Exit Planning Tools for Business Owners

Exit Options

Protect Your Business with A Solid Continuity Plan

by

The Need For A Solid Continuity Plan

A great characteristic of successful business owners is that they are optimistic people and will do what it takes to protect their business. They have a can-do attitude, setting their goals high, taking risks, hiring the right people, constantly striving to improve the delivery of their service or product, with a constant drive to build their entity into one of great significance.

As a result, building a successful company may give the owner great pride in their achievements and a strong sense of identity. That is normal human behavior. But because of that, the thought of an event that causes the owner to leave the business due to death or a disability is often never planned for and is overlooked. If such an event were to occur, it would not only jeopardize the value or even the survival of the business itself, especially if the business is heavily reliant on the owner or a key partner, but it also jeopardizes the future career paths of key employees and others, and leave customers scrambling to find somewhere else to go.

What Does It Take To Protect Your Business?

One thing is often on the minds of owners and advisors; how the family is taken care of through an unexpected death or disability. However, business continuity planning goes much further than that. A solid business continuity plan includes agreements, procedures, employee incentives, and safeguards that are put into place to help enable the business entity and all of its successors. This includes all key employees, vendors, operations, procedures, and customers. It helps the business continue on a successful path, with as little interruption as possible, if the owner/s is no longer present.

For instance, who will fill the slot of Chief Executive or Chief Operating Officer? Does the remaining management have a plan? Do they have financial resources available to search and bring in somebody from the outside to fill that position? Should they begin, now, to groom key employees for that role? How will the key vendors, creditors, and customers be handled? Will supplementary training need to take place? What will you tell the customers and the community to maintain confidence in the company during an unexpected death or disability? What plan will you put in place to entice the key employees to stay around and ensure the internal integrity of operations?

The reality within the marketplace is, if the business is left paralyzed and vulnerable, they risk losing key customers, creditors, and key employees who may be quickly recruited by competitors.

The Elements of a Solid Continuity Plan

The good news is that building a solid continuity plan is a required step within the exit planning process. It helps to build the value and marketability of the organization.

There are many areas that a continuity plan addresses and help protect your business. It includes the creation of a Buy-Sell Agreement, or amending or replacing one; the disposition of ownership interest, which is done through estate planning documents; insurance to fund the Buy-Sell Agreement; a management continuity reward program; retaining key employees after death or disability; a stay bonus plan; a process for terminating personal guarantees for business obligations, business continuity instructions; and a Buy-Back agreement for minority owners. There are other potential areas to address, but these are the likely critical areas.

Key Documentation

Buy-Sell Agreement – This document is created to summarize the terms of the written agreement that will govern the ownership transfer and ownership rights aspects of the ownership interest of the primary owner/s and other members of the controlling interest group. This document also covers the issues related to the rights and responsibilities of the parties to the agreement.

Disposition of Ownership Interest Through Estate Planning Documents – Estate Planning documents summarize the intentions and issues that are most important to the owner if he/she dies while holding the ownership interest in the company. This is carried over into the continuity plan and is created within the personal estate planning documents.

Insurance to Fund A Buy-Sell Agreement – The purpose of this exercise is to recommend and select the appropriate type of life and disability insurance related to the purchase/sale of the owner’s interest in the company. Proceeds from these policies are used to purchase the ownership interest.

Management Continuity Reward Program – This is to address the benefits that the owner intends to provide to the individuals who take over the management responsibilities if the owner should die or become disabled, and is unable to perform the regular responsibilities.

Retaining Key Employees After Death or Disability – This is the section of the plan that addresses the steps to retain key employees. This is not intended to include incentive and reward planning for key employees, which is more properly addressed in a separate component of the overall planning. Instead, attention is given to the particular issues relevant to the key employee retention when a majority or controlling owner is unexpectedly absent from the company. This section is intended to assist the successor management staff. It also allows them to concentrate on the continued success of the company and protect your business.

Stay Bonus Plan – Develop a written agreement that would become effective upon the owner’s death or disability. The Stay Bonus Plan acknowledges the indispensable employees remaining with the company should such an event occur. The plan provides confidence and support to specific employees who choose to remain with the company and provides substantial financial reward for them doing so.

