Exit Planning Tools for Business Owners

business strategy

How to Add Millions to The Value of Your Business – Using EBITDA Adjustments

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As a 5-time entrepreneur who has helped several businesses increase their value, I know what it takes to run a successful business. If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

According to Oberlo, the number of small businesses increased from 32.5 million in 2021 to 33.2 million in 2022. This trend shows no signs of slowing down as more and more people are taking their first steps into becoming an entrepreneur.

In addition to new businesses, many boomer business owners will be heading into retirement within the next decade, adding even more competition for the attention of buyers.

With both of these factors in mind, it is normal for more established organizations to wonder if the increase in new competition will have an impact on the value of their business when it comes time to sell.

While this can be intimidating, there is a process a business owner that is looking to retire can take to ensure a profitable exit.

Obsessing Over Your Multiple

If my 25 plus years of experience has taught me anything, it’s that a business trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can increase its value.

After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on how much you will realize on the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open to Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

How to Increase Your Companies Value in Time for Retirement with EBITDA Adjustments.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year.

You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business.

This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.

Some of the most common EBITDA adjustments relate to:

Rent (common if you own the building your company operates from and your company is paying higher-than-market rent).
Repairs and maintenance.
Start–up costs.
One-off lawsuits.
Insurance claims.
One-time professional services fees.
Lifestyle expenses.
Owner salaries and bonuses.
Family members wages and benefits.
Non-arms length revenue or expenses.
Revenue or expenses created by redundant assets.
Inventories

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries.

Is there an AI role in Exit Planning?

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The media is packed with stories about Artificial Intelligence. According to the stories, because a smart search engine (which is essentially what a Learning Language Model [LLM] is) can pass a Bar exam, it threatens all kinds of white-collar careers.

And in case you were wondering, no – I’m not writing this on ChapGPT. That “surprise” trope has been so overdone on every local television station that I hope I never see it again. Also, if you thought this column would be about how to write letters, proposals, and social media posts using AI, you’ll have to look elsewhere.

At ExitMap® we launched our AI upgrade in May. It does all the things I mentioned in the previous paragraph, but it can also be a useful tool for owners within its limitations. Writing a few hundred prompts (They used to be called “queries,” I don’t know the difference) has given us some insight into how it works, and where it doesn’t.

Using AI for research

What works for advisors also works for business owners. If you want to begin exploring our exit planning options using the free application of ChatGPT, here are some guidelines.

First, don’t ask AI for advice. Just about any prompt that begins with a first-person pronoun (I or we) will generate a disclaimer something like “As an AI, I don’t know the individual circumstances of the situation.” If you regenerate the response it will often drop the disclaimer. What follows is usually along the lines of “But here are some of the typical actions in such a situation,” which can be useful.

It’s worth it to ask things in different ways. For example, ask “What kind of incentives can help with employee retention after a sale?” The response will be more generic, like “a good culture, opportunity for advancement, job security, recognition, and stay bonuses.” If you add “structured financial” in front of incentives the response will include descriptions of stay bonuses, equity participation, performance bonuses, golden handcuffs, and phantom stock plans.

If you aren’t an attorney, you still know that a business with multiple owners should have a buy/sell agreement. Some owners say “Why? We’ve made it for 25 years without one.” Prompting AI for reasons to have a buy/sell agreement will generate comments on Succession Planning, Valuation. Preventing Unwanted Owners, Stability and Continuity, Funding Mechanisms, Conflict Resolution, and Tax Planning with an explanation of applicable situations for each.

I have clients who are already using AI to read X-rays, score Customer Service calls, and write employee satisfaction surveys. I work with one owner who creates orientation and training videos using an AI-generated animation of himself that reads AI-generated scripts.

The AI role in exit planning

What is the AI role in Exit Planning? Considering that exit planning as an activity involves multiple specialty advisors, you can save a lot of time and money by asking questions in various areas. Here are ten examples to start you off.

  • List the different exit planning options available to business owners
  • What is the difference between a certified valuation and a calculation of value?
  • What performance metrics can be used to assess a management team’s readiness for succession?
  • What situations indicate a need for a company to upgrade or revamp its purchasing systems?
  • Describe the differences between Core Values, a Mission statement, and Company Vision.
  • Explain the potential tax benefits of an ESOP for the company, owner, and employees.
  • How does owner centricity impact the Fair Market Value of a business?
  • List key components of a Business Continuity Plan.
  • What are common strategies that buyers use to finance a purchase?
  • How do you balance the needs of family employees and family stakeholders outside of the business?

