.  The next question usually is, “Which one do I need?” The answer is simple.  Whether the business is small or large, family-owned or not, astute business owners always need both.

succession planNearly $10 trillion dollars in business assets will be transferred globally in the next decade, according to Forbes Magazine.  Baby Boomers selling privately owned businesses or transferring them to family members will comprise much of that $10 trillion dollar transfer.  As the market becomes crowded with owners ready to sell, the advantage will go to those owners who have done their due diligence, considered all of their options, and planned for unexpected contingencies.

Succession Planning

Succession Planning focuses solely on transferring leadership inside the business from one generation to the next.  Succession plans identify key individuals within the organization who can be trained and mentored to someday take over as the existing business leaders exit.  Succession Planning is just one necessary aspect of a more comprehensive exit plan.

Exit Planning

Exit Planning incorporates succession planning with strategies for building transferrable value, reducing tax liability, preparing for unexpected contingencies, minimizing family stresses, and increasing the likelihood of a successful business transfer.  Exit plans also incorporate the personal and financial goals of the business owner, their spouse, and their family.  A prudent exit plan starts and ends with the long term business and personal objectives of the owner.

Plan Ahead for A Successful Exit

Succession plans and exit plans so share an important characteristic – neither should wait.  Business owners who eventually want to sell for top dollar with the least amount of trouble must start the planning process early enough to give it the thought and consideration it requires.   With the proper plans in place, you, the business owner, gains the ability to make critical long-term decisions that will significantly increase the likelihood of selling or transferring the business when you want, to whom you want, and for the price you want.

Pat Ennis is the President of ENNIS Legacy Partners (ennislp.com). The mission of ELP is to help business owners build value and exit on their own terms and conditions.