Exit Planning Tools for Business Owners

exit strategies

The 7 Deadly Sins of an Entrepreneur — Reprise

by

I make no claim that using the Seven Deadly Sins as a metaphor for business behavior is original. Of course, the original concept is a codifying of “undesirable” human behaviors, or sins. The work probably comes from the Latin word sons (guilty). Various sources attribute it to Old English and Hebrew, but since Latin was the language of the church, this seems most likely.

The concept of personifying the seven sins for popular consumption, as I mentioned in the first column in this series, goes back at least to Dante in the early 1300’s. It’s been used regularly in popular fiction including Roald Dahl’s Charlie and the Chocolate Factory (the five golden ticket winners each represent a sin, with Grandpa as Envy and Willie Wonka as Wrath); and in “Sponge Bob Squarepants” (I’ll assume that most readers don’t know the characters well enough to make identification worthwhile.)

gilligans-titlePerhaps the most amusing application was in “Gilligan’s Island.” The seven castaways fill their assignments well. There’s Gilligan (Sloth), the Skipper too (Wrath).  The millionaire (Thurston Howell — Greed) and his wife (Gluttony). The movie star (Ginger — Lust, of course); The professor (Pride) and Mary Ann (Envy), here on Gilligan’s Isle (Hell?)

My apologies if I just stuck that tune in your head for the rest of the day.

When I present “The 7 Sins of an Entrepreneur” to business audiences, they take special delight in identifying their own behaviors. Maybe it’s because they are relieved (“Gee, I only have four.”) or because they are naturally competitive (“Hey, I hit on all seven!”)

What ever the reason, it’s an easy way to organize negative behaviors. Perhaps that’s why it has remained so dominant a concept. Regardless of your failings, they can probably be categorized as one of the seven sins.

Here is a synopsis in order, with the corresponding “virtues” that counteract each.

  • The Operational Sins: Those which reduce your personal effectiveness as an owner and leader.
    • Lust: Allowing whim du jour to drag the company in differing directions. (Counteracting behavior: A Personal Vision.)
    • Gluttony: Hoarding all authority and decision-making for yourself. (Delegation)
  • The Tactical Sins: Those which denigrate the effectiveness of your organization.
    • Sloth: Settling for “good enough.” (Metrics and Benchmarking)
    • Wrath: Using adrenaline to drive performance. (Planning)
    • Greed: Addressing any problem with more effort or more intensity. (Budgeting)
  • The Strategic Sins: Those that prevent long term vision and improvement.
    • Envy: Thinking that no one else has your problems. (Outside advice and knowledge)
    • Pride: Believing that you are the single most important factor in your company. (Exit Strategy)

The sins are addressed in order. Dealing with the Operational Sins allows you to tackle the Tactical problems. Strategic improvement is only possible if you’ve first dealt with Tactical issues.

The Seven Deadly Sins of an Entrepreneur are an excellent mnemonic for considering your own behavior and those of your company.  Keep them in mind as you run your business day-to-day.

If you enjoy “Awake at 2 o’clock,” please share it with other business owners. Thanks for reading!

The Seventh Entrepreneurial Sin — Pride

by

Every business owner should be proud of his or her business. If you are the founder, you built every system, and probably landed the biggest customers. If you bought the business, you took what was in place and made it fit your vision and style.

But there is a dividing line between pride in what you’ve created and thinking that you are the business. Taking pleasure in seeing people add value and produce wealth is justifiable pride. Thinking that it exists only because of you is “sinful” pride.

(This is the eighth in a series on The Seven Deadly Sins of an Entrepreneur. It starts here.)

pawn to kingPride has characteristics that are easily recognizable in some owners. In meetings, do you do all the talking? Do you complain that you are the only one who has new ideas? Does everyone come to you for the solutions to any and every problem? Worse yet, do you insist on it? Do you reprimand employees for making decisions that, while they might work, aren’t exactly the way you would have done it?

My friend Kevin Armstrong in Vancouver says “The more you work in your business, the less it is worth.” Building an organization that is dependent on you to operate it has one drawback.

You can’t leave…ever. If you are the business, then it is worth nothing without you.

