Exit Planning Tools for Business Owners

exit planning

Addressing the Value Gap – Truth in Pricing

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Truth in pricing is a common issue when discussing the sale of a business.

The selling price of their company is a point of pride for any owner. When they are willing to share the price they were paid, they usually include everything that was listed in the purchase agreement. While there is nothing inherently dishonest about that, it’s often not exactly the truth either.

In our last article we saw Bob, the owner of Bob’s Widgets, came to the conclusion that he needed to sell his business for $6,000,000 in order to replace his current salary and the Seller’s Discretionary Earnings (SDE) such as the vehicle and health insurance that his business pays for.

He knows that his friend Edgar sold his widget company for $5,000,000. Both Bob and Edgar have about 40 employees. Bob thinks his newer manufacturing equipment allows him to operate more efficiently than Edgar. Edgar freely discloses that his revenues were $4,000,000 in the year prior to the sale. Bob’s sales were $7,000,000 last year.

We will ignore Bob’s EBITDA ($500,000) for this exercise. Whether his expectations are practical as a multiple of profits is a discussion for another time.

Is it unreasonable to presume that if a $4,000,000 revenue company in the same industry can sell for $5,000,000, then a $7,000,000 company should sell for $6,000,000? Bob figures that he is not only being reasonable, but perhaps he is shooting too low.

Truth in Pricing

To begin, let’s see what Edgar’s price consisted of.

Royalty payments on specialty widgets that Edgar patented were value at around $150,000 a year for the next ten years. That was $1,500,000 of his “selling price.” In addition, although Edgar’s equipment was old, it was paid for. His company was debt-free. He generated almost $1,000,000 in EBITDA annually.

truth in pricingEdgar’s buyer also wanted him to stick around for three years. Edgar calculated his salary of $150,000 a year as part of the “purchase price.” He also had an “earn out” of $500,000 a year for reaching certain sales goals in the next two years. In total, royalties, salary and conditional payments made up $2,950,000 of his $5,000,000 price, leaving only a bit more than $2,000,000 as “cash on the barrelhead.”

Did Edgar lie? Not in his own eyes. Given some time, effort and luck., he will eventually realize $5,000,000 in total pre-tax income related to his business. It’s his version fo truth in pricing.

Bob’s Price

First Bob has to consider what his price would include. He has about $350,000 left on the lease/purchase of his two newest widget manufacturing machines, which would have to be paid off by the buyer. He also owes about $300,000 on his revolving credit line.

Bob has always felt that vacation pay is earned, and never bothered to put a limit on its accrual by employees. He would be shocked to learn that his 40 employees, who average about $50,000 in salary, have about 240 weeks of unused vacation time. That’s another $230,000 plus the employer’s payroll taxes. Let’s call it a quarter million dollars. Edgar had a maximum one-week carryover. His liability was about $40,000. If Bob’s buyer is willing to pay a five (5x) multiple of EBITDA, the unrecognized vacation expense could drop the purchase price by nearly $1,000,000.

Bob is also anticipating a stock sale, with a tax burden of about $1,200,000 on his sale price. If it’s an asset sale (90% of small businesses are asset sales), he can expect that number to be much higher. In short, even if Bob could demand $6,000,000, his actual cash price might be more than a million and a half dollars less, and his tax burden almost a million dollars more. Suddenly Bob has the equivalent (in his eyes) of a $3,500,000 sale.

Closing the Value Gap

Welcome to the second part of the Value Gap. Now Bob realizes that not only will he need substantially more money to fund his post-exit lifestyle, but his company can’t currently provide the level of proceeds he was planning on for retirement.

It may seem surprising, but the answer to this problem for many owners is “I’ll just work longer.” The challenge of closing the Value Gap is too daunting to wrap their thinking around.

Some planning could help Bob. He can modify his benefit structures and pay off some debt, but let’s say that his $6,000,000 price is reasonable, and growing the value to $8,000,000 would meet his goals. Breaking that down on an annual basis renders a growth target of less than 6% annually over the next 5 years.

That may be a better solution than “just keep working.” Bob’s time frame may be longer or shorter. He may modify his target income. He may be able to economize in his business operations to increase cash flow. There are a number of options to consider, but they all require that Bob first understands his Value Gap and truth in pricing.

