Exit Planning Tools for Business Owners

Exit Options

The 3% Problem in Advisory Work: A Guide for Business Owners

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As a business owner, you belong to a unique group that makes up only 3% of the population. Yet, many advisors treat you like any other client—using the same approaches they apply to executives, professionals, or retirees. This is a fundamental misunderstanding that can impact your business and personal goals.

Why You’re More Than Just an Asset

You are not simply a high-income individual with concentrated wealth. Your business is not just an investment; it’s an integral part of your identity, your livelihood, and your daily purpose. It is the source of your authority, reputation, and even your personal satisfaction.

Navigating Identity, Not Just Assets

When traditional clients seek advice, the focus tends to be on optimizing their assets. In contrast, advising business owners like you involves navigating a complex web of identity and emotional attachment. This distinction is crucial and affects how you engage with advisors.

Understanding the Owner’s Perspective

The Structure of Your Business

Unlike executives who operate within established frameworks, you are the architect of your business’s structure. If a senior executive makes a mistake, it usually impacts their bonus. But for you, a misstep could jeopardize payroll, credit lines, or even your family’s financial security.

This creates a protective and cautious mindset that many advisors fail to recognize. Your business is not just an income engine; it’s something you’ve built, defended, and refined over years. Every employee, system, and brand element bears your imprint.

The Impact of Structural Suggestions

When an advisor casually suggests changes, it can feel less like strategy and more like criticism. Understanding this emotional landscape is vital; without it, you may resist recommendations that could genuinely benefit your business.

The Challenge of Decision-Making

As a successful entrepreneur, you are wired for decision-making. The constant loop of “What if we tried this?” fuels your creativity and drive. However, many traditional advisory engagements can lead to implementation failures:

1. Data Analysis: The advisor reviews your business metrics.
2. Recommendations: They develop a plan based on their findings.
3. Owner Response: You agree with the plan—but then take no action.

This isn’t about disagreement; it’s about ownership. You’re more likely to implement decisions you help create. This is why coaching before advisory work is essential, especially in exit planning.

Identity: The Key Variable in Exit Planning

Advisors often zoom in on valuation, tax efficiency, and succession logistics. While these aspects are important, the critical question you must consider is:

“What will you do when you no longer own this business?”

If your answer is vague—like “I’ll figure it out later” or “I’ll travel” —then your exit plan is likely incomplete. Liquidity without purpose can lead to regrets.

The Realities of Post-Exit Life

Research shows that 75% of former business owners report dissatisfaction a year after exiting. This is rarely due to financial shortcomings; it’s often because they haven’t redefined their identity.

As a business owner, you are exiting more than just an asset—you are relinquishing your relevance. Recognizing this early in your planning can lead to far better outcomes.

Conclusion: A Call to Action for Business Owners

Navigating the complexities of your business and its impact on your identity requires a unique approach from advisors. By understanding the emotional and psychological aspects of ownership, you can foster more meaningful relationships with your advisors.

If you’re contemplating exit strategies or want to redefine your post-business identity, consider engaging with a coach or advisor who recognizes these unique dynamics. Your business is your legacy; make sure your exit plan honors that.

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 Exit Planning Fallacy – A Business Owner’s Perspective

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One of the most common sales pitches you might hear from someone claiming to help you “enhance value” goes something like this:

“I’ve reviewed your company and believe it’s worth $4.2 million today. With the right planning, it could be worth $7.7 million. Would you rather exit with $4.2 million or $7.7 million?”

That’s not really a question—it’s a setup. Of course, no business owner would willingly choose the smaller number. But the real issue isn’t which number you prefer. It’s what it actually takes to bridge that gap—and whether you’re being given a full picture.

Are You Falling for the Planning Fallacy?


There’s a psychological term for this overly optimistic way of thinking: the planning fallacy.

A private equity investors group I follow, Chenmark.com, once cited a study published in the Journal of Personality and Social Psychology that perfectly illustrates the concept:

From a psychological perspective, the planning fallacy can perhaps be studied most profitably at the level of daily activities. Consider one familiar example: Academics who carry home a stuffed briefcase full of work on Fridays, fully intending to complete every task, are often aware that they have never gone beyond the first one or two jobs on any previous weekend.

The intriguing aspect of this phenomenon is the ability of people to hold two seemingly contradictory beliefs: Although aware that most of their previous predictions were overly optimistic, they believe that their current forecasts are realistic. It seems that people can know the past and still be doomed to repeat it.

What’s fascinating is that they know this pattern. Yet, every weekend, they’re sure this time will be different. Business owners do something similar: despite knowing how long things usually take (and how unpredictable growth can be), we still believe “this time” will follow our best-case forecast.

You may hear that big valuation potential and think, “Yes, that’s what I’ve always wanted—to grow the company by 83%! I just needed a plan.”

But a plan alone isn’t enough. It’s a start—but not the whole story.

What Really Closes the Gap?


