Exit Planning Tools for Business Owners

exit preparedness

What’s Your Purpose in Retirement?

by

Retirement can be an exciting milestone. It’s also a major lifestyle change. Oftentimes, your daily workday tasks (professionally or if you run your own business) will likely no longer exist.

Transitioning into retirement for some is an easy process. Perhaps their profession is not their absolute passion, and they always had other pursuits and hobbies they are ready to explore once exiting from their day job. But for others, their profession or business is their passion. They put all their time and energy into it and are dedicated to their profession for many years. Now suddenly, retirement is on the horizon and work is coming to an end. Alternatively, some people have it in their blood to consistently be achieving something, striving to make an impact and difference.

Whichever the case for you, a meaningful life with purpose is a healthy human condition for life fulfillment and longevity. This perspective has been around for generations. Teddy Roosevelt wrote about it in his book, “The Strenuous Life,” written in 1899. To reference his perspective, here is a quote addressing how to live a fulfilling life:

“I wish to preach, not the doctrine of ignoble ease, but the doctrine of the strenuous life, the life of toil and effort, labor and strife; to preach that highest form of success which comes, not to the man who desires mere easy peace, but to the man who does not shrink from danger, from hardship, or bitter toil, and who out of these wins the splendid ultimate triumph. A life of slothful ease, a life of that peace which springs merely from lack either of desire or of power to strive after great things, is as little worthy of a nation as an individual.” – Theodore Roosevelt

Since we’re quoting Teddy Roosevelt about living a fulfilling life, here’s another excerpt from one of his writings titled “Into the Arena”:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

The reason I bring these quotes into this discussion of retirement is that it’s important to remember just because your time spent working up to this point is coming to an end, doesn’t mean you stop laboring or that you don’t need to put effort into new endeavors or into making a difference.

What Are You Going to Do in Retirement?

I was at a gathering recently and in a conversation with two close friends of mine were discussing retirement, and one said to the other, “It’s not whether you can retire, it’s ‘what are you going to do when you retire?’”. He’s right, in my opinion.

The book, “The Magic of Believing,” written by Claude M. Bristol in 1948, wrote of a man he knew: “One man I know who has many achievements to his credit, and who has passed the seventy mark, declared that most people fall by the wayside because they never start anything.

I make it a plan and have for years, to start something new – that is, new for me – at least once a week. It may be only the making of some simple gadget for use in the kitchen, an entirely new sales plan, or reading an unfamiliar book. I find in following this plan not only keeps my body and mind active but also puts to use a lot of imaginative qualities that otherwise might fall asleep and atrophy. This idea of a man retiring when he’s sixty is (in my option) a great mistake.

As soon as a man retires and quits being active mentally and physically, he’s on the way to his grave in short order. You have seen what happens to fire horses when they are retired. You know what happens to your automobile when you leave it outside unused and neglected: it starts to rust and is soon headed for the junkshop. Humans are the same: they deteriorate out or wither and die when they go on the shelf.”

We Need Purpose in Retirement

I have deliberately referenced writings published many, many years ago to point out that this dilemma is as old as time; the human struggle hasn’t changed. We all still need deep purpose in our lives and the ability to make a difference for ourselves and for others to have a fulfilling life. In the practice of helping business owners exit their business successfully, I have heard stories of owners when facing the day of finalizing the sale of their company, don’t show up for the signing. Why? Because all their self-identity and their purpose are in the company they started, grew, and made a great success. To them, parting from it represents an end to all of that and a loss of a sense of control. But exiting doesn’t have to be viewed as an end. But does take careful thought, reflection, consideration, planning, and time to develop a new purpose and consistent passions. For some this is simple, but for others, takes time and consideration. However, it’s a critical area to address. A person who says that finally I’ll have time to play golf will likely find that passion dissipates after a few months and begin to ask, “now what?”

Over the years, our firm has developed a client conversation exercise called “Purposeful Conversation.” Originally, it was developed from our practice of “family legacy development,” We developed our P.C. exercise as a systematized approach to have a deep discussion with a client on “what matters most” to them.

