Exit Planning Tools for Business Owners

Exit Options

Private Equity and Privately Held Businesses

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Depending on who you are talking to, Private Equity is either the Great Satan or the savior of small and mid-market companies in the United States. The stories depend a lot on the personal experience of the speakers.

Once a vehicle for high-risk investment plays in corporate takeovers (see Bryan Burrough’s Barbarians at the Gate,) Private Equity has morphed into tranches where specialists seek opportunities in everything from a Main Street entrepreneurship to multi-billion-dollar entities.

What is Private Equity?

The term itself is relatively generic. According to Pitchbook, there are currently 17,000 Private Equity Groups (or PEGs) operating in the US. The accepted business model for our purposes is a limited partnership that raises money to invest in closely held companies. The purpose is plain. Well-run private businesses typically produce a better return on investment than publicly traded entities.

The current Price to Earnings (or PE – just to be a little more confusing) ratio of the S&P 500 is about 27.5. This is after a long bull market has raised stock prices considerably. The ratio is up 11.5% in the last year. That means the average stock currently returns 3.6% profit on its price. Of course, the profits are not usually distributed to the shareholders in their entirety.

Compare that to the 18% to 25% return many PEGs promise their investors. It’s easy to see why they are a favorite of high net worth individuals, hedge funds and family offices. As the Private Equity industry has matured and diversified, they have even drawn investment from the usually more conservative government and union pension funds.

Private Equity Types

Among those 17,000 PEGs the types range from those who have billions in “dry powder” (investable capital,) to some who claim to know of investors who would probably put money into a good deal if asked. Of course, which type of PEG you are dealing with is important information for an owner considering an offer.

private equity moneyThe “typical” PEG as most people know it has a fund for acquisitions. It may be their first, or it may be the latest of many funds they’ve raised. This fund invests in privately held businesses. Traditionally PEGs in the middle market space would only consider companies with a free cash flow of $1,000,000 or greater. That left a plethora of smaller businesses out of the game.

For a dozen years I’ve been writing about the pending flood of exiting Boomers faced with a lack of willing and able buyers. I should have known better. Business abhors a vacuum.

Searchfunders

Faced with an overabundance of sellers and a dearth of capable buyers, Private Equity spawned a new model to take advantage of the market, the Searchfunders. These are typically younger individuals, many of whom graduated from one of the “EBA” (Entrepreneurship By Acquisition) programs now offered by almost two dozen business schools.

These programs teach would-be entrepreneurs how to seek out capital, structure deals, and conduct due diligence. Some Searchfunders are “funded”, meaning they have investors putting up a stipend for their expenses. Others are “self-funded.” They find a deal, and then negotiate with investment funds to back them financially.

Both PEGs and Searchfunders seek “platform” companies, those that have experienced management or sufficiently strong operational systems to absorb “add-on” or “tuck-in” acquisitions. The costs of a transaction have bumped many seasoned PEGs into $2,000,000 and up as a cash flow requirement. Searchfunders have happily moved into the $500,000 to $2,000,000 market.

In the next article we’ll discuss how PEGs can promise returns that are far beyond the profitability of the businesses they buy.

 

 
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.

Are You Financially Ready to Exit Your Business Even if it Happened Tomorrow?

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Does Your Current Situation Have You Financially Ready to Exit Your Business?

Setting the Scene: The Importance of Financial Preparedness for Exiting a Business

Exiting a business is a significant decision that requires careful consideration, particularly regarding financial readiness. Whether you’re considering retirement, pursuing new ventures, or simply ready to move on, being financially prepared is crucial for a smooth transition.

Understanding the Decision: Factors to Consider Before Exiting Your Business

Before making the leap, it’s essential to understand the various factors that influence your decision to exit your business. From personal goals to market conditions, several considerations can impact your readiness to move on from your business venture.

Assessing Your Financial Readiness:
Evaluating Your Current Financial Situation: Income, Expenses, and Assets

Start by taking stock of your current financial situation. Evaluate your income streams, including revenue from the business, personal investments, and other sources. Consider your monthly expenses and assess your assets, including both business and personal holdings.

Estimating Your Business’s Value: Determining Its Market Worth

Determining the value of your business is a critical step in assessing your financial readiness to exit. Consider consulting with a business valuation expert to get an accurate estimate based on various factors, including revenue, assets, market trends, and industry standards.

