Exit Planning Tools for Business Owners

exit strategy

How to Add Millions to The Value of Your Business – Using EBITDA Adjustments

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As a 5-time entrepreneur who has helped several businesses increase their value, I know what it takes to run a successful business. If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

According to Oberlo, the number of small businesses increased from 32.5 million in 2021 to 33.2 million in 2022. This trend shows no signs of slowing down as more and more people are taking their first steps into becoming an entrepreneur.

In addition to new businesses, many boomer business owners will be heading into retirement within the next decade, adding even more competition for the attention of buyers.

With both of these factors in mind, it is normal for more established organizations to wonder if the increase in new competition will have an impact on the value of their business when it comes time to sell.

While this can be intimidating, there is a process a business owner that is looking to retire can take to ensure a profitable exit.

Obsessing Over Your Multiple

If my 25 plus years of experience has taught me anything, it’s that a business trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can increase its value.

After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on how much you will realize on the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open to Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

How to Increase Your Companies Value in Time for Retirement with EBITDA Adjustments.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year.

You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business.

This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.

Some of the most common EBITDA adjustments relate to:

Rent (common if you own the building your company operates from and your company is paying higher-than-market rent).
Repairs and maintenance.
Start–up costs.
One-off lawsuits.
Insurance claims.
One-time professional services fees.
Lifestyle expenses.
Owner salaries and bonuses.
Family members wages and benefits.
Non-arms length revenue or expenses.
Revenue or expenses created by redundant assets.
Inventories

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.

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.

Exit Strategies – The Road Less Traveled

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The road less traveled is often a misimpression when considering a transition from business ownership. Surveys show that roughly 85% of owners expect their exit to happen via a sale of the business to a third party.

A third-party sale is certainly attractive. The idea of monetizing decades of work in one lump-sum payoff seems equitable. Years of sacrificing to “invest in the business” is supposed to generate a return. “He (or she) sold the company” when applied to someone who is clearly enjoying a comfortable lifestyle in retirement acts as an advertisement for the benefits of cashing out.

Unfortunately, that isn’t only less frequent than assumed, but it’s so infrequent as to be close to a rarity.

The Numbers Don’t Lie

Baby Boomers owned businesses at about twice the rate of previous or succeeding generations. Franchising and an overcrowded job market for corporate careers drove about 6% of Boomers into entrepreneurship, where the traditional average for business ownership is closer to 3% of the population.

A decade ago, according to the SBA, about two-thirds of all businesses between 5 and 500 employees were owned by persons 48 years old or older. Today, just over half are owned by folks over the age of 58. That makes it pretty safe to extrapolate that around 4% of that age group still own businesses.

Census data puts the number of persons turning 65 years old at 10,000 a day, so it’s a decent guess to say that 400 of those, on average, probably own a business. That’s 2,800 a week, or about 140,000 a year. Not everyone exits when they hit 65, and almost 90% of those businesses employ fewer than 20 people.

For exit planning discussions, let’s divide the under and over-20 employee companies into two groups, which we will call “Main Street” and “Mid-market.” (Note- this is not a valid market definition of those two terms. For further explanation see the Afterword in my most recent work The Exit Planning Coach Handbook.”)

Main Street companies would then be 90% of our 140,000 owner population. That’s 126,000 businesses. According to the IBBA, Business Brokers sell about 8,000 Main Street companies annually, or about 20% of those they list. That leaves 92% of Main Street owners to find another way.

Of the 14,000 or so that we are classifying as Mid-Market, Private Equity activity accounts for about 6,000 transactions annually, many of which are handled by brokers. (So there is an unknown amount of double counting here.) The last two years saw a spike of about 50% in acquisitions due to low interest rates, but it is safe to say that at least a third of these presumably very desirable middle-market businesses have to find an alternative exit plan.

Advisors Ignore the Numbers

With these statistics, why do owners and their advisors continue to focus on exit strategies that only work for a small minority? The higher visibility of transactions is part of the bias, as are the higher professional fees that they generate, but the biggest issue is a lack of advisor education.

Advisors who work with owners approaching a transaction have an obligation to inform them of their options. Unfortunately, this is not always the case. We survey the exit planning industry annually. Only between 5,000 and 6,000 advisors claim exit planning as an offered service. That’s an advisor-to-owner ratio of 23:1 each year. If we consider the entire remaining population of Boomer-owned employers, that ratio is five hundred to one.

Most owners have 50% of more of their personal net worth in the business. Yet we continue to see financial planners who base their clients’ retirement calculations on an unconfirmed estimate of what the company will contribute via a third-party sale, when such a sale may be the least likely outcome. A financial plan for a business owner cannot be holistic if it doesn’t consider 50% of his assets.