In the worst cases, you can’t take a vacation. Even getting away for a few days requires that you be tethered to electronic communications. Perhaps you’ve built sufficient managerial capacity to keep things going for a few weeks, but upon your return you have to jump-start activity again.

Here’s another axiom, this one from John Brown of the Business Enterprise Institute in Golden, Colorado. “Sooner or later, every business owner leaves his or her business.” In stark terms, you can think about how you want to exit, or you can let it be a surprise.

The virtue that counteracts Pride is Exit Planning. An exit plan differs greatly with the owner’s age, his or her personal goals and the size of the business. In every case, it requires consideration of finances, career objectives, lifestyle ambitions, management development and self-maintaining systems.

Ah, but you are still young. You are still healthy. You still enjoy running the business. Why would you want to think about leaving?

Because thinking about how the business will function without you leads to greater profitability, a higher value for your company, and more personal flexibility in your life. Aren’t those reason enough?

Professional investors craft an exit strategy before they buy into a company. For most entrepreneurs, especially in their first five years, leaving is the furthest thing from their minds. If you are beyond your fifth anniversary as an owner, you should have one eye on the door, even if it’s still a long way off.

Thinking about the business as a separate entity, something that will survive after you’ve moved on, will help make you think in longer, more strategic terms about things like new products, target markets, and developing other decision makers in your organization. It brings up questions many owners ignore, especially “What does my company look like to a buyer?”

Long, long ago I was a manager for a national chain restaurant. They taught me a trick that I still use today. Once a week or so I’d walk out in front of my restaurant and stand with my back to it. I’d close my eyes and think “I am a new customer, who has never been to this establishment before. I’ve never even driven past. I am seeing it for the very first time.”

Then I’d turn around and look at my business for the very first time. I always saw something that could have been better.

Selling a business is a bit like selling a house. You spruce things up so that it looks good. In a business you make sure your financial statements are up to date and easily understood. You tighten up on expenses. You refresh operating procedures.

If you start seriously thinking about your exit now, you’ll naturally regard your business through your buyer’s eyes. To quote one of my own favorite axioms, “The things you should do to get the best price for your business are the same things you should do every day that you own it.”

Thanks for reading “Awake at 2 o’clock”. Please share it with other business owners.

The 7 Deadly Sins of an Entrepreneur

by

The Seven Deadly Sins are alive and well in small businesses today. Far from being a hoary religious holdover from the Dark Ages, they are practiced assiduously by entrepreneurs everywhere.

devil dancing in suitThere is something to be said for any concept that catches the public imagination for fifteen centuries. First postulated by Saint John Cassian around 400 AD, the sins were codified by Pope Gregory the Great in the late sixth century, and popularized by Dante Alighieri in “The Divine Comedy” in 1315. They remain present on a daily basis in many businesses  through the 21st century, 700 years on.

The Seven Deadly Sins are Lust, Gluttony, Sloth, Wrath, Greed , Envy and Pride. In a business, they can be divided into Operational, Tactical and Strategic sins.

The Operational Sins are Lust and Gluttony. Lust is present when the owner uses his or her power of position to pull the business in any direction he or she chooses. Gluttony is a tendency to hoard all authority and decision-making for yourself.

The Tactical Sins are Sloth, Wrath and Greed. Sloth in business is settling for “good enough,” when a bit more effort would produce a far better result. Wrath is using adrenalin to replace critical thinking, and reacting to problems by ratcheting up your emotional drive. Greed presents itself as the belief that every issue in the business could be solved by “just a little more.”

The Strategic Sins of Envy and Pride stem from the owner’s personal belief structures. Envy is the belief that no one has the same problems as you do. Pride is a conviction that the company can’t survive on a day to day basis without your special talents.

Christianity, of course, has corrective actions for the Seven Deadly Sins. Each sin has its counteracting virtue. For Lust there is Chastity. For Gluttony; Temperance. The sin of Sloth is counteracted by the virtue of Zeal, and that of Wrath by Kindness. Greed is foiled by Generosity, Envy by Love and Pride by Humility.

When applied to business ownership, the Entrepreneurial Sins also have corresponding “virtues” that can reduce or eliminate their negative effect on your business.