Terminating Personal Guarantees for Business Obligations – This is a stipulation of steps to be taken to protect the company if the owner’s personal financial resources are no longer available to support the financial activities of the business. In the event of death or disability, the company relationships may require that the business demonstrate financial stability to continue their relationship.

Business Continuity Instructions – Business continuity instructions are written instructions that are completed, signed, and stored with other important personal documents related to the owner’s death or disability.

Buy-Back Agreement for Minority Owners – The purpose of developing this agreement is to state the situations in which an employee owner’s interest will be purchased by you or the company in specific situations that may arise. It also governs the employee’s ownership interest while he or she is an owner. It addresses certain rights and responsibilities associated with the ownership status and other terms related to ownership.

 

Work Flow Diagram

Over the years my staff and I have developed a work flow diagram to help the owner understand how we can approach the development of a Business Continuity Plan. Although, every situation is different, it gives you a general idea of how it may come together.

Protect Your Business

The bottom line is, a solid Continuity Plan is critical for you, as a business owner, to develop and maintain, to help ensure that your business, which you and your staff have worked so hard to build, maintains its integrity and success if something should happen to you.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners and develops exit plans, increases business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com  

 

EBITDAC : What is Your Business Worth Now?

by

Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Exit Planning in a Crisis

by

Why would you be exit planning in a  crisis? At the height of the economic expansion (a few months ago in late 2019) I was reviewing a company’s financial statements. Their sales were stagnant, and profits were minimal. When I asked the owner why his business hadn’t grown, he responded, “Well, the Great Recession hit our industry pretty hard, you know.”

planning in a crisisTake note that it wasn’t his fault. He was in a hard-hit industry, and the economy dealt him a bad hand. He ignored the thousands of businesses just like his that had grown and prospered in the last ten years.

Once you hunker down behind “It’s not my fault,” it’s easy to stay there too long. First you are glad that you survived. Then you are glad to be making a little bit of money again. Then you wait for the same conditions that made you successful before. If they don’t come, it’s not your fault.

In the meantime, others are coming out of the downturn firing on all cylinders. They used the slow time to get ready; to plan what comes next. When the door of opportunity opened again, they were ready.

Baby Boomers’ Double Whammy

The coronavirus is especially lethal in senior citizens. Many of those are Baby Boomer business owners. They have also suffered a double financial hit. Their retirement account balances are lower, and their businesses, whether closed or just slow, are worth less then they were a few months ago.

Many owners will try to kick the can down the road. “I’ll spend a few years building the business back up, then I’ll sell it.” For some, that was their plan after the recession. Unless you have something new up your sleeve, you may be waiting a long time for the right buyer to come along. In the next economic cycle, you may wait too long. You can only kick that can so far.

If you are a Baby Boomer, the time to be planning your exit is now. That goes double if you are sitting in your house wondering what comes next. Most entrepreneurs started a business because they wanted control over their lives. When there’s an event that takes away that control, your best response is to get it back.

Exit Planning in a Crisis

Your exit plan starts with some basic questions.

  1. Do I know how much I need to retire, with a professional analysis of my living expenses, life expectancy and inflation assumptions?
  2. Do I know how much my company is really worth, and who is most likely to pay me that amount?
  3. If #2 doesn’t meet the needs of #1, do I know how long, and what it would take, to get my business there?
  4. Do I know all the options for monetizing my business, including a sale to employees, another entrepreneur or professional acquirers?

If you are a Baby Boomer, unless you are exit planning in a crisis, you risk a discussion in 2025, or 2028, or 2031 that starts with “Well. the coronavirus hit our industry pretty hard, you know.”

There is a network of advisors in the USA and Canada who specialize in a reasonably priced, 90-day planning process for small business owners, and who use a suite of online tools to help you work through all these questions remotely. They can help get you started right now.

For a listing of these advisors, go here.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Quarterbacking is Not Exit Planning

by

Quarterbacking is a popular term when exit planners are talking to clients. It’s supposed to invoke a vision of someone who is in control. Think about a Tom Brady, Aaron Rodgers or Patrick Mahomes standing tall in the pocket, surveying the offense and defense unfolding before him.

