Exit Planning Tools for Business Owners

business planning

What’s Your Purpose in Retirement?

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beach with blue hammocksRetirement can be an exciting milestone. It’s also a major lifestyle change. Oftentimes, your daily workday tasks (professionally or if you run your own business) will likely no longer exist.

Transitioning into retirement for some is an easy process. Perhaps their profession is not their absolute passion, and they always had other pursuits and hobbies they are ready to explore once exiting from their day job. But for others, their profession or business is their passion. They put all their time and energy into it and are dedicated to their profession for many years. Now suddenly, retirement is on the horizon and work is coming to an end. Alternatively, some people have it in their blood to consistently be achieving something, striving to make an impact and difference.

Whichever the case for you, a meaningful life with purpose is a healthy human condition for life fulfillment and longevity. This perspective has been around for generations. Teddy Roosevelt wrote about it in his book, “The Strenuous Life,” written in 1899. To reference his perspective, here is a quote addressing how to live a fulfilling life:

“I wish to preach, not the doctrine of ignoble ease, but the doctrine of the strenuous life, the life of toil and effort, labor and strife; to preach that highest form of success which comes, not to the man who desires mere easy peace, but to the man who does not shrink from danger, from hardship, or bitter toil, and who out of these wins the splendid ultimate triumph. A life of slothful ease, a life of that peace which springs merely from lack either of desire or of power to strive after great things, is as little worthy of a nation as an individual.” – Theodore Roosevelt

Since we’re quoting Teddy Roosevelt about living a fulfilling life, here’s another excerpt from one of his writings titled “Into the Arena”:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

The reason I bring these quotes into this discussion of retirement is that it’s important to remember just because your time spent working up to this point is coming to an end, doesn’t mean you stop laboring or that you don’t need to put effort into new endeavors or into making a difference.

What Are You Going to Do in Retirement?

I was at a gathering recently and in a conversation with two close friends of mine were discussing retirement, and one said to the other, “It’s not whether you can retire, it’s ‘what are you going to do when you retire?’”. He’s right, in my opinion.

The book, “The Magic of Believing,” written by Claude M. Bristol in 1948, wrote of a man he knew: “One man I know who has many achievements to his credit, and who has passed the seventy mark, declared that most people fall by the wayside because they never start anything.

I make it a plan and have for years, to start something new – that is, new for me – at least once a week. It may be only the making of some simple gadget for use in the kitchen, an entirely new sales plan, or reading an unfamiliar book. I find in following this plan not only keeps my body and mind active but also puts to use a lot of imaginative qualities that otherwise might fall asleep and atrophy. This idea of a man retiring when he’s sixty is (in my option) a great mistake.

As soon as a man retires and quits being active mentally and physically, he’s on the way to his grave in short order. You have seen what happens to fire horses when they are retired. You know what happens to your automobile when you leave it outside unused and neglected: it starts to rust and is soon headed for the junkshop. Humans are the same: they deteriorate out or wither and die when they go on the shelf.”

We Need Purpose in Retirement

I have deliberately referenced writings published many, many years ago to point out that this dilemma is as old as time; the human struggle hasn’t changed. We all still need deep purpose in our lives and the ability to make a difference for ourselves and for others to have a fulfilling life. In the practice of helping business owners exit their business successfully, I have heard stories of owners when facing the day of finalizing the sale of their company, don’t show up for the signing. Why? Because all their self-identity and their purpose are in the company they started, grew, and made a great success. To them, parting from it represents an end to all of that and a loss of a sense of control. But exiting doesn’t have to be viewed as an end. But does take careful thought, reflection, consideration, planning, and time to develop a new purpose and consistent passions. For some this is simple, but for others, takes time and consideration. However, it’s a critical area to address. A person who says that finally I’ll have time to play golf will likely find that passion dissipates after a few months and begin to ask, “now what?”

Over the years, our firm has developed a client conversation exercise called “Purposeful Conversation.” Originally, it was developed from our practice of “family legacy development,” We developed our P.C. exercise as a systematized approach to have a deep discussion with a client on “what matters most” to them.

The exercise is broken into three sections: Concerns and Priorities, Commitments and Causes, and Pursuit of Happiness/Life Fulfillment. Each of these areas has nine to twelve potential subjects that a client can consider. We help determine, with the client, the subjects that are relevant and have a deep discussion about importance. This can help them visualize their future, determine their life’s passions during retirement, and help determine what matters most in life. We discuss what makes them happy, what will help them continue to grow, and what brings fulfillment and create a plan now to allow them to focus on and pursue what they desire later.

We also developed a customized workbook to help identify their individual and family values and tie it all into their changing lifestyle.