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.

Is your business too dependent on you?

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By definition, a small business depends on you, its owner. Especially if you are its original founder. After all, the business would never have existed without the leap you took to start it in the first place. It wouldn’t have survived it’s early years without the sweat, tears and sacrifices, financial and otherwise, that were made.

Likely it survived and went on to flourish because of some special knowledge, skills or traits you either already had when you began, or that you developed while building it into the successful enterprise it has become. The value that you brought to the table in the beginning was your company’s most precious asset, and is likely still valuable today.

However, if your company is too dependent you, then it’s probably not operating as efficiently as it could. Put another way, If you are your company’s greatest asset, then you could also very well be its biggest liability. Owner dependence can be an obstacle for growth and hurt a company’s value when the time comes to sell.

Degrees of owner dependence

Owner dependence comes in many different forms. Does the business rely on you for most or all of its sales? Are you the go-to person for a key skill or necessary knowledge? Are you required to review others’ work and sign-off because you hold the required license? Are you still doing the bookkeeping or payroll?

Even if not involved in the daily operations, there are other ways a business could be owner-centric. Are you the only one who brings new ideas for growth? What business decisions are you responsible for? In what areas does your management team need your approval before taking action?

There are various surveys available which can help identify how owner-centric a business is; we offer one that takes less than 15 minutes to complete. Here’s another way to get a basic idea of owner-centricity that takes only a few seconds. How much time did you spend ‘touching base’ with your company during your last vacation? If you’re not sure, I’ll bet your spouse knows.

Too much dependence = less value

A business too dependent on its owner can make it more difficult to sell and even reduce its value. If a potential external or internal buyer (if you plan on selling to key employees) can’t fill your shoes, then they must either hire talent to replace the lost skillset, or keep you on for an extended time to help with the transition. Adding headcount means less profit and therefore less value. An extended transition means more risk to the buyer, (what if the business can’t be as successful without you) which again makes it less valuable.

Even if you don’t plan on selling any time soon, getting the business less dependent on you can provide value in other ways. How much would it be worth to you if you could spend 10 less hours a week at work? What would it mean to those you cared about if you had more time to spend with them? How would it feel if you could take 3 months off comfortably knowing that your company is humming along fine without you?

Some owners who have had this concept presented to them have reasons why they can’t take their fingerprints off the business. The most common ones are, “I’d love for the business to be less dependent on me, but I’m too busy to train someone else.” Or, “I’m involved in these areas because a mistake would be too expensive.” There’s also the classic “No one can do this as well as me!” These or other reasons could be challenges for you as well. I didn’t say this would be easy. On the other hand, owners that have been able to overcome these obstacles have created more business value and a better quality of life for themselves. And some who initially thought they wanted to sell had a change of heart. Once they found that the business wasn’t running them, ownership became enjoyable again and it was worth keeping.

Taking the first step

If this sounds like a worthwhile exercise, the first step is to identify the aspects of your business that are dependent on you. Then start small and pick one area to tackle first. Can it be delegated? Can it be systematized? Outsourced? Maybe some additional training is needed. Maybe someone with experience in that area should be hired.

Once you have the first one checked off, you should have more time and energy to tackle the next. It’s a virtuous cycle. Accomplish enough of these and not only will your company’s value increase, so will your quality of life.

Michael Jones, CFP, CEPA spent several years in management and engineering roles for various Fortune 500 companies. He has a B.S. degree in Mechanical Engineering from Virginia Tech and an MBA from the Krannert School at Purdue University. He is the President of Ataraxia Advisory Services, LLC.

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.

Owners are a Minority

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When it comes to careers, business owners are a minority of the population. In conversations this week, I mentioned the statistics several times, and each owner I was discussing it with was surprised that they had so few peers.

According to the Small Business Administration (SBA), there are over 33,000,000 businesses in the US. Let’s discount those with zero employees. Many are shell companies or real estate holding entities. Also, those with fewer than 5 employees, true “Mom and Pop” businesses, are hard to distinguish from a job.

The North American Industry Classification System (NAICS) Association, lists businesses with 5 to 99 employees at about 3,300,000, and 123,000 have 100 to 500 employees (the SBA’s largest “small business” classification.)