The exercise is broken into three sections: Concerns and Priorities, Commitments and Causes, and Pursuit of Happiness/Life Fulfillment. Each of these areas has nine to twelve potential subjects that a client can consider. We help determine, with the client, the subjects that are relevant and have a deep discussion about importance. This can help them visualize their future, determine their life’s passions during retirement, and help determine what matters most in life. We discuss what makes them happy, what will help them continue to grow, and what brings fulfillment and create a plan now to allow them to focus on and pursue what they desire later.

We also developed a customized workbook to help identify their individual and family values and tie it all into their changing lifestyle.

Pursure Passion in Retirement

Pursuing interests and passions can come in many forms and combinations. Once I took a Lyft from a downtown Denver hotel to the Denver Airport. The driver said that he had started a few tech companies in the past, sold them, and is now driving to meet and learn from other people. I also learned that he decided to learn all he could to master Neuro-Linguistics. This is the study of how verbal and non-verbal language is represented in the brain: that is, how and where our brains store our knowledge of the language that we speak, understand, read, and write. And what happens to our brains as we acquire that knowledge, and how we use it in our everyday lives. I describe it in detail because it’s quite involved! Nevertheless, this gentleman strived to master it and then apply it to his sales training and sales consulting. He told me he was, being hired by companies to facilitate training courses for their sales forces. Wow! Talk about pursuing something else with a passion. I am now connected with him on LinkedIn and learning from him.

You can make a new life in retirement, include whatever you desire, and in a way that brings you maximum fulfillment and meaning. Do whatever “floats your boat,” so to speak.

If you are approaching the runway to land into your retirement years, or the period of your life that transitions you from your profession to your passion, make sure to take time and plan for it. It will be well worth the effort.

I hope you find this article useful. If you have any questions on this subject, feel free to contact me at szeller@zellerkern.com.

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 with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

Main Street Business and Middle-Market

by

Main Street BusinessA common area of confusion among both business owners and advisors is the difference between a “Main Street” business, a “Middle Market” business, and a “Mom and Pop” business.

Main Street Businesses

The International Business Brokers’ Association and other professional intermediary organizations define “Main Street” as any company with a Fair Market Value of less than $3,000,000. That is about the upper limit of a business that can be purchased by an individual using “normal” 20% down financing. He or she is acquiring for the purpose of earning a living.

Main Street businesses typically calculate cash flow as Seller’s Discretionary Earnings (SDE). As discussed by Scott Gabehart, the creator of BizEquity valuation software, SDE is a better measure of a business’s return on owner labor, rather than return on investment.  SDE includes the benefits of ownership including salary, employer taxes, distributions, health insurance, vehicle, and other perks of ownership. It also includes non-cash tax deductions such as depreciation.

The average selling price for an owner-operated business in the United States is 2.3 times its SDE. That cash flow has to support any debt as well as provide a living for the principal operator.

If we extrapolate from the average multiple (which from my past experience as a business broker is accurate,) we would say that “Main Street” encompasses businesses that produce up to $1.3 million in cash flow. That number is actually pretty high and crosses the threshold of where Private Equity companies typically seek acquisitions. At that level, a buyer would have to have $600,000 for a down payment and about $25,000 a month for debt service.

In reality, companies that generate more than $500,000 a year in adjusted EBITDA cash flow (not counting owner compensation) are more commonly sold for multiples of EBITDA. At that size, a multiple of four times adjusted cash flow is pretty common, and would classify a company with up to about $750,000 in adjusted cash flow as “Main Street.”

Mom and Pop Businesses

There is no definition of what is too small to be considered “Main Street,” but I like the description used by Doug Tatum, author of No Man’s Land: Where Growing Companies Fail. Doug says that many entrepreneurs start a company to build wealth. They do all the jobs in the business and grow it by dint of their unflagging effort and willingness to work long hours. Eventually, they are earning an income that is three times what they could have made just holding down a job.

Unfortunately, they are earning that income by doing the work of three people. That is my definition of a “Mom and Pop” company. The owner is making a living, but the only way to improve that living is by further denigrating his or her lifestyle.