Pursure Passion in Retirement

Pursuing interests and passions can come in many forms and combinations. Once I took a Lyft from a downtown Denver hotel to the Denver Airport. The driver said that he had started a few tech companies in the past, sold them, and is now driving to meet and learn from other people. I also learned that he decided to learn all he could to master Neuro-Linguistics. This is the study of how verbal and non-verbal language is represented in the brain: that is, how and where our brains store our knowledge of the language that we speak, understand, read, and write. And what happens to our brains as we acquire that knowledge, and how we use it in our everyday lives. I describe it in detail because it’s quite involved! Nevertheless, this gentleman strived to master it and then apply it to his sales training and sales consulting. He told me he was, being hired by companies to facilitate training courses for their sales forces. Wow! Talk about pursuing something else with a passion. I am now connected with him on LinkedIn and learning from him.

You can make a new life in retirement, include whatever you desire, and in a way that brings you maximum fulfillment and meaning. Do whatever “floats your boat,” so to speak.

If you are approaching the runway to land into your retirement years, or the period of your life that transitions you from your profession to your passion, make sure to take time and plan for it. It will be well worth the effort.

I hope you find this article useful. If you have any questions on this subject, feel free to contact me at szeller@zellerkern.com.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

A Hazy Crystal Ball is Better than a Rearview Mirror

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Crystal BallSeveral 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.

Non-Qualified Plans

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When I talk to business owners about “non-qualified plans,” their first reaction is often “Hold on there. I don’t want to get in trouble!”

The term “Non-qualified” merely refers to the Employee Retirement Income Security Act of 1974, more commonly known as ERISA. As the title indicates, it is the basic set of regulations for retirement plans. If your company offers a 401K or SEP IRA, it has a Qualified Plan. If you have an Employee Stock Ownership Plan (ESOP), that is also an ERISA plan.

Under the terms of ERISA, a plan must be made available to all employees. In return, the company can deduct contributions as benefit expenses, and the employee can contribute pretax income to the plan.

A non-qualified plan doesn’t comply with ERISA requirements.  It is discriminatory in nature, meaning it is not offered equally to all employees. The employee cannot make contributions, and the employer usually can’t deduct the costs of funding the plan (which is built around future benefits,) as of current expenses.

Most non-qualified plans are designed as Deferred Compensation, thus the common acronym NQDC. The concept is to offer key employees a carrot for long-term retention. It can be enhanced retirement funding, insurance, or one of many forms of synthetic equity in the business.

Non-qualified Plan Types

We can start with the simplest example of NQDC. If an employee remains with the company until retirement, he or she will receive an additional year’s salary upon retiring. This benefit is not sequestered in a secure account anywhere, it’s just a promise by the company. It’s known as an “unfunded” benefit. There is no annual statement, just a guaranty (typically in writing,) by the business.

Non-qualified plansOften, an NQDC is funded by an insurance policy with a death benefit and an increasing cash value. It is owned by the company, which pays the premiums. At retirement, the employee receives the paid-up policy. This approach has the added benefit of lending confidence to the process, as the employee can see the funding and growth of the future benefit.

Synthetic equity may be stock options, phantom stock, or Stock Appreciation Rights (SARs.) In most forms, it is the right to future compensation based on any increased value of the business. For example, if the business is valued at $2,000,000 today, the employee may be given a contractual right to 10% of the difference in value at the time of retirement. If the company is worth $3,000,000 then, the employee would receive $100,000. ($3,000,000 minus $2,000,000 times 10%.)

Valuation, Vesting, and Forfeiture

Non-qualified plans based on equity should have a formula for valuing the benefit. It may be any financial measure such as revenue, pre-tax profit, or EBITDA. The objective is to make it clear to both parties how the benefit will be measured.

Vesting is an opportunity to be creative. The benefit can vest gradually, or all at once at a specific point in the future. An employee may be able to collect once fully vested or, in the case of synthetic equity, may have the right to “let it ride” for future growth if other conditions are met.

Regardless of how attractive a benefit may be, no employment relationship lasts forever. Pay special attention to how you construct acceleration and forfeiture clauses. Of course, no one wants to pay out to an employee who has been terminated for cause, but the employee deserves some protection against being let go just because a promised benefit has gotten too expensive.

Similarly, provisions for accelerated valuation in the case of a change in ownership are common. You also may want to consider rolling the NQDC into a stay bonus agreement if you sell the business. If there are options on actual stock involved, you will need to determine the handling of them if they could pass into the hands of someone other than the employee. That would be triggered by bankruptcy, divorce, or death.

Benefits of Non-Qualified Plans

As I described in my book Hunting in a Farmer’s World, incentives for employees should match their level of responsibility. Production workers have incentives based on their production. Managers have incentives based on their ability to manage.

Your very best people, the ones you want to stay with you through their entire careers, should be able to participate in the long-term results of their efforts for the company. Non-qualified plans are a way to single them out and emphasize your interest in sharing what you are building together.

As always. check with your tax advisor. Setting a plan up incorrectly could result in unwanted or phantom taxation for the company or the employee.

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.

Will You Be Ready?

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calendar with one pink flag to mark a special dateWill 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.

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.