Exit Planning Tools for Business Owners

exit strategies

The Unsellable Company

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What does an unsellable company look like? Some business brokers will assert that there is a buyer for any business. That may be true, but historically four out of every five small businesses listed for sale fail to sell.

In this post I am specifically discussing profitable Main Street businesses. That is loosely defined as those valued at under $3,000,000. “Small” doesn’t necessarily refer to size. Some low margin businesses, such as those in distribution of commodity products, could have revenue well into eight figures and still be not command a $3 million valuation.

Others, like those with proprietary software, might have a few million dollars in revenue and be snapped up by a strategic buyer for an eight figure price.

The buyers for most Main Street businesses are individuals who are seeking a livelihood. They usually have never owned a business, and are betting their life savings on the venture. It’s not surprising that they are nervous.

The price ceiling on defining a Main Street company is based on the projected ownership. Simply put, if a business’ principle purpose is to provide an owner (or perhaps a few owners) with a decent standard of living, the ceiling on valuation is based on what the company’s cash flow can support in owner salary, debt service and ROI on the down payment.

To see if your presumed value supports these three requirements, try the Valuation Sanity Check at http://yourexitmap.com/exit-planning-valuation-sanity-check/.

Just because your cash flow justifies your price however, doesn’t mean your company is saleable (or as my Canadian friend John Warrillow writes it in Built to Sell, sellable.) There are still a number of reasons why a solidly profitable business may not find a buyer.

Owner Centricity

Simply put, the whole business revolves around you.  A buyer’s due diligence keeps running into you at the end of every question. How do you do this? (Ask Bob.) Who are your most important customers? (Ask Bob.) What discounts are available from your suppliers? (Ask Bob.) You get the picture.

Even if you have excellent processes, duplicable talents and widespread delegation, an owner who personally holds the professional license needed to legally operate presents a similar issue for a buyer.

Customer Concentration

Some small businesses are very good at what they do, but luck always plays a part. If you’ve grown by depending on one customer for over 50% or your business, or a handful of customers for 80%, expect individual buyers to shy away.

Long term relationships are great, but if they aren’t documented don’t expect them to carry much weight in a valuation. It’s one thing to be proud of doing business on a handshake. It’s another to bet your life savings on one.

Uncertain Revenues or Margins

If you have to explain your tax returns with “We have some good years and some bad years,” you will have a problem attracting buyers. They don’t have your confidence that a bad year will be followed by a good one. If they are committing their retirement savings to the purchase (which is often the case) they are worried about having the financial stamina to withstand a dip in sales.

Similarly, it you are regularly buttressing your revenues with cuts in margin through big discounts or volume deals, it will be perceived by a prospective buyer as regularly having to “save” the business.

You may have steadily increasing revenues and profits, but companies that bid, or have to submit proposals for each job, strike fear into the hearts of inexperienced buyers. They have nightmares about failing to win another job from the day they take over.

Contracts help with this, but they often aren’t enough. I worked with one buyer whose offer was based on the revenue stream from each existing contract until it expired. He wanted to be made whole for the purchase price even if he proved unable to ever land another big customer.

The Unsellable Company

If you recognize your business as having any of these traits, you have three choices when it comes to exit planning.

You can sell the company to employees who understand the constraints of the business and are comfortable with them. You can list the company for sale anyway, and hope that yours is among the 20% of enterprises for whom the right buyer can be found.

Finally, you can implement a plan to eliminate the obstacles to a sale.

A Transition to Exit Planning

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It is time for a new direction. This marks my 400th posting to this site. I’ve enjoyed writing weekly about the daily issues and opportunities of business owners for almost ten years, but it is time for a change.

Awake at 2 o’clock has a new look and new navigation, although we decided to keep the title, logo and banner. More about that in a bit. First the why behind the change.

Regular readers may have noticed that, over the last year, I have been turning more frequently to exit planning subjects. That reflects my own career progress.

Before 2007 I sold businesses as a certified business broker, and helped numerous owners through transition as an executive coach. That year I wrote my first exit-related article (titled “Boomer Bust?”) for the business journal.