Attorneys and accountants frequently report that the first time they interact with a client about exiting is when a purchase offer is already on the table. Proactive discussions about eventual transfer or succession are usually brief, and cease when the client says “I’m not ready yet.” They let their clients postpone the discussion until circumstance or happenstance intervenes.

Business Brokers, of course, only talk to clients who have already decided on their preferred course of action. As a former Certified Business Intermediary, I can say from experience that unfortunately, most have no alternative for the 80% of listings they can’t sell.

The Road Less Traveled

The truth is, despite popular conceptions to the contrary, sales to third parties are the road less traveled. Certainly, many lifestyle businesses are really jobs and have to close when the founder/owner/CEO retires. Many others, however, could recoup the owner’s investment with a structured transfer to employees.

road less traveledGiven a few years, most owners could hire and train a suitable buyer. That usually requires support, since few have experience in recruiting and teaching someone to do what they do. There is also some education involved to help the owner understand how investing in a top-flight employee today can pay huge dividends in the future.

Additionally, there is the issue of owners who believe that they have to keep any rumor of their impending retirement from others in their industry. Customers, vendors and competitors are a fertile market for acquirers. A good advisor can act to maintain confidentiality when putting out feelers.

Advisors need to be more proactive in approaching clients about their objectives and their options. Initiating a structured conversation around both is in the best interest of the client and the advisor. They may choose to avoid the road less traveled.

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.

Owner Obstacles to an Exit Plan

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Owner obstacles to the implementation of an exit plan are often unconscious, but they can be dramatic.  Their attachment to the business can be difficult to break. An advisor spends a lot of time and energy developing the vision for life after ownership in the hopes that it is far more attractive to them than their current role in the business.

Yet no matter how well developed that vision is, or how well defined the action steps are, it isn’t unusual to find owners who behave in a way that ultimately sabotages the plan. Sometimes their actions are even intentional, but more often they aren’t. The problems arise in two ways.

 

“Death from Inattention”

We always ask exit planning clients for two target dates. The first is when they want to be relieved of day-to-day operational responsibilities. The second is when they want to be completely free of any connection to the company.

We tell a client that once we have achieved the first objective, the second may become more flexible. Freed on the task-based duties of running the business, an owner often becomes more strategic. He may start planning for new growth and value creation. She might go back to her role when the business first started when she was the best salesperson or the designer of novel product offerings.

Owners returning to their core skill set are usually a benefit to the business. The problem arises when they enjoy the lack of responsibility so much that they just become owners in absentia.

There is no strategy. The company drifts along on the backs of the operations managers, but doesn’t have a direction beyond “more of what we did yesterday.” There are no new initiatives.

Companies are organic. They are either growing or shrinking. The lack of direction may take a while to have an impact, but eventually, performance will suffer. Getting owners to re-engage after time away can be exceedingly difficult, but if they don’t, the transition is unlikely to accomplish their objectives.

“Death from Over-Attention”

The second obstacle to successfully implementing a transition occurs when owners have surrendered their task-based duties. In this case, they are unable to define their contribution in the absence of being “busy.” They begin looking for ways to contribute, often where their contribution isn’t needed.

It’s not uncommon to begin demanding more accountability and greater detail than is necessary. He or she pours over reports looking for errors, anomalies, or declining results to prove added value.

Another technique used to prove contribution is “seagull management”. An owner may look for opportunities to make decisions but does it without consulting the managers who are in charge of the function. Because they have always known best, they still know best. What isn’t as obvious is that they are now working in a vacuum, with little knowledge of what went before. The results are usually not ideal.

A third way owners might evidence over attention is with a “break the rules” mentality. They offer exemptions from policy or circumnavigate systems because they can. Exercising authority shows who is in charge, even if there is little apparent responsibility.

Preventing the Owner Obstacles

We call these “good” obstacles because they typically occur only after some level of initial success in the exit planning process. They are a direct result of relieving owners of the more mundane duties of management, and freeing them up for more effective leadership. Each is preventable with some preparation.

Either issue can be forestalled by including the owner’s next level of responsibility in the planning process. If the owner resists retained responsibilities, then the future becomes plain. Plans can then include the transfer of higher functions to the management team. If the owner insists on maintaining a level of day-to-day control, the coaching process should include defined parameters about what reporting is essential, and how often it will be presented.

owner obstaclesIn either case, owner obstacles occur when the owner is crossing the no man’s land between total focus on the business and the time when it isn’t a recipient of their attention at all. Like any no man’s land, it is unfamiliar territory, and some pathfinding is necessary. That is the exit planning coach’s job.

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.

Main Street Business: The Importance of a Written Exit Plan

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When planning for a vacation, do you typically jump in the car and just start driving without first determining where you are going?