A local distribution business may have $10,000,000 in revenue, but operate with a half dozen employees and the owners. Their profit before taxes could be as little as $200,000 – putting this $10 million business squarely in the category of “Mom and Pop.”

Mom and Pop business owners are seldom candidates for exit planning. When they stop working, the business ceases to exist. Their best hope is usually to pass it to a family member or employee who is also willing to work really hard to earn a decent living. There is seldom enough free cash flow to support much in the way of debt for the purchase of the company.

Middle-Market Businesses

Middle-Market businesses are defined by investment bankers as having revenues between $100 million and $3 billion with less than 2,000 employees. The US Department of Commerce lists the parameters as between $10 million and $250 million in revenue. One accounting association says the “lower middle market” is classified as companies between $5 million and $100 million. Investopedia.com pegs it as $10 million to $1 billion. Divestopedia.com goes with $5 million to $500 million. TheStreet.com has the widest range at $5 million to $1 billion.

Of course, a $5 million revenue company could easily have less than $500,000 in pre-tax earnings, which would put it squarely in the Main Street category. On the other hand, a substantial number of software and Internet-based companies have become “unicorns” (over $1 billion in market valuation) with far less than $100 million in revenue.

This discussion illustrates two points. First, few people know exactly what they are referring to when they say “Main Street” or “Middle-Market.” They have their own idea and definition, which is fine. Unfortunately, it is unlikely that the person they are talking to has the same definition.

Second, inexperienced advisors may say they “don’t work with Main Street.” Many Main Street business owners are excellent candidates for exit planning. In fact, when the $3,000,000 fair market value yardstick is specified, two-thirds of exit planning professionals say that half or more of their clients are in that category(1).

The Business Owner’s Perspective

Why should any of this matter to a business owner? There are two areas where these definitions play an important role in your exit planning.

First, when you look for an intermediary to help you sell, understanding the market they serve is critical. Most business brokers will list a Mom and Pop business, and sell those to downsized corporate executives or others seeking to earn a living. They also handle Main Street listings, although those with over a million dollars in earnings are probably out of reach for 90% of their buyers. You should carefully look at their track record in selling businesses of that size.

Most business brokers will also say that they can handle lower middle-market companies. As we’ve seen, that covers an extremely wide range of revenues and earnings. Again, if you are in the range of profitability that would attract a corporate or financial acquirer, you are likely better off retaining an investment banking firm for the sale.

(1) 2022 National Exit Planners Survey – www.exitplannerssurvey.com

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.

A Hazy Crystal Ball is Better than a Rearview Mirror

by

Car side mirror with a rear view of a clear road and a sunset in the mirror.Several years ago, I did a cross-country trip with my family. We laid out a rough plan of what we wanted to see, how long it’d take, and most importantly, what we wanted to eat!

When we hit the road, I did not drive looking primarily in the rearview mirror, with an occasional glance at the gas gauge and the road signs. I looked ahead and tweaked the plan. Yet, that is often how business owners run their businesses. Often, this year’s business planning consists of, “let’s do what we did last year – just more of it.” We look at whether we have cash in the bank, check our financial statements, and compare how we fare against last year. Although this is a common practice we should run our businesses with an eye on the future.

No one has a crystal ball that provides perfect clarity on the future. A million factors and forces affect our business and most of them are not within our control. Forecasting and planning require looking ahead a taking our best (hopefully educated) guess on what the future holds. I want to convince you that a rough, hazy plan is better than no plan at all!

If you do not know where to start, here are some practical pointers.

MAKE THE PLAN

Every forecast needs to answer the following questions:

  1. Where am I? Assess your revenue, profitability, operations, market position and see how you are doing. What is working well and what isn’t?
  2. Where do I want to be in the future? Lookout 3 to 5 years and write down goals. How much revenue growth, how much net income growth, what improvements are necessary for the business?
  3. HOW do I get there? This is most critical. Identify actions/investments you could take/make to attain your goals. These might include:

    4. • Establishing new markets
    • Creating new products
    • Adding key staff
    • Improving processes

  4. What is most important? Prioritize your improvements and plan them over 3 to 5 years. Tackle 2-3 goals per year.
  5. The end result should be:

• How much will my revenue grow in the next few years?
• What improvement do I need to make?
• How much will my bottom line grow in the next few years?
• Who do I need to hire/get on the bus?
• How much will this cost?

