Exit Planning Tools for Business Owners

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What’s in YOUR Nondisclosure Agreement?

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A Nondisclosure Agreement (NDA) has become one of the basic standard documents in every company’s wallet. Between the rising swell of Baby Boomer owners entertaining exit planning, and greater caution surrounding the legal issues of strategic partnering, an NDA is now the standard next step following many initial exploratory conversations.

What should you protect in an NDA? (Note: I am not an attorney, and I don’t create Nondisclosure Agreements for clients.)

Secret informationFirst, there is the question of who is covered by the agreement. Most allow for advisors to each party to see the agreement. That can encompass accountants, attorneys, consultants, bankers and employees. I think employees present the greatest risk, since they are the most likely to personally benefit from information about customers, vendors and pricing.

Some attorneys include language requiring every person who shares the information to sign and return a separate copy. That is cumbersome, and opens the question of enforcement. If you talk to someone on the other side of the transaction, and don’t have a signed copy of the agreement first, have you voided that condition yourself?

Try to keep the responsibility for protecting information with the other side. One mechanism is to have each person who sees information add their signature to the agreement, with language that makes it the other party’s responsibility to only share with signatories. At a minimum, the other party should be required to make certain everyone on their side is informed of the confidential nature of the information. Electronically stamping everything “Confidential” and converting it into pdf is also a basic caution.

Then there are decisions about what information to share. Most potential acquirers are concerned about customer concentration in sales. They will ask for customer purchasing history as one of the first items in preliminary examination of your company.

That is a legitimate concern, but it doesn’t mean they need the names of the customers until much later in the process. We provide redacted reports, identifying customers by letters or numbers.

The same type of common sense applies to vendors, employee compensation and margins by product line. You can provide sufficient information for valuing the business without the details. No matter how honest or well intentioned the other party may be, he or she will remember that you are making 10% more on a specific product, or are selling substantial amounts to a customer they thought was all theirs.

Finally, we recommend that the Nondisclosure Agreement go beyond just keeping information confidential. It should always include a non-employment clause regarding your employees. Non-solicitation is okay, but it’s hard to prove if the company claims the employee approached them. Just make it simple; they can’t hire any employee for two years following your discussions. You may be surprised at how many potential partners balk at this condition.

Always have a qualified attorney draft any Nondisclosure Agreement, but there is no need to go wild. One page is typically insufficient, but more than two pages and you are usually loading it up with conditions that are either irrelevant or unenforceable.

No NDA will stop someone from being dishonest. It is intended to make plain what you consider yours, and how you expect it to be handled. As in any other business transaction, what’s written on the paper doesn’t replace trust.

 

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The 7 Deadly Sins of an Entrepreneur — Reprise

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I make no claim that using the Seven Deadly Sins as a metaphor for business behavior is original. Of course, the original concept is a codifying of “undesirable” human behaviors, or sins. The work probably comes from the Latin word sons (guilty). Various sources attribute it to Old English and Hebrew, but since Latin was the language of the church, this seems most likely.

The concept of personifying the seven sins for popular consumption, as I mentioned in the first column in this series, goes back at least to Dante in the early 1300’s. It’s been used regularly in popular fiction including Roald Dahl’s Charlie and the Chocolate Factory (the five golden ticket winners each represent a sin, with Grandpa as Envy and Willie Wonka as Wrath); and in “Sponge Bob Squarepants” (I’ll assume that most readers don’t know the characters well enough to make identification worthwhile.)

gilligans-titlePerhaps the most amusing application was in “Gilligan’s Island.” The seven castaways fill their assignments well. There’s Gilligan (Sloth), the Skipper too (Wrath).  The millionaire (Thurston Howell — Greed) and his wife (Gluttony). The movie star (Ginger — Lust, of course); The professor (Pride) and Mary Ann (Envy), here on Gilligan’s Isle (Hell?)

My apologies if I just stuck that tune in your head for the rest of the day.

When I present “The 7 Sins of an Entrepreneur” to business audiences, they take special delight in identifying their own behaviors. Maybe it’s because they are relieved (“Gee, I only have four.”) or because they are naturally competitive (“Hey, I hit on all seven!”)

What ever the reason, it’s an easy way to organize negative behaviors. Perhaps that’s why it has remained so dominant a concept. Regardless of your failings, they can probably be categorized as one of the seven sins.

Here is a synopsis in order, with the corresponding “virtues” that counteract each.