No, of course not. You plan out where you want to go, when you want to leave, what activities you want to do on the trip, and so forth. You create a plan to make sure that you know where you are going and what you are going to be doing.

The same principle applies to business owners when transitioning from their Main Street and Mid-Market businesses. Without an exit plan in place, the odds of reaching your end goal are extremely low. Only by implementing a comprehensive plan with actionable steps do you stand a chance of making a successful exit from your business.

To quote baseball great, Yogi Berra, “If you don’t know where you are going, you’ll end up someplace else.” Without a detailed exit plan in place, you may find that your destination may not be where you want it to be.

While you may think you’re headed toward retirement and many years of well-earned relaxation, without a plan in place you could find that retirement is just out of reach or that you’ll have to work well past the age in which you thought you would. Many small business owners spend their entire lives working on their business, adding value to the bottom line, and developing strategies to build their customer base, only to find that it’s nearly impossible to sell the business when it comes time to retire.

If you don’t have a plan in place this can come as a real shock. What do you do then? You may get lucky and come across an “angel investor” who will buy you out at the right price, but the odds of that happening are slim to none. It’s more likely that you’ll end up caught between a bad option and an even worse choice.

Unfortunately, as many business owners near retirement, they find themselves in this precarious position because they never developed a real exit plan on how they will ultimately leave their business. This isn’t to say that business owners aren’t good planners. Most owners wouldn’t have a successful business if they hadn’t developed an in-depth plan long ago on how best to operate their company, so it’s profitable and set up for long-term growth.

The problem is that a business plan is not the same as an exit plan. While a business plan helps keep the company on track, it isn’t enough on its own because it only addresses the needs of the business, not the individual goals of Main Street Business owner.

A true exit plan involves the creation of foundational objectives and the execution of a strategy to implement those goals that are actionable and leads to the owner leaving on their terms. It typically involves support from a wide range of experts, such as an exit planning adviser, attorney, financial adviser, and certified valuation analyst, among others, so that all areas of the exit are considered.

This plan is an established process that lends itself to success. While no plan is foolproof, a plan that’s never implemented has no chance of success, which is why it’s so imperative to develop a thorough and actionable exit plan now and not wait until it’s too late.

Steven Douglas is a leader of Porte Brown’s Exit Planning practice group. Porte Brown offers one of the few exit planning programs specifically designed for small businesses, Exit RoadMAP Express, and hosts a free monthly webinar series that outlines various options specifically focused on the needs of main street business owners.

Are Remote Employees Value Killers?

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Remote workers, computers, businessesRemote employees can have a dramatic impact on the value of your business. If your exit strategy is to sell to a third party, take some time to think about the areas where offsite workers could have an impact.

Curb Appeal

One of the first things any good business broker will look at is your curb appeal. Your business needs to look good, just like a house that’s for sale. (OK, maybe right now a house doesn’t even need to look good, but you know what I mean.)

When I brokered Main Street businesses, I was always surprised at how much we had to tell owners. Clean up the piles of files in the office. Clean and sweep the parking area. Remove the pile of broken pallets next to the dumpster.

What message does your office space send?  Is it better to downsize, and just describe the employees who are no longer on the premises? Or would a buyer prefer to see a room full of empty desks, so that he knows he could bring them back if he so desired? (But he would also be calculating the wasted rent in his mental cash flow.)

Equating Dollar Value

What are your productivity measurements or KPIs for remote workers? Can you prove that they are worth what you are paying them? How? What level of confidence can a new owner have that he is acquiring a productive team? A recent survey in the U.K showed that almost 30% of remote employees were working a side gig on company time.

How is their remote presentation? Unless they are in a job that is strictly production-based, most will interact with customers, vendors or other employees. Do you have standards for their workspace and their appearance on video?

Can you give a buyer confidence in their compensation structure? New ownership can be a great time to ask for a raise. What assurances are there that it won’t happen? As I wrote a few weeks ago, how do you integrate them into your culture?

Confidentiality and Human Resources

Confidentiality about the transaction is more difficult. Does the buyer interview remote employees one by one? You can be sure they are talking to each other, whether on Teams or Slack or just texting each others’ cell phones.

On the other hand, a group video call raises new issues. A buyer could come out of it with a poor impression because one individual is obnoxious or inattentive. Someone might press for inappropriate information. (“Will all of us keep our jobs?”)

Remote Employees Increase  Risk

I am not campaigning against remote employees. They are a fact of life, now and likely for the foreseeable future. I’m just pointing out that handling their management, controlling the information flow to them, and anticipating their potential impact have all become part of exit planning.

The best surprise is no surprise. Part of your planning process when listing your company for sale should be how you will handle these questions.

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.