WORK THE PLAN

Once the plan is created, establish a consistent review and adjust as needed. This may include:

  1. Review your monthly financial performance against the plan. Include revenue, cost of goods, overhead, net income, and other appropriate key metrics. This implies a monthly budget.
  2. Conduct a monthly review of strategic projects. Routinely assess whether you are making progress on your major goals. Are you ahead? On track? Behind? Dead-in-the-water?
  3. Adjust course. If you are not “on the plan,” why? What are the causes of the variance and what do you need to do to get back on track?
  4. Modify the plan as needed. The “crystal ball” is hazy and there is no perfect plan. As you adjust you will learn your capacity for change and identify ways to improve.

Start Now and Keep It Simple

In planning our road trip, we identified key sights to see along the way and saw most of them. We paced ourselves and enjoyed the trip. You may not know how to forecast, but you DO know your business! Trust your experience and make a “road trip” plan to identify the following, at a minimum:

  • Revenue goals for next 5 years
  • Net Income goals for the next 5 years
  • New Critical Hires & the cost
  • Major projects & the cost

When you shift your gaze out, you are more able to see the business as an asset, rather than a job. The team knows where you are going and will often get on board to help you stay on track. Looking ahead allows you to see the potholes in the road before you hit them and it helps the journey become more predictable. Hopefully, you will start to enjoy the business more. Proven ability to grow is a key value driver when selling a company but, it may also help you build the company you want to KEEP!

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Die at Your Desk or Go Golfing?

by

Die at Your Desk or Go Golfing?

The truth of the matter is, every small business owner will eventually transition from the business. While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.

Whether you love your work so much that you would be happy to die at your desk, or you would like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit. And planning has significant benefits.

The Business Enterprise Institute defines three major objectives that a business owner should consider before reaching that point where they must exit the business.

    Timing of your exit – When do you want to leave?
    Financial needs after exit – how will you support the post-exit lifestyle you desire?
    Who’s going to take care of your baby and run the business when you are not there?

When do you want to leave the business?

Unless you want to die at the desk, you will want to consider at what point you desire to make the transition. Pick a time frame and begin considering the implications of that time frame. When do you back out of the day-to-day operations? How long do you take to do this…years or months? Can I effectively transfer the company to whom I wish to transfer it within that period? How long will it take to train my successor or children to be owners? Will I be able to realize my financial goals within that time frame? Will market conditions lend toward a successful sale to a third party? The time frame you decide on is a key driver. And, it is essential to establish at least a target date, or you could end up on the perpetual “I’m going to leave in around five years…” merry-go-round.

What income do you need?

Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself. However, The large majority of owners require some type of income either from the business at the sale, or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity. As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.

Who’s going to watch over your company?

Hopefully, you have enjoyed working in your business and there is a sense of giving up “your baby” to someone else. Choice of a successor is a significant, and often an emotional decision. There’s the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company. Several options exist, from passing the business on two children, selling it to key employees, selling it to a trusted third party, or even an employee stock ownership program. So significant factors come into play here – the most critical being who has the skills, knowledge, and temperament to own and run the company as well as you have.

Should a business owner have family in the business, the above questions become even more significant. Taking the time to thoroughly discuss your goals and desires with your spouse, children in the business and children not in the business are all very significant. It’s often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family. Planning enables conversations to be had so everyone’s expectations are clearly understood before that day when the transition occurs.

Corby Megorden is a Principal at ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Key Employees: Build and Protect Business Value

by

Key Employees

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

  • Makes a substantial business contribution
  • Possesses critical information or knowledge
  • Maintains and nourishes key contacts and relationships

Sellable Business

In helping clients plan to build a sellable business, and then eventually exit on their terms and conditions, we emphasize that “key people are a key value driver” in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

  • Building business value
  • Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that is aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners Beware

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as make up for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

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.