Analyzing Cash Flow: Ensuring Stability Post-Exit

Cash flow analysis is essential to ensure financial stability post-exit. Evaluate your business’s cash flow projections to understand how it will sustain your lifestyle and cover expenses after you’ve left the business. Consider factors such as ongoing revenue streams, debt obligations, and potential changes in expenses.

Understanding Exit Options:
Exploring Different Exit Strategies: Sale, Succession, or Closure

There are several exit strategies to consider, including selling the business, passing it on to family members or employees through succession, or simply closing the doors. Each option has its pros and cons, depending on your personal and financial goals, as well as the state of your business.

Pros and Cons of Each Option: Weighing the Benefits and Challenges

Take the time to weigh the advantages and disadvantages of each exit strategy. Selling the business may offer a significant financial windfall but requires finding the right buyer. Succession can preserve your legacy but may come with complexities in transition. Closure provides a clean break but may not maximize financial returns.

Considering Timing: Is Now the Right Time to Exit?

Timing is crucial when it comes to exiting your business. Consider factors such as market conditions, industry trends, personal readiness, and potential tax implications. Assess whether the current timing aligns with your financial goals and objectives.

Financial Planning for Exit:
Creating a Financial Exit Plan: Setting Clear Goals and Objectives

Develop a comprehensive financial exit plan that outlines your goals and objectives for exiting the business. Define what financial success looks like for you and establish clear milestones and timelines for achieving your objectives.

Building a Contingency Fund: Preparing for Unexpected Expenses

Prepare for unexpected expenses by building a contingency fund. Set aside a portion of your assets to cover unforeseen costs or emergencies that may arise during the exit process. Having a financial safety net in place can provide peace of mind and ensure a smoother transition.

Engaging Financial Advisors: Seeking Professional Guidance for Exit Planning

Consider seeking guidance from financial advisors who specialize in exit planning. An experienced advisor can help you navigate complex financial decisions, optimize tax strategies, and maximize the value of your business. Their expertise can provide valuable insights and support throughout the exit process.

Maximizing Business Value:
Increasing Profitability: Strategies to Boost Revenue and Reduce Costs

Take proactive steps to increase the profitability of your business before exiting. Implement strategies to boost revenue, such as expanding market reach, launching new products or services, or improving customer retention. Similarly, focus on reducing costs and improving operational efficiency to enhance overall profitability.

Enhancing Business Operations: Improving Efficiency and Productivity

Streamline business operations to maximize efficiency and productivity. Identify areas for improvement, such as workflow processes, technology integration, and resource allocation. By optimizing operations, you can increase the value of your business and make it more attractive to potential buyers or successors.

Investing in Growth Opportunities: Expanding Market Reach and Customer Base

Explore growth opportunities to expand your business’s market reach and customer base. Consider diversifying into new markets, partnering with complementary businesses, or investing in marketing and advertising efforts. By positioning your business for growth, you can enhance its value and appeal to potential buyers or successors.

Managing Debt and Liabilities:
Assessing Debt Obligations: Understanding Your Business’s Debt Structure

Assess your business’s debt obligations to understand its financial liabilities. Review outstanding loans, lines of credit, and other forms of debt, including repayment terms and interest rates. Understanding your debt structure is essential for developing a plan to manage or repay debts before exiting the business.

Developing a Debt Repayment Plan: Prioritizing Payments and Negotiating Terms

Develop a debt repayment plan to address outstanding obligations before exiting the business. Prioritize debt payments based on interest rates, maturity dates, and creditor requirements. Explore options for negotiating repayment terms or consolidating debts to improve your financial position.

Addressing Legal and Financial Liabilities: Mitigating Risks Before Exit

Identify and address any legal or financial liabilities that may pose risks to your business or personal assets. Review contracts, leases, and agreements to ensure compliance and mitigate potential liabilities. Seek legal advice to address any outstanding legal issues or liabilities before finalizing your exit plans.

Preparing Personal Finances:
Separating Personal and Business Finances: Organizing Accounts and Assets

Separate your personal and business finances to streamline your financial affairs. Organize accounts, assets, and expenses into distinct categories to simplify financial management and reporting. Establish clear boundaries between personal and business transactions to avoid confusion and potential legal or tax issues.

