Exit Planning Tools for Business Owners

Exit Options

Personal Vision – Life After the Sale Part I

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Life after the sale is often both the most important and most neglected factor in exit planning. Although (according to two different surveys in 2013 and 2022,) 75% of owners report regrets or unhappiness a year after the transition, exit plans continue to be constructed primarily around financial targets. In the event you haven’t heard this since you were five years old, “Money doesn’t fix everything.”

Superficial Planning

To be fair, most advisors include some conversation about “life after” in their planning conversations. Unfortunately, they are often satisfied with the features associated with an abundance of free time. Visiting the family, RV’ing through the country, playing 72 holes of golf a week, or seeing the great capitals of Europe can all be accomplished in the first year after ownership.

When they attempt to broach the idea of longer-term activity, the client’s answer is often “Let’s get the money. Then I’ll worry about what to do with it.” It’s challenging to push beyond the client’s desire to focus on the most obvious goal, especially when it seems to enable everything that follows. Nonetheless, owners who are unhappy because they didn’t get enough money failed either to understand the realities of their transactions or the future cost of their life plans. That certainly isn’t 75% of planning clients.

We are discussing the far greater number who have sufficient funds, but after their initial splurge of free time are unsure of what to do next.

Emotional Preparation

The first issue an exited owner faces is identity. “I used to own a company” quickly wears thin, and increasingly fades as years pass. “I’m retired” is a nebulous identity, and lumps them into a group with every wage earner who says the same. That’s a class they’ve proudly differentiated from for most of their lives.

Some mental health professionals have compared the emotional reaction to missing ownership identity to post-partum depression. Their world has changed overnight. The principal subject of their interest is gone, and they aren’t sure what replaces it. Post-partum is characterized as including “a feeling of guilt, worthlessness, hopelessness or helplessness.”

As an owner, there was always something else that needed their attention. Now there isn’t. Distress from discussing the daily news (which they now watch more frequently) used to be countered by a requirement to attend to the business. Now there is no business to attend to. The feeling of “What I do is important to a lot of people” has gone.

Identity in Life After the Sale

We encourage clients to at least mentally design their next business card. Handing someone your card is a shorthand version of declaring your identity. The first attempt by many is jocular but meaningless. “Part-time Philanthropist, Bon Vivant and Man About Town” is funny, but only once. “Grandparent, Outdoorsman and Classic Car Mechanic” is better. At least it describes real activities for further conversation.

“Business Counselor and Chairman of the Board of (Charity Name)” describes an identity, ongoing contribution to something or someone, and a role of importance. It doesn’t have to be true today (we aren’t printing the business cards yet,) but it’s at least aspirational.

Building a plan for life after the sale begins with establishing a future identity. There are several other components that we will cover in the next two articles.

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.

Exit Strategies – The Road Less Traveled

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The road less traveled is often a misimpression when considering a transition from business ownership. Surveys show that roughly 85% of owners expect their exit to happen via a sale of the business to a third party.

A third-party sale is certainly attractive. The idea of monetizing decades of work in one lump-sum payoff seems equitable. Years of sacrificing to “invest in the business” is supposed to generate a return. “He (or she) sold the company” when applied to someone who is clearly enjoying a comfortable lifestyle in retirement acts as an advertisement for the benefits of cashing out.

Unfortunately, that isn’t only less frequent than assumed, but it’s so infrequent as to be close to a rarity.

The Numbers Don’t Lie

Baby Boomers owned businesses at about twice the rate of previous or succeeding generations. Franchising and an overcrowded job market for corporate careers drove about 6% of Boomers into entrepreneurship, where the traditional average for business ownership is closer to 3% of the population.

A decade ago, according to the SBA, about two-thirds of all businesses between 5 and 500 employees were owned by persons 48 years old or older. Today, just over half are owned by folks over the age of 58. That makes it pretty safe to extrapolate that around 4% of that age group still own businesses.

Census data puts the number of persons turning 65 years old at 10,000 a day, so it’s a decent guess to say that 400 of those, on average, probably own a business. That’s 2,800 a week, or about 140,000 a year. Not everyone exits when they hit 65, and almost 90% of those businesses employ fewer than 20 people.

For exit planning discussions, let’s divide the under and over-20 employee companies into two groups, which we will call “Main Street” and “Mid-market.” (Note- this is not a valid market definition of those two terms. For further explanation see the Afterword in my most recent work The Exit Planning Coach Handbook.”)

