Exit Planning Tools for Business Owners

leadership

Internal Leaders Affect the Value of Your Business

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Internal leaders may not be obvious. They may not even have a “leadership” title. Make no mistake, however; internal leaders are critical to value and attractiveness when it comes to selling your business.

In Super Bowl 55 we saw the impact of an internal leader. Tom Brady has the highest winning percentage of any single athlete in major professional sports. The Tampa Bay Buccaneers have (or at least did up until this season,) the worst win/loss record over their entire existence of any major professional sports team. Yet one man changed the culture of the organization almost overnight.

Remember, for all the accolades being heaped on Brady, he is an employee. He doesn’t own the Buccaneer enterprise or negotiates any contracts other than his own. He didn’t choose the team’s logo, uniforms, location, or coaches.

Tom Brady is paid to fill only one of 53 player positions in the organization. There are also 31 coaches on the team, whose jobs are to teach and give direction to those 53 players. Although every player will acknowledge that winning is a team effort, none will argue the impact of one strong internal leader on his 83 coworkers.

Internal leaders can be good or bad

When I was a very young business owner, I hired an experienced salesman. He was an alcoholic and began inviting other employees to his house for a cocktail after work. It took me some time (too long) to realize that he was plying his coworkers with free booze while he ranted daily about how poorly the company was being run.

I couldn’t understand why there was so much resentment among my team. They seemed to resist any direction I gave them. Finally, one person was kind enough to explain to me what was happening. Because this salesman was my top producer, I was afraid of the impact on revenues if I fired him.

He didn’t want my job. In fact, he didn’t want any of the responsibility that should go with leading. He had merely discovered one of the biggest truths about leadership. It’s easier to tear something down than build it up. People love to hear that things could be better. It’s making them better that is the tough part.

Tom Brady made the Tampa Bay Buccaneers better. Like any good internal leader, he didn’t limit his contribution to his job description as Quarterback. He helped recruit and train the people around him to build a better team.

Identify your internal leaders

An army dispatches its troops under the leadership of its lieutenants, but it succeeds on the ability of its sergeants. As a business owner, you can inspire with core values and set great goals. Whether you reach them, however, will be determined by your internal leaders.

When it comes time for your transition, they are more important than ever. If you are selling to family or employees, they may not expect to be included in equity, but they will determine the acceptance of those who are.

If you are selling to a third party, his or her achievements following the sale are conditional on the support of your internal leaders. They can prop up an inexperienced owner, or sink him without a trace.

If any part of your proceeds from exiting depend on the continued success of the business, you would be wise to identify your internal leaders and make some provision for their continued loyalty after you are gone. If they don’t buy-in, you could see the value of your enterprise (and your payout) decline substantially.

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.

Exit Planning and Marathon Runners

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“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor. We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything. We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

What has this got to do with Exit planning?

Business owners know they should be taking steps to plan for the future, but all too often they don’t seem to get around to it. With each passing year comes the thought, “I’ll get to that.” But, like the good intentions for diet and exercise, the longer one waits, the harder it gets.

Exit Planners Help Businesses Get In Shape

Exit planners are a bit like personal trainers. What personal trainers do for fitness, exit planners do for businesses. They take a look at the shape a business is currently in, and develop plans to improve that business until it is in optimal condition, usually so that the business can be transferred or sold in such a way that the owner remains in control of the sale. A business in less than optimal condition often means that the owner will lose some of control of the sale to the whims of the buyer.

Dream Big

A middle-aged person who develops a dream to run a marathon soon finds that just reading about marathons is not enough to get in the race. Still, if they never dream the marathon dream the race has no chance of being run at all.

Business owners who intend to sell also should not hesitate to dream big, even if they do not plan to sell for five or ten years. Big dreams mean big accomplishments. Every business owner should dream big about two things:

1. The ultimate objectives (financial, personal, family, and/or philanthropic goals) for leaving the business.

2. The “transferable value,” of that business, which should ensure that the owner does not have to go with the business when it is sold.