My research for that piece convinced me that there was a seismic event on the way in the retirement of the Boomers. I also learned why they were the most entrepreneurial and competitive generation in history. I hadn’t yet heard the term “exit planning”, but I was already thinking about the advisory help I knew would be needed.

I certified as an Exit Planner (CExP) in 2011, and gave up my Business Brokerage practice in the same year. In 2012 I published a new edition of my first book 11 Things You Absolutely Need to Know about Selling Your Business, and began speaking about “Beating the Boomer Bust” to audiences nationally.

In 2013 I published the award-winning book, Hunting in a Farmer’s World, which looks at the psyche of business owners, including their challenges when leaving their businesses.

I also developed an online product, The ExitMap®, to help owners and their advisors begin conversations about exit planning. It is based on my coaching experience with hundreds of owners and fills a gap left by the more technical/financial assessments that currently dominate the market. We’ve built a national network of professionals, experts in multiple disciplines, who are committed to exiting owners’ need for skilled and experienced help.

Finally, in 2016 I chose not to renew my 20-year franchise with The Alternative Board® in order to concentrate on helping owners leave their businesses. In the last decade I’ve progressed from not fully understanding the term “exit planning” to practicing it full time.

This year I will publish my new book, Your Exit Map: Navigating the Boomer Bust, which is accompanied by an online library of resources for business owners at www.yourexitmap.com . It has turned into more than a consulting skill. The millions of transitioning Boomers who need assistance have become my calling.

People ask me all the time, “Why is your blog called Awake at 2 o’clock?” Most business owners understand the reference to those nights when you can’t sleep because you are thinking about the business. It seems appropriate to keep the title when considering the biggest single financial transaction in most owners’ careers; the sale of their businesses.

We have a new tag line: Plan…Build…Exit…Enjoy. It describes both the path to a successful transition as well as the four topic areas we will discuss in this space.

Plan

Exit Strategies. These articles will focus on the big picture. What do you need to know in order to prepare well and successfully implement a lucrative transfer of the business? What do the acquisition markets look like? How do current events impact your time frame or financial objectives?

Build

Improving Value. Enhancing the value of your business takes on new importance when you are looking at cashing out. How do you secure employees and customers? How do systems and processes affect your sale price? What specific areas of improvement will make your business more attractive?

Exit

Exit Options. Should you be targeting a specific segment of the buyer market? How can that be accomplished? What technical issues will you face with taxation, negotiation and contract structure? The specific and unique challenges of Family, Employee and Third-Party sales.

Enjoy

Exit PlanningLife After the Business. The purpose of exit planning is to…EXIT! In collecting reader recommendations for my latest book, the most frequently submitted suggestion was to include discussions of the ways people enjoy their post-ownership lives (or don’t.) We’ll collect real-life stories and share them.

I plan to mix up my approach a little more. Instead of merely relating my observations and experience about ownership, I will invite guest bloggers, review new books on exiting, and interview entrepreneurs about their own experiences. If it will help business owners who are planning the next stage of life, it belongs here.

I will post when I have something worthwhile to share. Since the subject matter is more focused, I will no longer have the flexibility to post every week on whatever topic appeals to me. A little discipline never hurt.

Finally, in a world where content is paramount, we aren’t discarding the 200,000 or so words already cached on this site. You can still search by topic for any past posts.

I know that some subscribers are not planning their exits right now, but I encourage you to stick around. Sooner or later every owner leaves his or her business. Expanding your knowledge about the process now will prove handy down the road. Your exit planning objectives should be influencing how you run your company today.

I am very excited about this new direction and plan to continue writing with the same passion and enjoyment that has fueled this column since 2008. As always, thank you for reading!

John F. Dini, CMBA, CExP

Stop Managing

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Why would anyone advise business owners to stop managing? Management is a proven science. From the time and motion studies of Frederick Winslow Taylor in the late 1800s, to Matthew Kelly and Patrick Lencione’s Dream Manager, we are constantly in search of ways to make employees more effective.