Every business is different, and every owner is unique. No query can possibly take into consideration all of the variables inherent in every transition. That’s why we still need advisors.

The AI role in exit planning helps an owner to better prepare when talking to an advisor. It helps owners be better able to explore other options than the ones that are most obvious.

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 Role of a Coach in Exit Planning

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Defining the role of a coach on your exit planning team doesn’t just happen. Like any other aspect of working with consultants, you need to set expectations upfront.

Many advisors like to characterize themselves as the “quarterback” of a transition planning team. I’ve always objected to that. We regard the business owner as the quarterback of the planning process. After all, the coach never gets sacked by a 300-pound defensive lineman. The advisor may want to win every bit as much as the business owner, but it’s the owner who actually has skin in the game.

A Coach’s Responsibilities

It’s one thing to say that you are a coach and another to act like it. Here are seven basic rules an owner should expect from the coach on a planning team.

  1. He (or she) speaks the truth always, even (or especially) if you don’t particularly want to hear it.
  2. He must act as a Fiduciary, putting your needs first.
  3. He should offer options and alternatives, especially when you have a fixed idea of how things need to be done.
  4. He acts as the defender of your objectives and points out when other advisors on the team are drifting from those objectives.
  5. He documents the progress of your engagement, as well as that of the other advisors.
  6. He respects the work of other advisors and solicits their input.
  7. He delivers your contributions on schedule, but respects your need to attend to business first.

role of a coachThese “rules” can be verbalized or set out in writing, but it is important that your expectations are discussed at the outset.

Let’s continue with the coaching analogy for a moment. The quarterback must not only accept the coach’s advice, but in his role as leader of the team he should be telling the position players that his plays are the ones they are going to use. The quarterback understands that the route assigned to the wide receiver is only part of the picture. There are other men that are going to protect him so he has time to throw, or occupy defenders so the receiver can get open. The pieces have to work together as a whole.

Leading a Team

Similarly, the business owner must make plain that the coach’s responsibility includes overseeing the other members of the advisory team. No receiver would dream of coming into the huddle and saying “Hey guys. I just thought up a different play. Here’s what I want you all to do.” Some advisors, however, seem to think that is OK.

But if the receiver comes to the quarterback while the offense is on the sidelines and says “They are using the same coverage on me every time. I think I have an opportunity down the sideline,” it’s the quarterback’s role (and obligation) to bring that to the coach. Then an appropriate play can be drawn up that involves the entire team. Similarly, you should be open to other advisors’ input, but bring it to the coach right away.

Every team needs a coach. It’s his or her responsibility to help them work together for a single outcome. It’s not your job as an owner. You have neither the experience nor the time to devote to the task. Defining the role of a coach leaves you, the quarterback, the ability to focus on winning the game.

 

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.

“Work From Anywhere” Comes Full Circle

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Work from anywhere has been a necessity, an epithet, an obstacle, and an opportunity over the last 3 years. To paraphrase Aristotle’s axiom about Nature (“Horror Vacui”), business abhors a vacuum. Where one occurs, it is quickly filled.

Work from anywhere started as a COVID-induced necessity. During the lockdowns of 2020-2021 (and longer in some places) we all had a crash course in video calling, VPNs, and virtual meetings.

Employees quickly expanded the definition of anywhere. They tired of shunting the children off to a bedroom during conference calls, or using office-like backdrops to hide their kitchen cabinets. Soon they began changing their backgrounds to something more aspirational, like a mountain cabin or a scenic lake.

From there it wasn’t much of a leap to make the mental shift from a make-believe environment to a physical one. Pretty soon employees were calling in from real mountain cabins. In many cases, they shifted to someplace where the cost of living was much lower than in their former metropolitan workspace.

Work from Anywhere as an epithet and an obstacle

As employees moved further afield from their office environment, bosses began to sound off. “We aren’t going to pay Los Angeles wages to someone who has a Boise cost of living,” was a commonly heard complaint.  Most put up with it because qualified help was getting harder to find. Hiring remotely was too hard a new skill to master.

The complaints of employers grew louder as they began to ask employees to return to their former location of working activity. They made arguments about deteriorating corporate culture or a lack of mentoring opportunities.

At the same time, stories surfaced about workers who were getting full-time paychecks from multiple employers, or who were “quiet quitting” by doing as little as possible. The “Great Resignation” forced many organizations to put up with it. If you wanted to keep employees, you needed to accommodate their demands.