  • The Operational Sins: Those which reduce your personal effectiveness as an owner and leader.
    • Lust: Allowing whim du jour to drag the company in differing directions. (Counteracting behavior: A Personal Vision.)
    • Gluttony: Hoarding all authority and decision-making for yourself. (Delegation)
  • The Tactical Sins: Those which denigrate the effectiveness of your organization.
    • Sloth: Settling for “good enough.” (Metrics and Benchmarking)
    • Wrath: Using adrenaline to drive performance. (Planning)
    • Greed: Addressing any problem with more effort or more intensity. (Budgeting)
  • The Strategic Sins: Those that prevent long term vision and improvement.
    • Envy: Thinking that no one else has your problems. (Outside advice and knowledge)
    • Pride: Believing that you are the single most important factor in your company. (Exit Strategy)

The sins are addressed in order. Dealing with the Operational Sins allows you to tackle the Tactical problems. Strategic improvement is only possible if you’ve first dealt with Tactical issues.

The Seven Deadly Sins of an Entrepreneur are an excellent mnemonic for considering your own behavior and those of your company.  Keep them in mind as you run your business day-to-day.

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The Seventh Entrepreneurial Sin — Pride

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Every business owner should be proud of his or her business. If you are the founder, you built every system, and probably landed the biggest customers. If you bought the business, you took what was in place and made it fit your vision and style.

But there is a dividing line between pride in what you’ve created and thinking that you are the business. Taking pleasure in seeing people add value and produce wealth is justifiable pride. Thinking that it exists only because of you is “sinful” pride.

(This is the eighth in a series on The Seven Deadly Sins of an Entrepreneur. It starts here.)

pawn to kingPride has characteristics that are easily recognizable in some owners. In meetings, do you do all the talking? Do you complain that you are the only one who has new ideas? Does everyone come to you for the solutions to any and every problem? Worse yet, do you insist on it? Do you reprimand employees for making decisions that, while they might work, aren’t exactly the way you would have done it?

My friend Kevin Armstrong in Vancouver says “The more you work in your business, the less it is worth.” Building an organization that is dependent on you to operate it has one drawback.

You can’t leave…ever. If you are the business, then it is worth nothing without you.

In the worst cases, you can’t take a vacation. Even getting away for a few days requires that you be tethered to electronic communications. Perhaps you’ve built sufficient managerial capacity to keep things going for a few weeks, but upon your return you have to jump-start activity again.

Here’s another axiom, this one from John Brown of the Business Enterprise Institute in Golden, Colorado. “Sooner or later, every business owner leaves his or her business.” In stark terms, you can think about how you want to exit, or you can let it be a surprise.

The virtue that counteracts Pride is Exit Planning. An exit plan differs greatly with the owner’s age, his or her personal goals and the size of the business. In every case, it requires consideration of finances, career objectives, lifestyle ambitions, management development and self-maintaining systems.

Ah, but you are still young. You are still healthy. You still enjoy running the business. Why would you want to think about leaving?

Because thinking about how the business will function without you leads to greater profitability, a higher value for your company, and more personal flexibility in your life. Aren’t those reason enough?

Professional investors craft an exit strategy before they buy into a company. For most entrepreneurs, especially in their first five years, leaving is the furthest thing from their minds. If you are beyond your fifth anniversary as an owner, you should have one eye on the door, even if it’s still a long way off.

Thinking about the business as a separate entity, something that will survive after you’ve moved on, will help make you think in longer, more strategic terms about things like new products, target markets, and developing other decision makers in your organization. It brings up questions many owners ignore, especially “What does my company look like to a buyer?”

Long, long ago I was a manager for a national chain restaurant. They taught me a trick that I still use today. Once a week or so I’d walk out in front of my restaurant and stand with my back to it. I’d close my eyes and think “I am a new customer, who has never been to this establishment before. I’ve never even driven past. I am seeing it for the very first time.”

Then I’d turn around and look at my business for the very first time. I always saw something that could have been better.

Selling a business is a bit like selling a house. You spruce things up so that it looks good. In a business you make sure your financial statements are up to date and easily understood. You tighten up on expenses. You refresh operating procedures.

If you start seriously thinking about your exit now, you’ll naturally regard your business through your buyer’s eyes. To quote one of my own favorite axioms, “The things you should do to get the best price for your business are the same things you should do every day that you own it.”

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The Sixth Entrepreneurial Sin — Envy

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This week we start on the two remaining deadly sins of an entrepreneur. Envy and Pride are the strategic sins. The first two (Lust and Gluttony) are operational; they interfere with how you function as an owner and leader. The middle three, Sloth, Wrath and Greed, are tactical. They interfere with how you run your business.

The strategic sins twist your vision and goals for the business. The first of these, Envy, is defined in the dictionary as a feeling of discontent with regard to another’s advantages.

In our business owner peer groups, we ask new members after their first Board meeting what they took away from the experience. By far the most common answer is “I thought I was the only one experiencing problems in my business.” That’s envy, an unrealistic belief that the face other owners show to the world is entirely true, and that you are the only one facing challenges.

envy whyYou are guilty of Envy if you think everyone else has better employees than yours. If you believe that other owners are making more money, or have a better work/life balance than you, envy is a problem. The common envious phrase that I hear is “My problems are different. No one else has a business that’s as difficult as mine.”