The Operational Sins require behavioral changes. The counter to Lust comes with having a Personal Vision. Gluttony is defeated with Delegation.

The Tactical Sins dissipate in the face of internal organizational  practices. Sloth can be overcome by Metrics; the use of clear goals and objectives. Wrath is far less of a problem in the presence of Planning. Greed lessens when there is objective Budgeting.

Strategic Sins are those that can be defeated with more long range initiatives. Envy falters in the face of Knowledge about your industry and your markets. Pride dies a natural death when you engage in Exit Planning.

The Seven Deadly Sins of Entrepreneurs is a fun way to look at much of what we do in our business. I’ve presented it a number of times as a workshop for local and national business groups, and the idea is catchy enough to have landed me an Easter Sunday television interview a few years ago.

You may not be inclined to New Year’s resolutions (I’m not, myself) but most of us start a fresh calendar with some level of intent to “do better.” We’ll spend the remainder of January examining the indicators of these sins in your business, and what you can do about them.

If you know a business owner who might benefit from correcting one or more of the Seven Deadly Entrepreneurial Sins, please forward this column so he or she can subscribe. Thanks!

 

Is Your Business in the “Neutral Zone?”

by

As Baby Boomers business owners approach retirement (the youngest of them turned 50 this year) they face a unique challenge. The market for small businesses is increasingly a buyer’s smorgasbord A shrinking middle-aged population, corporate competition for talent and less interest in the long hours associated with many traditional small businesses combine to make selling many Boomer enterprises a more difficult proposition.

The best-of-class companies on both the smaller and larger end of the spectrum will still stand out as appealing propositions to buyers. On the main street side (companies selling for less than $3 million or so) there are still plenty of aspiring entrepreneurs who seek a lucrative opportunity.

The mid-market (companies with over $1 million of pre-tax income) has more money chasing fewer target prospects. Current estimates calculate over $1.6 trillion (about the GDP of Japan) allocated by Private Equity Groups and corporate M&A departments for purchasing those businesses.

stuck in betweenWhat about the companies in the middle? As in the Star Trek “Neutral Zone,” the place where neither the Federation nor the Romulans travel, these businesses have a special challenge when their owners seek to transition, and especially when they want to exit with the value of what they’ve built.

A generic history of these Neutral Zone companies applies to thousands of them. A Boomer entrepreneur bootstrapped a business thirty years ago. Badly undercapitalized, he or she struggled for years to make a decent living. As time passed, a four decade long expanding economy, driven by the influx of workers and consumers from the same generation, helped to grow the business until it provided a comfortable living.

Now in their 50s or 60s, those owners have achieved their life goals. Their labors have resulted in an enterprise that employs between 15 and 50 people, and puts between 300,000 and a million dollars to the bottom line above and beyond their own salaries. Compared to 95% of Americans, they are “rich.”

But they are too big to sell easily in the small business (main street) markets, and too small to attract mid-market buyers. They are in the Neutral Zone.

In main street sales (as I’ve explained here before) solid companies sell for an upper limit of around three times the pre-tax profit combined with the owner’s salary and benefits. As that pricing exceeds $3 million, and certainly above $4 million, it becomes difficult to find an individual entrepreneur who can leverage that purchase price.

In the mid-market, where the cost of a transaction limits targets to those with $1 million and more in EBITDA, many Neutral Zone owners would have to grow the business by 30% to 70% just to make the entry level numbers.

A Boomer entrepreneur who is in the “harvesting” phase of business ownership; enjoying the benefits that come from decades of dedication to the business, is often not interested in another big push. It may require more investment, more risk, and probably a lot more effort.

He or she built the company with a belief that it would fund a certain post-business lifestyle upon sale. Now they are finding out that a well run organization with solid and sustained profitability may not be enough.

I typically work with between 15 and 25 of these owners at any given time. For many, the solution can be to “hire a buyer.” Their companies are financially capable of recruiting top management talent. That talent should first be capable of taking the day-to-day management duties from the owner, but in addition, be entrepreneurial enough to eventually assume ownership in turn.