Main Street companies would then be 90% of our 140,000 owner population. That’s 126,000 businesses. According to the IBBA, Business Brokers sell about 8,000 Main Street companies annually, or about 20% of those they list. That leaves 92% of Main Street owners to find another way.

Of the 14,000 or so that we are classifying as Mid-Market, Private Equity activity accounts for about 6,000 transactions annually, many of which are handled by brokers. (So there is an unknown amount of double counting here.) The last two years saw a spike of about 50% in acquisitions due to low interest rates, but it is safe to say that at least a third of these presumably very desirable middle-market businesses have to find an alternative exit plan.

Advisors Ignore the Numbers

With these statistics, why do owners and their advisors continue to focus on exit strategies that only work for a small minority? The higher visibility of transactions is part of the bias, as are the higher professional fees that they generate, but the biggest issue is a lack of advisor education.

Advisors who work with owners approaching a transaction have an obligation to inform them of their options. Unfortunately, this is not always the case. We survey the exit planning industry annually. Only between 5,000 and 6,000 advisors claim exit planning as an offered service. That’s an advisor-to-owner ratio of 23:1 each year. If we consider the entire remaining population of Boomer-owned employers, that ratio is five hundred to one.

Most owners have 50% of more of their personal net worth in the business. Yet we continue to see financial planners who base their clients’ retirement calculations on an unconfirmed estimate of what the company will contribute via a third-party sale, when such a sale may be the least likely outcome. A financial plan for a business owner cannot be holistic if it doesn’t consider 50% of his assets.

Attorneys and accountants frequently report that the first time they interact with a client about exiting is when a purchase offer is already on the table. Proactive discussions about eventual transfer or succession are usually brief, and cease when the client says “I’m not ready yet.” They let their clients postpone the discussion until circumstance or happenstance intervenes.

Business Brokers, of course, only talk to clients who have already decided on their preferred course of action. As a former Certified Business Intermediary, I can say from experience that unfortunately, most have no alternative for the 80% of listings they can’t sell.

The Road Less Traveled

The truth is, despite popular conceptions to the contrary, sales to third parties are the road less traveled. Certainly, many lifestyle businesses are really jobs and have to close when the founder/owner/CEO retires. Many others, however, could recoup the owner’s investment with a structured transfer to employees.

road less traveledGiven a few years, most owners could hire and train a suitable buyer. That usually requires support, since few have experience in recruiting and teaching someone to do what they do. There is also some education involved to help the owner understand how investing in a top-flight employee today can pay huge dividends in the future.

Additionally, there is the issue of owners who believe that they have to keep any rumor of their impending retirement from others in their industry. Customers, vendors and competitors are a fertile market for acquirers. A good advisor can act to maintain confidentiality when putting out feelers.

Advisors need to be more proactive in approaching clients about their objectives and their options. Initiating a structured conversation around both is in the best interest of the client and the advisor. They may choose to avoid the road less traveled.

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 Build vs. Buy Equation

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If you’re wondering what your business might be worth to an acquirer, there is a simple calculation you can use.

Let’s call it “The Build vs. Buy Equation”.

At some point, every acquirer does the maths and calculates how much it would cost to re-create what you’ve built. If an acquirer figures they could buy your business for less than they would spend on both the hard and soft costs of re-deploying their employees to build a competitive product, then they will be inclined to acquire yours. If they think it would be less costly to create it themselves, they are likely to choose to compete instead.

The key to ensuring that what you have is difficult to replicate is focusing on a single product or service and building on your competitive point of differentiation. When you create a product or service that is unique and pour all of your resources into continuing to differentiate it from the pack, you can dictate terms, because re-creating your business becomes harder the more you focus on one thing.

The worst strategy is to offer a wide range of services and products only loosely differentiated from others on the market. Any acquirer will rightly assume they can set up shop to compete with you by simply undercutting your prices for a period of time and driving you out of business.

C-Labs Focuses On Building An Irresistible Product

Chris Muench started C-Labs in 2008 to go after the burgeoning opportunities presented by the Internet-of-Things (IOT). He began by writing custom software applications that allowed one machine to talk to another. In 2014, he got the industrial giant TRUMPF International to acquire 30% of C-Labs, which gave him the cash to transform his service offering into a single product.

By the end of 2016, Muench’s product was showing early signs of gaining traction but C-Labs was running out of money.