Building Personal Savings: Establishing a Safety Net for Post-Exit Life

Build personal savings to establish a financial safety net for post-exit life. Set aside funds in savings accounts, retirement plans, or investment portfolios to cover living expenses, healthcare costs, and other financial needs. Having a robust savings cushion can provide financial security and peace of mind during the transition period.

Planning for Retirement: Securing Financial Stability Beyond Business Ownership

Plan for retirement to ensure long-term financial stability beyond business ownership. Evaluate retirement savings options, such as IRAs, 401(k)s, or pensions, and consider how they fit into your overall financial plan. Develop a retirement income strategy that aligns with your lifestyle goals and objectives for retirement.

Tax Implications of Exit:
Understanding Tax Consequences: Capital Gains, Income Tax, and Other Considerations

Understand the tax implications of exiting your business, including capital gains tax, income tax, and other relevant taxes. Consult with tax professionals to assess your tax liability and explore strategies to minimize taxes legally. Consider timing your exit to optimize tax outcomes and maximize financial returns.

Utilizing Tax Strategies: Maximizing Deductions and Credits Before Exit

Explore tax strategies to maximize deductions and credits before exiting your business. Take advantage of available tax incentives, such as deductions for business expenses, retirement contributions, or capital investments. Implementing tax-efficient strategies can help reduce your overall tax burden and preserve more of your wealth.

Consulting Tax Professionals: Navigating Complex Tax Laws and Regulations

Seek guidance from tax professionals who specialize in business exits and transitions. A qualified tax advisor can help you navigate complex tax laws and regulations, interpret tax implications, and develop tax-efficient exit strategies. Their expertise can ensure compliance with tax requirements and optimize your financial outcomes.

Exiting with Confidence:
Finalizing Your Exit Plan: Documenting Agreements and Contracts

Finalize your exit plan by documenting agreements and contracts that outline the terms and conditions of your departure. Work with legal advisors to draft legally binding documents, such as sale agreements, succession plans, or dissolution agreements. Ensure all parties involved understand their rights and responsibilities.

Communicating with Stakeholders: Keeping Employees, Customers, and Partners Informed

Communicate openly and transparently with stakeholders about your exit plans. Keep employees, customers, suppliers, and partners informed about the transition process and how it may impact them. Address any concerns or questions promptly and reassure stakeholders of your commitment to a smooth transition.

Celebrating Achievements: Reflecting on Your Business Journey Before Moving On

Take time to reflect on your achievements and milestones before moving on from your business. Celebrate your successes and the hard work that went into building and growing your enterprise. Express gratitude to employees, customers, and supporters who contributed to your journey. Celebrating achievements can provide closure and pave the way for new beginnings.

Conclusion:
Taking the Leap: Are You Financially Ready to Exit Your Business?

Exiting a business is a significant decision that requires careful consideration and financial preparedness. By evaluating your financial readiness, understanding exit options, and planning strategically, you can confidently take the leap into the next chapter of your entrepreneurial journey.

Moving Forward with Confidence: Embracing the Next Chapter of Your Entrepreneurial Journey

As you embark on the journey of exiting your business, remember to move forward with confidence and optimism. Embrace the opportunities that lie ahead and leverage your experience and expertise to pursue new ventures or enjoy well-deserved retirement. With careful planning and preparation, you can navigate the transition successfully and embark on a new entrepreneurial adventure with confidence.

Reposted with permission of the author, Tara L. Groody, Executive Assistant/Operations Specialist for Brett Andrews and Fortress Business Advisory.

Brett Andrews, CWS, CExP, CEPA, is the President of Fortress Business Advisory. He has worked with individuals and businesses managing their assets since 1998. His mission is to help clients reach their goals while managing risk in their total financial situation. To accomplish this, Brett has combined modern financial planning techniques with technical, quantitative, and behavioral analysis to achieve a truly unique and dynamic approach to total wealth management.

20 Red Flags to Look Out for When Buying a Business

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Buying a business is an opportunity to skip the growing pains of launching a startup. It’s a chance to start with a proven model with customers and cashflow. How can you tell if the prospective business is a genuine investment opportunity or a disguised escape route for a burnt-out owner?

The following is a list of the top five things to consider when prospecting a business purchase – and some red flags for each category so you can recognize trouble a long way away. This list is no way exhaustive and there are many other issues to consider when buying a business. However, nailing these will tip the odds of success in your favor. Here are 20 red flags for buying a business you should look out for.

