Exit Planning Tools for Business Owners

business planning

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

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One 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.

Your Exit Plan: The 3 Inarguable Reasons to Start NOW

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What is Your Exit Plan?

If you’ve ever done a business plan for the purpose of raising capital, one of the key questions is “What is your exit plan?” Many business owners think that question is self-serving, intended merely to let the venture capitalists figure when and how they will get their return on investment. In truth, however, that question is far more important.

An exit plan is a strategic plan with an end date. Putting a time frame on your plan, and defining the goals to be achieved by that date, creates a future-focused mindset for the owner. It controls and reduces your tendency to prioritize daily firefighting over long term thinking. It provides you with a yardstick to measure progress. Most importantly, it affects your thinking about almost everything in your business.

Here are the 3 inarguable reasons why you should start your exit plan now.

Reason #1: It’s Never Too Soon

your exit planIn my years of working with business owners, I’ve helped many transfer their businesses to family and employees. I’ve worked with others who sold their companies to a third party for tens of millions of dollars.

Surveys show that many owners have regrets afterward. Others happily move into the next phase of their lives or careers. A few have seller’s remorse. On the other end of the spectrum, some come to the realization that they hated their business owner lives for years. The majority feel that they received a reasonable reward for monetizing their work of decades.

None of them. NOT ONE of them, has ever said “I spent too much time planning.”

It’s likely that the sale of your business will be the most important financial event of your life. There are a few lucky owners who have wealth outside or beyond the value of their businesses, but for most of us monetizing those decades of effort is the culmination of our working careers.

If your exit plan is to transfer to family, you can choose vehicles like Grantor Retained Annuity Trusts (GRAT) or Self Cancelling Installment Notes (SCIN).  These may have to be in place for years to substantially reduce or eliminate taxable proceeds for you and/or your heirs.

In a sale to employees, developing the documentation that shows their assumption of managerial responsibilities over time is a basic qualification for SBA loan approval. That, plus developing their “down payment” equity, punches the ticket for you to walk away with your proceeds in pocket on the same day that you cede control of the company.

In a sale to third parties, the condition of the financial markets at your time of exit will decide the size of your multiple.  Preparing your business with due diligence in mind, and understanding the different classes of buyers, (see my post on identifying a buyer) allows you to better choose the time, method and proceeds of your transition.

Although it is difficult to time the stock market, shifts in acquisition multiples take much longer to develop.  Being prepared allows you to enter the market while prices are at a peak.

Five years is a reasonable planning time. Ten years is better. There is no time frame that’s “too far out” to be thinking about your exit.

Reason # 2: It Changes Your Thinking

It’s difficult to run a business without being reactive. Employee issues, customer problems, and vendor policies can shift your priorities on a daily basis.

When your exit plan is in place, you have a broader perspective. Every decision you make is now in the context of “Does this support my bigger picture?” There are numerous examples.

Hiring: If your exit plan is to pass the business on to your children, then hiring becomes a support function. You look for employees who can fill in areas where your offspring lack the necessary skills, or don’t have an interest.

If you plan to sell to employees, then you are looking for a Successor in Training (SIT). That is someone who shares many characteristics with you. If you are selling to a third party, you want a Second in Command (SIC). That is someone who compliments your strengths, and who can be contractually incented to stay on the job with a new owner. (See my piece on SIT vs. SIC here.) Securing a management team adds considerable value to any company.

Lease vs. Buy: If your plan calls for selling to someone who is likely to relocate the company, or who already has your production capabilities, you may want capital equipment to be easily disposable. A competitor or much larger acquirer may want to leave the equipment out of the transaction. In a Main Street business, you may choose to have a strong tangible asset base for an entrepreneurial owner to use when obtaining acquisition financing.

Real Estate: Should you own your building? Some buyers (say a publicly-traded acquirer) prefer to lease space. In that case, owning your building could provide a post-transition income stream in your retirement.

On the other hand, a relocated company could stick the owner/landlord with a special purpose building that requires significant remodeling to be rentable.

These are just a few of the decisions that are better made in the context of your long term plan. The decisions you are making in your business today all have lasting implications.

Reason #3: A Plan is not an Action

youe exit planIf you are taking a long trip, you likely determine the route before you start out. If it is complex, you may print out the directions. Nonetheless, you are still likely to use a wayfinding app to alert you to problems along the way, like traffic jams or construction.

But everyone understands that printing out the directions isn’t the same as beginning the journey. You might take that step days or even weeks before actually getting into your car.

It’s the same with your exit plan. Choosing your time frame and preferred method of transition isn’t the same as making it happen. Writing it down is a key component of preparation, but it shouldn’t be confused with implementation.