It’s not true. I’ve consulted in hundreds of companies, and I have yet to see one that didn’t hit bumps in the road. Each has its own special challenges.

Take the construction trades for an example. The roofing repair contractors say “No one else is as weather dependent as we are. When it rains, we can’t work. When the sun shines, no one needs us.”

Electricians are the first on the job (to run power for everyone else) and the last to leave (installing face plates on a finished project.) The window contractors have to provide a finished (and fragile) product at an early stage of construction, but are expected to have it still look perfect after months of everyone else working around it.

I’ve heard each say that their issues are unique to their trade, which is true. They also say that no one else has challenges as great as theirs, which isn’t.

The business virtue that counters Envy is Knowledge. Knowledge is a three-legged stool. You need financial knowledge, legal knowledge and business knowledge to succeed in business.

Financial knowledge grows out of meeting with your accountant and banker more than once a year. They can provide a lot of insight into your business if you ask the right questions. How are others in my industry faring in this market? What metrics do you use when judging the credit worthiness of companies like mine?

Legal knowledge comes from talking to an attorney when issues are small, not just when you are afraid of a lawsuit. Do I need a contract for this? What will my possible liability be in this situation? Are there regulations or laws I need to be aware of?

Most business owners acknowledge that they need legal and financial advice. The biggest remedy for Envy, however, lies in the third leg of the stool — business advice. Accountants and lawyers aren’t typically entrepreneurs. Good business advice comes from business people.

There are lots of places to find business advice. Your trade group or professional association is the first place to look. There you’ll find others who deal with exactly what you face. The business departments of local colleges, the Service Core of Retired Executives (SCORE) and Small Business Development Centers (SBDC), both sponsored by the SBA, offer free counseling in most cities.

After five years as a member of peer groups and another two decades facilitating them, I admit to a prejudice in favor of getting business advice from other business owners. There is nothing more valid than real-life experience from folks who have “Been there — Done that — Have the tee shirt.”

Eighty percent of running a business is common to all businesses. We all deal with employee compensation and incentives, new technology, changing market conditions, competitors, regulations, vendors and customers. The other 20%, the part that generates revenue, is all that is uniquely yours.

If you don’t have a safe and confidential place to discuss your business with others who face the same issues, find one. It’s the only cure for Envy.

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The Fifth Entrepreneurial Sin — Greed

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Few small business owners identify with the bloated income of Wall Street Tycoons. To accuse an entrepreneur of Greed brings up memories of the Gordon Gekko 1980’s, when “Greed is Good” seemed to be the motto of 30-something Boomers focused on the quest for success. in reality, most owners work very hard for a modest income, and feel that a little more would be amply justified.

(If you are reading Awake for the first time, this series on “The Seven Deadly Sins of an Entrepreneur” starts here.)

wrench and dollar signGreed in your business isn’t the quest for material success. That’s presumably why you own a business in the first place. Greed is a trait that prevents success. Greed is a foolish quest for more without knowing what more is. It’s focusing your efforts on cost and savings in the belief that you never have quite enough…of anything.

You can’t afford to raise wages because you need a little more revenue first. You can’t upgrade your equipment until you have a little more margin. You could be more competitive or expand your presence if you just had a few more good employees.

Greed shows its ugly face in a company where no expenditure is made unless it is unavoidable.

  • Technology is only replaced when it breaks, and then with the cheapest equipment that is the minimum necessary to do the job.
  • The office décor is a tribute to the durability of faux wood paneling.
  • No one gets a raise unless they demand it
  • Your website looks like it was done by a 14 year old (and perhaps it was.)
  • Maintenance and repair expenses increase every year.

Greed comes when an owner doesn’t know how to measure success. He or she can’t identify the most profitable lines of business, calculate underutilized capacity, or estimate return on investment for new equipment.

We previously mentioned that the business virtues that counter the sins of Lust and Sloth are Planning and Benchmarking. These need to be in place before you can defeat Greed, because its countering virtue is Budgeting.

Budgeting is the system by which you determine what success looks like. It starts when you define success, so build your budget from the bottom up. Begin with profit. Profit isn’t what is left over after everything else is taken care of. It’s the entire reason for your company’s existence.

From a target profit, work up through the expenses that will make it possible. How many employees will it require? How much raw material? How many transactions? What will each one cost; and what margin will it contribute?

Now you are ready to project the necessary revenues. Not the revenue you merely wish for (like “Ten percent more than last year,” with no idea  of where it will come from.) It’s the revenue you’ll need to make the profit you want, attract the best employees, and grow your business on something other than a shoestring.

Perhaps the revenue you need seems out of reach. In that case, you can make it into a two year or three year budget. The idea is to understand, in a concrete way, what will actually deliver the business and lifestyle you want. It’s understanding how that revenue will be created, ands what it will take to do it.

If all you know is that it’s more than you have right now, with no idea of how you’ll get there, you are guilty of Greed.

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