The secret to realizing the full value of a Neutral Zone company may not lie in bringing it up to another level (or, perish the thought, down to a lower level) of prospective buyers. Instead, consider using the organizational strength and profitability you’ve created to engineer an internal sale on your own terms, in your own time, and under your control.

 

Do you enjoy “Awake at 2 o’clock?” Please share it with other business owners.

Owners Live in Two Different Worlds

by

Business owners live in two different worlds. If you are a Baby Boomer, the title of this column might bring memories of any one of the many covers of the song by the same name. (Everyone from Nat King Cole to Roger Williams, and from Jerry Vale to Englebert Humperdinck recorded it.)

My application of it in business refers to the chasm between those owners who plan to sell a business valued at less than $3 million, and those who have companies valued at more than that. In M&A parlance; “main street” and “mid-market” businesses.

business presentationSome background is in order. I spent the week at two conferences. At the Business Enterprise Institute’s Exit Planners’ Conference we talk mostly about the complexities and structures of mid-market transfers. From there, I attended The Alternative Board’s International Conference for advisors who run peer advisory groups and provide coaching, principally for the owners of main street companies.

At the latter, I had the privilege of being on a panel with Bo Burlingham of Inc. Magazine, the author of Small Giants and Finish Big, and John Warrillow, the Founder ofBurlingham Warrilow Dini the Value Builder System and author of  Built to Sell. It would be challenging to find three people in the country who have spent more combined time studying how small businesses sell, and what determines their value to a buyer.

Even with two audiences of savvy professionals who are focused on the flood of business owners transitioning from their businesses, in many sessions the presenters had to explain the difference between the two markets. As an owner, it’s critical that you understand what the market is for your company. Using data from the other side of the fence is only destined to frustrate you.

Mid-Market

These are companies with a value (not revenue!) of greater than $3,000,000. To garner the interests of financial buyers (private equity groups), they have to generate pre-tax earnings of at least a million dollars a year. To attract strategic buyers, they must have some real differentiation in their industry or market. Those who are truly scalable and have already grown to over 100 employees are the hottest commodity; but according to Doug Tatum, the author of No Man’s Land, they presently account for about 30,000 of the 6.5 million private employers (2-500 employees) in the marketplace.

The acquisition outlook for these companies is wonderful. The financial market is blazing hot, with 7,000 private equity players and publicly traded acquirers chasing those 30,000 businesses, or at least any among them who will still take a phone call. Valuations  are growing quickly, with multiples in the upper end of the market up over 20% in the last two years, and well over a trillion dollars of “dry powder” waiting to be spent on buying them.

Main Street

Clearly, the odds are pretty high that you are one of the 6,470,000 owners whose company does not fit the description above. Welcome to Main Street, where differentiation is difficult or impossible to quantify. (Sorry, but in all but the rarest cases,  “service” is not a competitive differentiation.) The business exists primarily for the purpose of providing financial security for the owner and the employees.  Likely acquirers include individuals seeking to purchase an income, small competitors, or if you are close to the million dollar pre-tax mark, perhaps a private equity group looking for a “tuck-in” or “bolt-on” to an existing similar acquisition.

The news for these owners could not be more starkly different than for the chosen few in the mid-market. According to Burlingham, somewhere between 1.3 and 2 million of these businesses will come up for sale in the coming decade. According to both IBBA (the business broker’s association) and the US Chamber of Commerce, only about 20% of them will successfully sell to a third party. With the much lower population of Generation X, who have little in the way of liquid savings and eschew 50 hour work weeks, the pre-tax multiples in Main Street values are contracting, and the shrinkage grows worse the farther down the food chain you are.

The message is clear. As John Warrillow said, if you are anywhere close to the magic numbers that attract mid-market buyers, the most important thing you can do is drive your company over the top. The difference can mean double, or even triple the proceeds you receive. Here’s an exercise. A company making $700,000 a year with a valuation of 3x earnings can sell for $2,100,000. If they grow to $1,100,000 in profits with a value of 5x earnings they’d get $5,500,000 at sale. That’s 57% growth in profits for 161% growth in price.

Any questions?

Even the measurement of earnings between the two types of business is different. We’ll discuss that next week.