Starting Your Exit Plan

Venture capitalists ask an entrepreneur  “What is your exit plan?” because the answer shows that he or she has thought through the implications of their decisions. They have built the business with a purpose beyond merely growing or getting through the next cycle. It shows that the allocation of resources, the selection of personnel, and choices in product and service offerings are coordinated.

There will be obstacles along the way. Your strategy may shift to compensate for new technology or changing market tastes. As the company grows in your chosen direction, you could just be having too much fun to leave on your originally planned date.

But those changes will be conscious. You will see how new factors fit with your plan, and when they don’t. Course adjustments keep the goal in mind. Alternatively, you understand when the goals themselves have to change.

For years, clients have asked me “What should I do to increase the value of my business?” My answer is always the same. “Exactly the same things that you should be doing to improve your business every day.”

Stephen Covey coined the axiom “Begin with the end in mind.” Yogi Berra said “If you don’t know where you are going, you may wind up somewhere else.”

Your exit plan is the road map to your eventual financial security. It doesn’t have to be a huge undertaking. All plans begin with where you are now. You already have the company, the management team, the customers, and the products or services. You’ve likely thought about how you would like to finish. What’s left is just putting the two together.

The sooner you go through the exercise, the sooner your company will be a component of your exit plan, rather than a distraction from it.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at www.YourExitMap.com 

 

 

 

 

Protect Your Business with A Solid Continuity Plan

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The Need For A Solid Continuity Plan

A great characteristic of successful business owners is that they are optimistic people and will do what it takes to protect their business. They have a can-do attitude, setting their goals high, taking risks, hiring the right people, constantly striving to improve the delivery of their service or product, with a constant drive to build their entity into one of great significance.

As a result, building a successful company may give the owner great pride in their achievements and a strong sense of identity. That is normal human behavior. But because of that, the thought of an event that causes the owner to leave the business due to death or a disability is often never planned for and is overlooked. If such an event were to occur, it would not only jeopardize the value or even the survival of the business itself, especially if the business is heavily reliant on the owner or a key partner, but it also jeopardizes the future career paths of key employees and others, and leave customers scrambling to find somewhere else to go.

What Does It Take To Protect Your Business?

One thing is often on the minds of owners and advisors; how the family is taken care of through an unexpected death or disability. However, business continuity planning goes much further than that. A solid business continuity plan includes agreements, procedures, employee incentives, and safeguards that are put into place to help enable the business entity and all of its successors. This includes all key employees, vendors, operations, procedures, and customers. It helps the business continue on a successful path, with as little interruption as possible, if the owner/s is no longer present.

For instance, who will fill the slot of Chief Executive or Chief Operating Officer? Does the remaining management have a plan? Do they have financial resources available to search and bring in somebody from the outside to fill that position? Should they begin, now, to groom key employees for that role? How will the key vendors, creditors, and customers be handled? Will supplementary training need to take place? What will you tell the customers and the community to maintain confidence in the company during an unexpected death or disability? What plan will you put in place to entice the key employees to stay around and ensure the internal integrity of operations?

The reality within the marketplace is, if the business is left paralyzed and vulnerable, they risk losing key customers, creditors, and key employees who may be quickly recruited by competitors.

The Elements of a Solid Continuity Plan

The good news is that building a solid continuity plan is a required step within the exit planning process. It helps to build the value and marketability of the organization.

There are many areas that a continuity plan addresses and help protect your business. It includes the creation of a Buy-Sell Agreement, or amending or replacing one; the disposition of ownership interest, which is done through estate planning documents; insurance to fund the Buy-Sell Agreement; a management continuity reward program; retaining key employees after death or disability; a stay bonus plan; a process for terminating personal guarantees for business obligations, business continuity instructions; and a Buy-Back agreement for minority owners. There are other potential areas to address, but these are the likely critical areas.

Key Documentation

Buy-Sell Agreement – This document is created to summarize the terms of the written agreement that will govern the ownership transfer and ownership rights aspects of the ownership interest of the primary owner/s and other members of the controlling interest group. This document also covers the issues related to the rights and responsibilities of the parties to the agreement.

Disposition of Ownership Interest Through Estate Planning Documents – Estate Planning documents summarize the intentions and issues that are most important to the owner if he/she dies while holding the ownership interest in the company. This is carried over into the continuity plan and is created within the personal estate planning documents.

Insurance to Fund A Buy-Sell Agreement – The purpose of this exercise is to recommend and select the appropriate type of life and disability insurance related to the purchase/sale of the owner’s interest in the company. Proceeds from these policies are used to purchase the ownership interest.