Let’s reframe that optimistic pitch with a more realistic one:

“To grow from $4.2 million to $7.7 million in five years, you’ll need proper planning, dedicated effort, some strategic hires, and reinvesting a significant portion of your profits. That requires growing the business 19% annually—starting immediately. That’s more than double your best year to date. If you spend a year building that foundation first, then you’d need to grow at least 25% annually over the next four years. If you keep growing at your best year’s rate of 7.5%, it will take over 12 years to reach that goal.”

Those are the facts. And the reality is that very few business owners hit those growth rates without serious changes—and trusted advisors to help them.

The Power of Perspective (and the Right Guide)


You may have a solid company. It supports your lifestyle, your employees, and your reputation. Maybe you’ve even dreamed of taking it further. But the risks, the effort, or the lack of a clear roadmap have held you back.

That’s exactly where experienced advisors come in—not to promise easy gains, but to help you map a realistic path to your goals. They help align what you want (your proceeds), with what you’re willing to do (your effort), in the time you have left (your exit timeline).

In our work, we use a Value Gap coaching model that considers four essential pieces:

1. Current business value
2. Your desired outcome—not just “more,” but a specific number
3. The timeframe in which you want to exit
4. The required growth rate to get there

Often, once those last two are on the table, the conversation changes. It’s not just about the money—it’s about what you’re willing and able to do to get there.

The real planning fallacy? Believing it’s just about hitting a number. The truth is, getting the outcome you want depends on understanding the full picture—and working with an advisor who helps you navigate it honestly, strategically, and with clarity.

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.

Cash Flow Normalization

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Cash flow normalization is done with the intention of identifying Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) or Seller’s Discretionary Earnings (SDE). These differing measures are not interchangeable, but are used by different classes of buyers for different categories of acquisition.

Free cash flow is an important measure when calculating the value and price for any business. It is the amount theoretically available for servicing acquisition debt, working capital, return on investment for any cash outlay in the acquisition, and future expansion.

Cash Flow Measures

EBITDA establishes free cash flow as a measurement for most mid-market businesses. It evens out the differences in earnings caused by various tax jurisdictions. In the United States, there is federal income tax at the corporate level, but many states have additional income taxes, and in some cases, even smaller jurisdictions like cities may have their own income tax. These obviously impact the profitability of a company and could distort a buyer’s impression of its profitability.
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EBITDA calculations do not include the owner’s earnings, since the companies being examined are more likely to be acquired by investors who would replace the owner with a management executive.

SDE is the measurement used to illustrate the sum total of financial benefits available to the owner-operator of a business. It assumes that the owner is running the company on a day-to-day basis. SDE encompasses not only salary, bonuses, and distributions, but includes insurance and other benefits such as a company-paid vehicle.

A simple way to put it is that EBITDA is the cash flow available for a return on investment. SDE is the cash flow available for a return on the owner’s labor.

Making Adjustments

2 businessmen fishing for money from a boatIn the SDE calculations, there are two places where there is often an adjustment of expenses to market. The first is for a family member employed in the business or partners who intend to leave simultaneously with the principal owner.

In many instances, family members are paid according to their needs or the needs of the business instead of at a market rate for the position. With family members who are “underpaid” adjusting to the market rate will have the effect of reducing the cash flow available in the business. This reflects the fact that the family member or partner will have to be replaced by someone who is unlikely to work for a below-market salary.

The opposite is of course true for family members or partners who are overpaid. Reducing their compensation to a fair market rate will add to the discretionary cash flow of the business.

A second area of adjustment is when the owner of the company also owns the real estate that the company operates in. Again, the rents paid on the real estate often reflect the owner’s objectives more than they do the practical reality of the local real estate market.
A company that is underpaying rent is having its bottom line shored up by the reduced income to the real estate entity.

Overpayment of rent requires the owner to make a decision. If they expect the same rent from a new tenant, the profitability of the business as presented to a prospective buyer will be lower. Considering that most transactions involve a multiple of cash flows, you can usually point out to the owner that trying to maintain a higher rent is not in their interest as the seller of the company. Adjusting the rent to a market rate increases the cash flow of the company and presumably the basis for an evaluation multiple.

Which Cash Flow is “Right?

The decision of whether to use EBITDA or SDE when calculating cash flow is dependent largely on the size of the client’s business. If the company has cash flow in excess of $1 million annually or is large enough to be a likely target for professional buyers, EBITDA is the appropriate measurement for cash flow.

If the company is going to be purchased by family members, employees, or another entrepreneur and has a cash flow of less than $700,000, SDE is almost always a more appropriate measurement.

Which cash flow is used is a situational decision and may change if different classes of buyers are being engaged.

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.

Purpose – Life After the Sale Part 3

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The third component of life after the sale is 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

Purpose - Life After the Sale Part 3So what kept them working long hours and pushing the envelope after they had reached primary, secondary, and even tertiary financial goals? Sure, non-owners may 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 presence. This thing they created is their purpose.

Life After the Sale

Unsurprisingly, 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 in your life after the sale 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 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.

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.