Then the work-from-anywhere poaching started. If an employee could do the job from a thousand miles away, why not just hire people from a thousand miles away? Now recruiters could dangle Los Angeles wages at candidates from Boise. Many employers saw work from anywhere as a curse costing them their best talent.

Work from Anywhere as an Opportunity

But as I said at the outset, business abhors a vacuum. Every action has a reaction. When the job can be done from anywhere, does that mean anywhere?

work from anywhereIf the higher cost of living centers can fill their needs by hiring people who are accustomed to earning less, why shouldn’t employers look at those candidates before the local talent? The Internet allows almost-instant communication across countries, what about across oceans?

In the last few months, I’ve worked with employers who are hiring accountants in India, staffing recruiters in the Philippines, programmers in Argentina, support techs in Colombia, and screening nurses in Nicaragua.  None of these employers are multinationals. Each one fits the SBA’s definition of a small business.

Their new employees are educated, English speaking, have the same hours as the employer, and are thrilled for the opportunity. Some are hired directly through a local placement agency. Others work for an organization in their home country that makes them exclusive to the client and promises to replace them if needed.

Most of the wages appear to be about 50% more than the same job would pay in the country of residence, and roughly half of what the position in the U.S. would cost.

Business has once again filled a vacuum. I wonder what is next?
 
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.

Owner Obstacles to an Exit Plan

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Owner obstacles to the implementation of an exit plan are often unconscious, but they can be dramatic.  Their attachment to the business can be difficult to break. An advisor spends a lot of time and energy developing the vision for life after ownership in the hopes that it is far more attractive to them than their current role in the business.

Yet no matter how well developed that vision is, or how well defined the action steps are, it isn’t unusual to find owners who behave in a way that ultimately sabotages the plan. Sometimes their actions are even intentional, but more often they aren’t. The problems arise in two ways.

 

“Death from Inattention”

We always ask exit planning clients for two target dates. The first is when they want to be relieved of day-to-day operational responsibilities. The second is when they want to be completely free of any connection to the company.

We tell a client that once we have achieved the first objective, the second may become more flexible. Freed on the task-based duties of running the business, an owner often becomes more strategic. He may start planning for new growth and value creation. She might go back to her role when the business first started when she was the best salesperson or the designer of novel product offerings.

Owners returning to their core skill set are usually a benefit to the business. The problem arises when they enjoy the lack of responsibility so much that they just become owners in absentia.

There is no strategy. The company drifts along on the backs of the operations managers, but doesn’t have a direction beyond “more of what we did yesterday.” There are no new initiatives.

Companies are organic. They are either growing or shrinking. The lack of direction may take a while to have an impact, but eventually, performance will suffer. Getting owners to re-engage after time away can be exceedingly difficult, but if they don’t, the transition is unlikely to accomplish their objectives.

“Death from Over-Attention”

The second obstacle to successfully implementing a transition occurs when owners have surrendered their task-based duties. In this case, they are unable to define their contribution in the absence of being “busy.” They begin looking for ways to contribute, often where their contribution isn’t needed.

It’s not uncommon to begin demanding more accountability and greater detail than is necessary. He or she pours over reports looking for errors, anomalies, or declining results to prove added value.

Another technique used to prove contribution is “seagull management”. An owner may look for opportunities to make decisions but does it without consulting the managers who are in charge of the function. Because they have always known best, they still know best. What isn’t as obvious is that they are now working in a vacuum, with little knowledge of what went before. The results are usually not ideal.

A third way owners might evidence over attention is with a “break the rules” mentality. They offer exemptions from policy or circumnavigate systems because they can. Exercising authority shows who is in charge, even if there is little apparent responsibility.

Preventing the Owner Obstacles

We call these “good” obstacles because they typically occur only after some level of initial success in the exit planning process. They are a direct result of relieving owners of the more mundane duties of management, and freeing them up for more effective leadership. Each is preventable with some preparation.

Either issue can be forestalled by including the owner’s next level of responsibility in the planning process. If the owner resists retained responsibilities, then the future becomes plain. Plans can then include the transfer of higher functions to the management team. If the owner insists on maintaining a level of day-to-day control, the coaching process should include defined parameters about what reporting is essential, and how often it will be presented.

owner obstaclesIn either case, owner obstacles occur when the owner is crossing the no man’s land between total focus on the business and the time when it isn’t a recipient of their attention at all. Like any no man’s land, it is unfamiliar territory, and some pathfinding is necessary. That is the exit planning coach’s job.

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.