Exit Planning Tools for Business Owners

exit strategy

The Transfer Options Many Owners Don’t Consider

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Transfer OptionsIf you ask most business owners what their exit strategy is, they will tell you they intend to sell the business to a third party. It is the most straightforward-sounding option. Find a buyer, negotiate a price, sign some documents, and walk away with a check. The problem is that it may be the hardest option to execute successfully.

According to data from business broker associations, intermediaries fail to sell approximately eighty percent of the businesses they list. When you run the arithmetic on how many businesses are available for sale versus how many buyers exist in any given market, the odds for a typical owner are not encouraging. Yet most owners approach this as their principle plan, not just as a fallback.

Your job as an advisor is to help them understand the broader range of options before they commit to a strategy that may not work. It’s important to start that conversation early enough that the alternative options are still available.

Why the Default Option Is the Hardest One

A third-party sale requires a buyer who is willing to pay a price the owner finds acceptable, has the financial resources to complete the transaction, and is prepared to take on the responsibility of running the business without the current owner. That is a combination that doesn’t always present itself on demand.

It also exposes the owner to a process that most are not prepared for. First is the confidential marketing, then buyer qualification, then due diligence. If you get that far there’s a negotiation of terms, determining representations and warranties, and a transition period that may require the seller to remain involved for a year or more after the sale. It’s not unusual to have an earn-out that depends on performance during that time, or perhaps even afterwards.

The process is time-consuming, often emotionally difficult, and frequently results in a price below what the owner expected.

None of that means a third-party sale is the wrong option. It means it needs to be approached with realistic expectations and thorough preparation. Our job is to help the owner needs to the alternatives.

Option Two: The Internal Sale

Selling to employees or a management team is, in many cases, the most controllable exit option available to a business owner. It is consistently underutilized because it is consistently misunderstood.

The most common objection I hear is “My employees don’t have the money.” That is often not the obstacle it appears to be. A well-structured internal sale doesn’t require employees to show up with a check on closing day. It uses the cash flow of the business itself as the source of acquisition financing and may include equity compensation programs to allow qualified buyers to accumulate ownership over time.

The owner can often maintain control until they are paid. The buyer is someone who knows the business and has been trained to run it. The transition is gradual, planned, and far less disruptive to customers, employees, and operations than a third-party sale.

It typically takes five to seven years to structure and execute a leverage buy-out properly, which is why the conversation needs to start early.

Option Three: Family Succession

When a family member is being positioned to take over, the planning challenges are different but no less significant. Family succession is not merely a matter of adding the next generation’s name to the ownership documents.

The incoming generation needs to earn credibility with employees, suppliers, and customers. That requires time and working in the business in a way that builds genuine capability. The financial structure of the transfer needs to be clear, so the outgoing generation is reasonably compensated and the incoming generation isn’t saddled with debt that undermines their ability to invest in the business.

And the family dynamics relationships, expectations, and the old grievances that never quite got resolved, are present in every conversation. They don’t disappear because the topic is business. If anything, the stakes make them more vivid.

Advisors who can help a family navigate those dynamics are providing a genuinely valuable service.

Option Four: Planned Liquidation

This option is less exciting to talk about, but it is the right answer for more owners than anyone (especially those owners) wants to admit. If the business cannot realistically be sold for a meaningful multiple, or if the owner is the business in ways that can’t be separated, then the owner should run the business profitably for as long as they choose, pay themselves well, invest those proceeds appropriately, and wind down the company when they are ready.

That is not failure. That is a rational financial decision. A business that generates good income for its owner for twenty or thirty years likely has fulfilled its purpose, whether or not it sold at the end.

Helping an owner see that option clearly is serving them better than pursuing a third-party sale that the market won’t support.

Option Five: Watch and Wait

Some owners have built businesses with characteristics that make them attractive to specific buyers in specific market conditions. There may be an opportunity for a strategic acquisition by a competitor, a private equity roll-up of their industry, or a specific buyer who appears at the right moment.

An owner who has kept the business performing well, maintains clean financials, and has structured the company to be transferable is positioned to take advantage of those opportunities when they arise. Waiting for the right buyer is not the same as having no plan.

Your Role in Expanding the Conversation

Most owners default to the third-party sale because it’s the one they’ve heard of. They’ve never had an advisor sit down with them and lay out the full menu of options, and their potential given the circumstances of the owner and the business.

That conversation, done well, is one of the most valuable things you can offer. It positions you as the advisor who is thinking about their whole future, not just the transaction. And it gives you something to plan together, which is where the most valuable advisory relationships are built.

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 Role of Business Valuation In Your Exit Strategy

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Accurate business valuation is a cornerstone of a successful exit strategy, as it provides the foundation for setting expectations and achieving a fair sale price. Determining the true worth of your business requires a comprehensive assessment that goes beyond financial analysis to include market conditions and intangible assets. This thorough evaluation helps in setting a realistic asking price and attracting serious buyers.

Understanding the factors that influence business value, such as financial performance, industry trends, and competitive positioning, is crucial. This knowledge enables you to make informed decisions and enhance your business’s value before the sale.

Engaging valuation experts can provide an objective and accurate assessment of your business. Their expertise ensures that the valuation reflects the true worth of your business and assists in addressing complex valuation issues, providing a solid foundation for negotiations.

Utilising the results of this valuation is essential in guiding your exit strategy. It helps in setting goals, identifying potential buyers, and structuring the sale. A well-informed exit plan, based on accurate valuation, contributes to achieving a successful sale and maximising business value.

Finally, it’s important to regularly revisit your business valuation to account for changes in market conditions and business performance. Keeping the valuation up-to-date ensures that your exit strategy remains aligned with current value and market trends, helping you stay on track for a successful sale.

Kerry Boulton, CEPA is Australia’s most respected exit strategy advisor. With over 20 years in business as an entrepreneur, transformative coach, consultant, sought after speaker and talented facilitator, Kerry has been helping business owners like you to overcome challenges while providing the steps needed to ensure that you find the financial freedom you deserve.

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.