Management trends (some say “fads”) come and go. Wikipedia lists a number of major theories since the 1950s, including Management by Objectives, Matrix Management, Theory Z, One-minute Management, Management by wandering around, Total Quality Management, Business process reengineering, Delayering, Empowerment, 360-degree feedback, Re-engineering and Teamwork.

You could probably throw in a couple of offshoots like ISO 9000, Open Book Management, Six Sigma, Balanced Scorecards and Net Promoter Score. All have metrics (Key Performance Indicators) to measure their effectiveness.

In the 125 years since Taylor, after the introduction of automobiles, telecommunications, manned flight and the Internet, we are still working from the basic framework of time and motion studies. We try to empower people, but that often just means having them track their own production rather than have someone else do it for them. (Delayering)

That leads us to one of the Catch 22s of many business owners’ reality.  Once you have grown an enterprise large enough to require management, you’ve outgrown the skill set that made your business successful.

Small businesses become bigger businesses through their owners’ leadership and creativity. Time isn’t a fungible commodity, you can’t save it or get more of it. In a zero-sum  equation, any increase in one factor means a reduction in others. The more time you spend managing, the less there is left over for leading and creating.

Stop Managing, Start Creating

Last week, I sat in on a panel of three successful business owners who were discussing the value of a second in command. Each mentioned how delegating the management tasks of daily operations had freed them to focus on longer-term objectives, develop new ideas, and improve their personal quality of life. (In case you’ve forgotten, that’s why we own companies.)

A second-in-command to manage the business can’t be undervalued. I recommend Gino Wickman’s Rocket Fuel for a terrific examination about the relationship between a visionary and an implementer. If you haven’t read my own Hunting in a Farmer’s World, subscribe to Awake at 2 o’clock (to the right) for the chapter “I’m a little bit ADD” and see if you recognize yourself. (If you already subscribe, don’t worry. We don’t send duplicate emails.)

There were a number of owners from smaller businesses in the panel’s audience. Their comments were not unexpected. “I can’t afford a hire really top-flight manager.” “What if I get dependent on someone and he leaves?” “How can I find someone who knows as much about the business as I do?”

Those observations are being made by looking through the wrong end of the binoculars. The real question to ask  is “What would happen if I had more time to do what I do best?”

The average business owner estimates that about 20% of his or her time is spent in business development, the long-term creation of new products, services, systems and relationships. If a second in command can take just 30% of your duties, you could increase your business development effort by 150%.

What will happen if you stop managing, and devote 2 1/2 times the effort to growing your business? That’s how much a good manager is worth.

Are you over 50 years old, or do you advise business owners who are?

Sign up for free excerpts of my upcoming book, Your Exit Map: Navigating the Boomer Bust

Exit Planning in a New Political Environment

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What does a new political environment mean for business owners who are planning to transition their businesses? Should you accelerate your plans, or slow them down?

As I’ve said many times in this space and elsewhere, the biggest single factor in successfully selling a company is the current condition of the financial markets. Since the Great Recession, the Federal Reserve has poured new cash into the system at very low interest rates. This “cheap money” has trickled down to fund a wave of leveraged buyouts by financial professionals seeking a better return than that from more traditional investments.

This wave of cash enables some 7,000 private equity groups (PEGs) to seek targets in almost every industry. Those targets, however, are typically among the 20,000 or so privately held companies with over $1,000,000 in pre-tax profit.

That leaves out some 9 million employers on Main Street (those that sell for less than $3,000,000.) Of those, about 5 million are owned by Baby Boomers who are, or should be, thinking about life after business ownership.

Most of the owners I talk to are at a loss to predict the climate of the next few years. They hope that a pro-business administration will reduce bureaucracy and pull back some of the regulatory burden on business owners. On the other hand, they are concerned that trade wars, rescission of treaties or diplomatic snafus will drive the US, or the world, into another economic trough.

A very few claim that they know exactly what President Trump and the Republican Congress will do. In the words of Prussian General Helmut von Moltke, “No battle plan survives contact with the enemy.” People may think they know what is coming, but it would be foolish to bet the ranch on any single outcome.