Management Continuity Reward Program – This is to address the benefits that the owner intends to provide to the individuals who take over the management responsibilities if the owner should die or become disabled, and is unable to perform the regular responsibilities.

Retaining Key Employees After Death or Disability – This is the section of the plan that addresses the steps to retain key employees. This is not intended to include incentive and reward planning for key employees, which is more properly addressed in a separate component of the overall planning. Instead, attention is given to the particular issues relevant to the key employee retention when a majority or controlling owner is unexpectedly absent from the company. This section is intended to assist the successor management staff. It also allows them to concentrate on the continued success of the company and protect your business.

Stay Bonus Plan – Develop a written agreement that would become effective upon the owner’s death or disability. The Stay Bonus Plan acknowledges the indispensable employees remaining with the company should such an event occur. The plan provides confidence and support to specific employees who choose to remain with the company and provides substantial financial reward for them doing so.

Terminating Personal Guarantees for Business Obligations – This is a stipulation of steps to be taken to protect the company if the owner’s personal financial resources are no longer available to support the financial activities of the business. In the event of death or disability, the company relationships may require that the business demonstrate financial stability to continue their relationship.

Business Continuity Instructions – Business continuity instructions are written instructions that are completed, signed, and stored with other important personal documents related to the owner’s death or disability.

Buy-Back Agreement for Minority Owners – The purpose of developing this agreement is to state the situations in which an employee owner’s interest will be purchased by you or the company in specific situations that may arise. It also governs the employee’s ownership interest while he or she is an owner. It addresses certain rights and responsibilities associated with the ownership status and other terms related to ownership.

 

Work Flow Diagram

Over the years my staff and I have developed a work flow diagram to help the owner understand how we can approach the development of a Business Continuity Plan. Although, every situation is different, it gives you a general idea of how it may come together.

Protect Your Business

The bottom line is, a solid Continuity Plan is critical for you, as a business owner, to develop and maintain, to help ensure that your business, which you and your staff have worked so hard to build, maintains its integrity and success if something should happen to you.

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 and develops exit plans, increases business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com  

 

EBITDAC : What is Your Business Worth Now?

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Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Exit Planning in a Crisis

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Why would you be exit planning in a  crisis? At the height of the economic expansion (a few months ago in late 2019) I was reviewing a company’s financial statements. Their sales were stagnant, and profits were minimal. When I asked the owner why his business hadn’t grown, he responded, “Well, the Great Recession hit our industry pretty hard, you know.”

planning in a crisisTake note that it wasn’t his fault. He was in a hard-hit industry, and the economy dealt him a bad hand. He ignored the thousands of businesses just like his that had grown and prospered in the last ten years.

Once you hunker down behind “It’s not my fault,” it’s easy to stay there too long. First you are glad that you survived. Then you are glad to be making a little bit of money again. Then you wait for the same conditions that made you successful before. If they don’t come, it’s not your fault.

In the meantime, others are coming out of the downturn firing on all cylinders. They used the slow time to get ready; to plan what comes next. When the door of opportunity opened again, they were ready.

Baby Boomers’ Double Whammy

The coronavirus is especially lethal in senior citizens. Many of those are Baby Boomer business owners. They have also suffered a double financial hit. Their retirement account balances are lower, and their businesses, whether closed or just slow, are worth less then they were a few months ago.

Many owners will try to kick the can down the road. “I’ll spend a few years building the business back up, then I’ll sell it.” For some, that was their plan after the recession. Unless you have something new up your sleeve, you may be waiting a long time for the right buyer to come along. In the next economic cycle, you may wait too long. You can only kick that can so far.

If you are a Baby Boomer, the time to be planning your exit is now. That goes double if you are sitting in your house wondering what comes next. Most entrepreneurs started a business because they wanted control over their lives. When there’s an event that takes away that control, your best response is to get it back.

Exit Planning in a Crisis

Your exit plan starts with some basic questions.

  1. Do I know how much I need to retire, with a professional analysis of my living expenses, life expectancy and inflation assumptions?
  2. Do I know how much my company is really worth, and who is most likely to pay me that amount?
  3. If #2 doesn’t meet the needs of #1, do I know how long, and what it would take, to get my business there?
  4. Do I know all the options for monetizing my business, including a sale to employees, another entrepreneur or professional acquirers?

If you are a Baby Boomer, unless you are exit planning in a crisis, you risk a discussion in 2025, or 2028, or 2031 that starts with “Well. the coronavirus hit our industry pretty hard, you know.”

There is a network of advisors in the USA and Canada who specialize in a reasonably priced, 90-day planning process for small business owners, and who use a suite of online tools to help you work through all these questions remotely. They can help get you started right now.

For a listing of these advisors, go here.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.