Overall, that means about 1% of the country are private employers. Owners are a small minority, a very small minority, of the population. Even if we only count working adults (161,000,000) business owners represent only a little more than 2% of that population.

So What?

Where am I going with this, and how does it relate to our recent discussions of purpose in business exit planning? It’s an important issue to consider when discussing an owner’s identity after transition.

Whether or not individual owners know the statistics of their “rare species” status in society, they instinctively understand that they are different. They are identified with their owner status in every aspect of their business and personal life.

At a social event, when asked “What do you do?” they will often respond “I own a business.” It’s an immediate differentiator from describing a job. “I am a carpenter.” or “I work in systems engineering,” describes a function. “I am a business owner” describes a life role.

When asked for further information, the owner frequently replies in the Imperial first person plural. “We build multi-family housing,” is never mistaken for a personal role in the company. No one takes that answer to mean that the speaker swings a hammer all day.

Owners are a Minority

We process much of our information subconsciously. If a man enters a business gathering, for example, and the others in the room are 75% female, he will know instinctively, without consciously counting, that this business meeting or organization is different from others he attends.

Similarly, business owners accept their minority status without thinking about it. They expect that the vast majority of the people they meet socially, who attend their church, or who have kids that play sports with theirs, work for someone else.

There are places where owners congregate, but otherwise, they don’t expect to meet many other owners in the normal course of daily activity. This can be an issue after they exit the business.

You see, telling people “I’m retired” has no distinction. Roughly 98% of the other people who say that never built an organization. They didn’t take the same risks. Others didn’t deal with the same broad variety of issues and challenges. Most didn’t have to personally live with the impact of every daily decision they made, or watch others suffer the consequences of their bad calls.

That is why so many former owners suffer from a lack of identity after they leave. Subconsciously, they expect to stand out from the other 98%. “I’m retired” carries no such distinction.

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 House of Gucci Succession Plan

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By now, you may have seen the movie House of Gucci. Lady Gaga and Al Pacino star in the true depiction of the Gucci family.

The Gucci brand started with two brothers who own the family business equally. Each brother had a son, and each son was to inherit the empire. One of the sons was a ne’er-do-well, who always attracted and found trouble. Despite nobody ever giving him a chance, the viewer could tell his successor ownership was doomed. The other son married the woman who was played by Lady Gaga. The story progresses through time as one of the fathers die and the other goes to jail while the wife rises to power and greed. To complicate the succession plan, lavish lifestyles, poor business decisions, children and divorce ensue.

The Gucci brand has always been iconic, and it remains so today. The movie describes the struggle between the two brothers and their ideas on how to grow the brand. One brother wants to expand into shopping malls across the world, while the other brother believes the idea of having a Gucci store in a mall is despicable. The two brothers who have these opposing views show how difficult it is running a family business with 50-50 ownership.

The two sons are the on-again/off-again heir apparent to the fortune, and eventually they will run or have a hand in running Gucci. The ne’er-do-well son struggles and is really off-base with his ideas, which are very inconsistent with the brand, and he lacks any sense of training or sense of how to run a business. Subplots in the movie describe how the other stakeholders attempt to circumvent his ownership and ultimately the rest of the family.

The other brother is smart, but he has a blind spot in that he has never had to struggle financially. He has never had to know what it was like to lack resources. His approach to management and growth are flawed because of the company culture and his paradigm. The influence of his wife and others around him also taint the management and success of a family run business. He lives lavishly, incurring personal expenses that he funds through the company.

Subterfuge and infighting ultimately become the demise of the family. The business survived but it was sold off for pennies on the dollar and was turned into a publicly traded company and as a result, the family no longer owns the business.

Clearly, the Gucci’s would have benefited from a team of exit planning advisors to help them navigate these waters! Indeed, there was no training of the sons, there was no alignment by the brothers, there was no dealing with the other stakeholders in the family. There was no financial planning, nor personal planning. Other than the brand quality, there was no development of cultural consistency or business attractiveness. There was a lack of management succession, planning and delineation of who does what. Sadly, there are many family run businesses that much less well known, but who lack the kind of exit planning that is needed to successfully pass along the business to the next generation.

House of Gucci illustrates how important it is for families to pay attention to succession and exit planning. I give this movie two thumbs up for the entertainment value of the movie, but two thumbs down on exit planning!

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.