What does this mean for exiting business owners? At the risk of sounding too pat, it means exit planning is more important now than ever before.

Why Start Exit Planning Now?

Here are some reasons why an exit plan is valuable in uncertain times:

  • If your planned exit is more than five years from now, the landscape will likely change again before you transition. A plan will give you the tools to track key components of a successful exit, and improve your ability to respond to changes.
  • If your intention is to preserve the legacy of your company by selling it to employees or family members, starting the transfer now can put you in a position to accelerate or delay the final transfer according to current conditions.
  • If the stated intention of the new administration (a return to 4% GDP growth) is successful, a plan to maximize your value to a third-party buyer will leverage higher pricing multiples.
  • If the economy winds up in the tank, a plan is only a plan. It can always be put on hold until conditions improve.

An exit plan is, by definition, a strategic plan with the addition of a completion date. Some owners fear that by stating a deadline, they are committing to it regardless of circumstances. Of course that isn’t true.

Planning your exit and actually exiting are two different activities. It only makes sense that the political environment should be one of the factors that affect your final decision.

Would you like free excerpt from my new book Your Exit Map: Navigating the Boomer Bust?

Just register here. We’ll send you short pieces every few weeks until its publication in the Spring.

Protecting Your Best Asset

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If you are planning your exit from the business, what is the best asset that you have to sell? Unless you have patented product, exclusive rights, or long-term customer contracts, you answer was likely “Our people.”

employees-in-officeEven if you have strategic differentiation like the ones above, “our people” was still likely a top-three answer. Proponents of Human Resource Accounting correctly point out that few businesses have a bigger investment. Hiring, training and developing talent is at the center of most successful organizations.

But people aren’t chattels. How can someone rationally consider paying top dollar for your successful business when its best asset might disappear the day after closing the sale?

Securing a great price for your company means paying attention to its value drivers. Those include documentation of reproducible processes and quality controls. Customer diversity, long term relationships and a clear marketing strategy are also important. All those pale, however, against the ability to assure a transition of your key people.

The Last Minute Bonus

There are numerous stories in the planning world about owners who neglected to protect their best asset. Some are certainly apocryphal, but they all go something liked this.

Bob was straightening up his desk in preparation to move to his smaller, temporary office. He kept pulling out his phone to check if his bank balance reflected the proceeds from the closing wire transfer. He wasn’t thrilled about spending a few months as an employee, but it was well worth it.

There was a quick knock on the door and Jack, the Director of Sales walked right in. Bob thought of how much that irked him, but he wouldn’t have to deal with it much longer. As usual, Jack got right to the point.

“Congratulations Boss. I know that you put many years into building this company, and from what the buyers just told me, you received a great price. I’ll miss working with you.”

Jack didn’t wait for a response. “That new owner, Carl, seems like a nice enough guy. You know, he told me that I was one of the main reasons they bought this business, and they have big plans for me in the future.”

Bob knew the other shoe was about to drop. “So I was thinking. Considering how important I am to a successful transition, how much of that big check were you planning to share with me?”

Bob thought of the escrow fund in the agreement, and how it required transfer of the company without major changes in personnel. He took a deep breath, wondering how much of it he should use for an opening offer.

Sooner Rather than Later

The time to negotiate a stay bonus is before you start the sale process, not after there is money on the table. Securing your best asset adds value to the business, and greatly lessens the chance that an employee will derail any deal.

Many owners hesitate because they fear telling key employees that the business may be sold. That is a rational concern, but the sooner you bring it up, the more inertia will be  on your side. When things don’t change right away, people tend to go back to what they were doing.

Explain that transitioning is a logical step for every business, and that once you start the process, it could take years. You want to recognize the employee’s contribution, but you also want to make sure that he or she gives any new owners a fair chance.

Stay bonuses very widely, but an additional half-year’s salary is reasonable in return for two years of post-transition service. In some cases, the bonus can involve a percentage of the sale proceeds placed in escrow and paid after the transition period. The benefit can also vest over time, strengthening your short-term retention.

One thing is certain. Protecting your best asset before starting an exit process will be cheaper than being forced to do it afterwards.

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