In the end, TRUMPF acquired C-Labs in a seven-figure deal that could stretch to eight figures if Muench is successful in hitting his future targets. Why would a large, sophisticated company like TRUMPF acquire an early-stage business like C-Labs? Because they knew that re-creating Muench’s technology would cost much more than simply writing a seven-figure cheque to buy it outright.

In other words, TRUMPF used The Build vs. Buy Equation and realized that buying C-Labs was cheaper than trying to reproduce it.

Selling too many undifferentiated products or services is a recipe for building a business that—if it is sellable at all—will trade at a discount to its industry peers. By contrast, the trick to getting a premium for your business is having a product or service that is irresistible to an acquirer, yet difficult for them to replicate.

Kerry Boulton, CEPA is Australia’s most respected exit strategy advisor. With over 20 years in business as an entrepreneur, transformative coach, consultant, sought after speaker and talented facilitator, Kerry has been helping business owners like you to overcome challenges while providing the steps needed to ensure that you find the financial freedom you deserve.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

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John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “saleable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

o Transaction and professional fees.
o An asset sale was negotiated and there was income tax on some asset depreciation recapture.
o $1 million in business debt needed to be repaid.
o Capital gains and affordable care act taxes.
o Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a saleable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Avoiding the “Exit” Word

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Owners don’t like the “Exit” word. They tell us regularly to change it, or that talking about it is uncomfortable. It’s the elephant in the room.

I understand. Anyone selling life insurance or funeral pre-planning knows that you don’t start with “So, let’s discuss what happens when you DIE.” For business owners, leaving the business is like a little bit of death. That’s why black humor in the exit planning world goes like this. “There are seven ways to exit your business. Six of those are head first.”

Your company has been the central focus of your life for twenty or thirty years, and perhaps more. It is so ingrained in your persona, your self-identification, that it’s frightening to think of that part of your identity disappearing.

Who is Bob?

When Bob leaves home every day to run Bob’s Widgets, he assumes the superhero cape of the owner. He walks in the door of the business as the head honcho, el hefe, the final word, the boss. That cape never comes off. The employees might go out for a beer after work, but he never becomes just one of the guys (especially when the table check comes.) The employees are careful about what they say around him, and he self-censures his conversations with them.

Just as importantly, that cape is always present in his personal life. He is Bob, the owner of Bob’s Widgets, everywhere he goes. At the kids’ sporting activities he is asked to sponsor (“It would be good for your business!”) In his church, at the Chamber of Commerce, and at parties he is introduced as “Bob, the owner of Bob’s Widgets.”

He overhears the identification at family gatherings. “Oh, that’s Sally’s cousin Bob. He owns his own business.” When his friends discuss their jobs, a bad boss, pending layoffs, or a reorganization they say “Of course you don’t have to worry about these things, Bob. You own the company.” (Ah, if they only knew…)

The “Exit” Word

So the word “exit” has a finality that jars a lot of clients. Advisors use lots of alternatives, like transition, succession or continuation – all of which imply an ongoing process, albeit one that doesn’t include you. Why would an advisor use the term “Exit” at all if it could be avoided?

We face up to it because it’s the elephant in the room. I am an Exit Planner. My companyex sells Exit Planning tools to advisors. We conduct the annual National Exit Planners Survey™. Our ExitMap® suite of coaching tools uses that word on virtually every page.

We use it because a coach is a trusted advisor, and a trusted advisor always speaks the truth. Not some of the time. Not just when it is agreeable. Not when it can’t be avoided. All of the time. The coaching relationship should be comfortable, but not too comfortable. Introducing a bit of unease to reinforce a point is part of the job.

I use the “exit” word to describe the final outcome of an implemented business plan. It usually involves a transaction, with legal documentation of a sale or other transfer mechanism. It can also include detailed succession planning for family members or a management team. We often discuss continuation – what happens if the plan is accelerated by unfortunate circumstances. Retirement might have a place in the conversation, or it might be about designing a “second act” or pursuing your life’s passion.

But all those terms, whether synonyms or euphemisms, are encompassed in the  “exit” word, We might as well get that on the table from the outset. If you start the advisory process by ducking anything that a client finds uncomfortable, you aren’t serving your purpose as a coach.

Let’s be Honest

Let’s agree to call a business transition what it is. Whether an owner wants to sell the business to a third party, create a family legacy through his or her children, finance a leveraged buy-out to employees, or just close down in an orderly manner, the ultimate objective is to exit.

 

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.