1. Why the Business is For Sale

Before you fall in love with a business, make sure you understand why it’s for sale. You’ll want to interview the owner about their experience with ups and downs, their efforts to course-correct, and what tactics have been most successful.

Above all, you should be checking to see if you have what it takes to take the business to the next level and why hasn’t the previous ownership attempted this course. It’s not just about if the company could be a profitable investment– it’s about verifying the fit with your skills and resources.

Red flags:


The owner is burnt out or seems to be filling multiple roles
A toxic culture and/or high employee turnover
A poor business plan that can’t compete with costs or competition
An industry that is contracting or being disrupted by technology.

2. Perform Due Diligence

Due diligence will occur after your Letter of Intent has been accepted. It’s a comprehensive process, taking anywhere from 45 days to 9 months. This is the most critical step in the acquisition process. This is your chance to get “under the hood” and see how the business operates and to validate what you have heard from the owner in the prior discussions.

Due diligence includes:

Verification of sales and cashflow
Key employees
Concentration risk – clients and key suppliers
Financial/Tax Review
Asset Consideration
Legal Review
Operational Efficiency
Company debt
Real Estate status – lease expiring, property owned by the owner.
Inventory – obsolescence, turnover
Environment Concerns

Red flags:


Findings are significantly different than similar companies
The business model is overly complicated
Report results seem unlikely
Cultural concerns

3. Financial Review

Although briefly discussed in the previous section on due diligence, this is where you will determine what the financial opportunity of acquiring this business will be. It’s critical to partner with an independent and qualified CPA / financial professional to ensure that the story the numbers are telling are accurate. It is your responsibility to verify the results being provided to you.

You’ll want to dig into:

Profit and Loss (P&L) Statements
Balance Sheet
Cash Flow Statements
Tax Returns
Accounts Payable
Accounts Receivable
Sales history

Red flags:


The owner claims that the company makes more than the books reflect
Customer concentration
Equipment will need to be replaced soon (significant early expenses)
Account receivable and Accounts payable aged past 90 days Lack of budget and rolling 13 week cash forecast.

4. Get Clear About the Industry’s Future

You’ll also need to research the future of your new company. Is growth likely? What are the barriers to entry? Competitive landscape? Is the industry fading in relevance, being disrupted by technology, requiring significant product development to stay alive?

Access to industry research and speaking with industry experts is important. Talk with future competitors under the guise that your are considering becoming an investor in the industry. Seek out recent transactions and what the multiples are. How have the new owners faired post-acquisition.

Red flags:


The owner claims to have little competition
Inability to adequately explain declines in sales or margins
The owner reports having a hard time keeping up with established competitors
The owner mentions continuous new competition
The industry isn’t flexible to modern innovations

5. Reputation Matters

A good reputation isn’t just nice to have– its value is measured in dollars. Companies with a good reputation benefit from higher profits, free marketing, and better hiring ability.

Clean branding has never been more critical in an age of consumer determination to buy socially, ethically, and environmentally friendly. With social media and reviews in the driver’s seat, it’s crucial to work with intact brands.

Remember, brands don’t get a redo just because ownership changed.

Red flags:

Poor social media or news coverage
Significant poor reviews
Mistrust in target consumer base

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. He is the Managing Member of Blue Sky Exit Planning Services.

Purpose After the Sale

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Purpose after the sale is one of the biggest challenges for an exiting owner.

Purpose – “Having as one’s intention or objective.”

Many exit planning advisors discuss the three legs of the exit planning stool – business readiness, financial readiness and personal readiness. In our previous two articles, we focused on two of the “big three” components of a successful life after the sale, activity and identity. The third is purpose.

So many advisors point to the 75% of former owners who “profoundly regret” their transition, and say it’s because they didn’t make enough money. To quote Mr. Bernstein in the great film Citizen Kane, “Well, it’s no trick to make a lot of money…if all you want is to make a lot of money.”

I’ve interviewed hundreds of business founders. When asked why they started their companies, by far the most common answers are about providing for their families and having control of their future. Only a very small percentage say “I wanted to make a lot of money.”

Decades of Purpose

So what kept them working long hours and pushing the envelope after they had reached primary, secondary and even tertiary financial goals? Non-owners often chalk it up to greed, but Maslov’s hierarchy of needs drifts away from material rewards after the first two levels. Belonging, Self-Esteem and Self-Actualization may all have a financial component, but money isn’t the driver.