There is a real problem with using “Quarterbacking” when referring to your exit planning professional team. The quarterback calls the plays. The job of the rest of the team is to run them as instructed.  I’ve yet to meet a CPA or attorney who thinks that is the best way to develop a client’s exit plan.

Teamwork

Exit planning, like no other form of professional consulting, is a team sport. When I am engaged by a client, I have the responsibility of defending his or her long-term objectives. The other advisors, who may include an insurance agent, financial planner, or appraiser, all have experience to lend to the process.

We can modify a plan multiple times and in many ways. The accountant may have some excellent restructuring ideas to save taxes. The attorney can add terms to a buy/sell agreement to protect the owners from having their equity unfairly valued by the IRS, or from having it pass to parties outside the company.

The insurance agent can mitigate the risk of illness or death derailing the timely transfer of the business, or of the surviving family being left destitute. The appraiser can develop valuations that take advantage of the discounts permitted under IRS guidelines.

Each of these professionals has a role, and should be able to add their skills to the process, with only one exception. They should not be permitted to do anything that interferes with the owner’s objectives. That’s the responsibility of the exit planner.

The Alternative to Quarterbacking

I prefer to think of the exit planner’s role as analogous to that of an orchestra conductor.

quarterbackingThe exit planner may not be as skilled in any specific discipline as the others on the team. He may know something about tax planning, or legal structuring or insurance. She probably knows a bit about valuation and even more about contracts.

But, like the conductor, he or she doesn’t know more about any of those subjects than the advisor who spends full-time in that area.

No one expects the conductor to step off the podium for a violin solo, or to fill in for the French Horn.  In fact, you don’t even want the conductor to tap the triangle for that one little note in the pause. If he did, he would be distracted from his primary role of keeping all the musicians on the same page.

Having one advisor coordinate the contributions of others greatly improves the overall result. Expecting him or her to dictate details outside his area of expertise is foolish. Expect your exit planner to lead without quarterbacking.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Exit Planning Checklist for 2020

by

The beginning of a new year is a great time to review your Exit Planning Checklist. All business owners will stop being business owners at some point.  So, there is no better time to begin planning for the inevitable than the present.  The earlier you begin planning, the more options you will have for a successful exit.

hand with a pen completing a check listHowever, like any strategic plan, it can be difficult to know how and where to begin.  With the start of the new year it’s also an ideal time for us to publish a basic “To-Do List” that will serve you in considering that most significant event as a business owner…your future exit.

DECIDE WHERE YOU WANT TO GO

Establish Clear Goals and Objectives for Exit and Your Life After Exit.

  • When do you want to leave the business? Whom do you wish to transfer/sell the business to?
  • What are your values-based and legacy exit goals?
  • What is your post-exit “life-plan”? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.
  • Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE 

Without Accurate Data All Planning Becomes Meaningless.

  • Get an accurate Business Valuation. If the business is your largest asset shouldn’t you know what it really is worth to potential buyers?
  • Assess your business Value-Drivers and areas of Risk.
  • Review your Business Continuity Plan for life transitions and unexpected death or disability. Co-Owners would include a review of their Buy-Sell Agreement to ensure alignment with the current goals of all owners.
  • Review Estate Plan to ensure alignment with exit goals.

 DESIGN AND IMPLEMENT A PLAN

Build Transferable Value and Enjoy a Future Exit On Your Own Terms and Conditions.

  • Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.
  • Focus on growth and profitability today. At the core of tomorrow’s successful exit plan is today’s profitability and plan for growth.
  • Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.
  • Update a strategic financial plan for the business.
  • Do you have the right Team of Experienced Advisors for plan design and implementation?
  • Who will Manage the Exit Planning Project?

The most important thing you could do in 2020 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until you’re ready to exit to begin planning, you won’t be ready and neither will your business.  Keep in mind, that “You don’t know what you don’t know” and, like in all other areas of life, that could end up being disastrous.

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2020 to be as responsible and successful in planning your eventual exit as you have been in running your business. You can start with this Exit Planning Checklist.

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