For most owners, the driving motivation is this thing they’ve built. The company has a life of its own, but it’s a life they bestowed. They talk about the business’s growing pains and maturity. Owners are acutely aware of the multiplier effect the success of the company has on employees and their families. In a few cases, that multiplier extends to entire towns.

That’s the purpose. To nurture and expand. In so many cases every process in the business was the founder’s creation. He or she picked out the furniture and designed the first logo. This aggregation of people breathes and succeeds on what the owner built.

That’s why so many owners still put in 50 or more hours a week, long after there is any real need for their constant presence. This thing they created is their purpose.

Purpose After the Sale

It’s no surprise that so many owners find that 36 holes of golf each week, or 54, or 72, still isn’t enough to feel fulfilled. You can get incrementally better, but it doesn’t really affect anyone but you. Building a beautiful table or catching a trophy fish brings pride and some sense of accomplishment. Still, it never matches the feeling of creating something that impacts dozens, scores or hundreds of other human beings.

That’s why we focus on purpose as the third leg of the personal vision. In the vast majority of cases, it involves impacting other people. Any owner spent a career learning how to teach and lead. Keeping those skills fresh and growing is a substantial part of the road to satisfaction.

Purpose may involve church or a community service organization. It could be serving on a Board of Directors or consulting for other business owners. It might be writing or speaking. Purpose after the sale doesn’t require a 50-hour week, but it does require some level of commitment, and the ability to affect the lives of others.

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.

Personal Vision – Life After the Sale Part 2

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In our last article about life after the sale we discussed identity. Even when business owners are comfortable with who they are, however, there is still the nuts and bolts issue of activity.

A business owner spends 20, 30, or (not uncommonly with Boomers,) 40 years focused on running a business. Unless they’ve built a substantial organization that is run by employees, it likely remains their biggest single time commitment right up until they leave. That commitment is frequently a lot more than 40 hours.

Even if the time “in the office” or “on the job” is less than 40 hours, there are the emails before and after hours, the texts, phone calls from unhappy customers or from employees who aren’t going to make it to work, and just thinking about what comes next, frequently at 2 o’clock in the morning.

Extended Vacation

When asked about activities to fill their week, many owners will say “I’ll have plenty to do!” That isn’t enough. “Plenty” requires some planning if it is really going to occupy the bulk of their work week.

After exiting a business, most owners bask in their newfound freedom. If we presume a selling price that’s substantial enough to allow them a wide range of choices, their first reactions typically include a few lengthy trips. These may range from a long-promised European vacation with the spouse to purchasing an RV to tour the National Parks.

This extended vacation period usually ranges from six months to a year. After that, most owners are looking for something to do. Their grandchildren (and their grandchildren’s parents) are less enthusiastic about having Grandpa and Grandma around too frequently. Travel is too tiring to keep it up indefinitely. Friends are rarely in the same position. Either they are still working and lack the leisure time, or they’ve progressed beyond the extended vacation period and settled down into their own retirement routine.

And as astounding as it may sound to enthusiasts, I’ve heard “I never thought I could play too much golf,” any number of times.

Life After the Sale…and After the Vacation

We use an exercise that brings home just how much the business has dominated an owner’s life. It starts by asking the owner to think a year ahead.

We start with the owner’s “average” work week. Let’s say 50 hours for this example. Then we begin deducting those activities that comprise their impression of “plenty to do,” putting an hourly commitment to each activity.

Regular travel, either for relatives or recreation, still comes close to the top of the list. We ask “How about two weeks away every quarter?” The response is that eight weeks a year is a lot, but could be enjoyable. Then we do the math: 8 weeks x 50 hours= 400 hours of vacation, divided by 52 weeks = 7.7 hours a week. A good start, but we still have 42 hours to fill to replace the business.

How about fitness? Getting into shape is often a goal, but working out every weekday only absorbs another 5 hours.

Working for a cause such as serving lunch at the local homeless shelter a few days a week, can use up another 10-12 hours. We still have 25 hours to go, or about half the time currently spent working.

We can still fit in 18 holes twice a week. That’s 8 more hours. At this point, many owners run out of ideas. That still leaves 17 hours a week, or two full “normal” work days.

The objective isn’t to merely fill up the time slots. It’s to illustrate just how big a void needs to be filled to replace the business. Whether your exit is planned for a year from now or ten, it is time to begin thinking about life after the sale.

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.