Set Small, Achievable Goals

Like someday wanting to run a marathon, dreams are easy to write down, but need diligent daily work to achieve. They will not happen on their own. Whether you a baby boomer nearing retirement, in the middle of your career enjoying the excitement, or just at the very start of a venture, taking these simple steps will prepare you for the future:

1. Get help to develop a “workout plan.” Just as it can be helpful to get a personal trainer involved when you begin to exercise, the same is true for business planning. It’s a complex process that requires specific knowledge in certain areas (legal, financial, estate planning, human resources, etc.) to ensure your business gets in optimum shape.

2. Set simple goals – Simple goals when one begins exercising help to prevent accidental injury, and the same is true for exit planning. Three simple, easily achievable goals are:

     a. Determine how much money you need, or want, for retirement

     b. Decide when you want to leave your business

     c. Identify the person, or persons, to whom you want to transfer the business

3. Start slowly – you can’t rush getting into great physical conditioning, and you can’t rush the business planning process. Set realistic goals and act on them one by one.

4. Stay steady and consistent – sticking with the plan and taking small, consistent steps will pay off. Make time in your busy schedule to do the essential steps.

5. Measure progress – in order to ensure you’re making progress toward your goal you’ve got to measure it. Setting 90-day goals allows manageable progress and the ability to celebrate the small wins.

As you work hard in the business day-to-day, take the necessary time to prepare for tomorrow – starting your exit planning program now will maximize your quality of life in the future.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

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.

The Coaching Skill in Exit Planning

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The single most important talent in your exit planning team is coaching skill. I’ve written often in this space about the need for multiple talents, from taxation to legal, financial planning, and risk management. None, however, is more important than coaching.

Let me put it this way. Your planning team can be led from any position, as long as the person leading has coaching skill. If he or she doesn’t, all the clever tax advice or ironclad documentation in the world won’t lead to your successful transition. But if the person leading the team is an experienced coach, you’ll probably be okay.

What is Coaching Skill?

Let’s make it simple. Coaching is asking questions. An experienced coach will ask the questions that no one else does, preferably in a way that doesn’t offend.

Do you want to save money on taxes? Of course, and that should be apparent to every professional involved. Do you want to maintain control until you are paid what the company is worth? Sure. Do you want to ensure that your family is taken care of? Naturally.

These aren’t the questions that derail a transition plan. Here are a few that, left unasked, will.

Is there something more important to you than the proceeds from selling? Is there a part of your legacy that must be preserved if at all possible? Are there non-financial or non-equity stakeholders whose welfare must figure into the plan? Is your family on board with this?

These are the questions that an advisor who is focused on the technical complexities of exiting will often omit.

The Most Important Question

What will you do when you no longer own this business?

For many entrepreneurs, that’s the stumper. Unless you can answer it comfortably, your plan is very likely to fail. Most advisors will ask it in a casual way. “So what will you do next?” They may react little or not at all if your response is “I don’t know.”

When I was active as a business broker, I would decline a listing if an owner couldn’t enunciate a plan for life after the business. In my first book, 11 Things You Absolutely Need to Know about Selling Your Business, I describe a case where an owner declined two offers, each for twice his company’s estimated value. He simply didn’t know what he would do next.

“I don’t know” is a signal that the owner can’t envision life without the activity of the business.

Sometimes the answer is too facile. “I’ll play a lot more golf!” Nice try, but I’ve heard many a retiring owner tell me “I never thought I could play too much golf.” Here is an exercise I use with clients to help them visualize the next phase of their lives.

Filling in the Week

Start with the time you currently spend at the business. Include that “quiet time” at the beginning or end of the day when you like to think. Add in answering emails and texts at home or reading reports and articles on the weekend. Let’s say, conservatively, that you are engaged with your business for 50 hours a week.

Now, let’s start retirement with golf every Monday, Wednesday, and Friday. That’s a lot of golf, but we have only consumed about 15 hours of your workweek. What else?

Many folks will say they want to do more community service. Unless you plan to take on the full-time responsibility of running a charitable organization, let’s try simple volunteering to start. Two half-days a week? That’s another ten hours. We are up to twenty-five.

Travel is a big goal. How do four, two-week trips a year sound? That’s an average of another 8 hours a week.

Now you have two months of traveling, 150 golf outings, and 100 days a year working for charity. That only leaves you with about 17 hours a week to fill. Sleep in, exercise more, catch up on your reading?

There are lots of ways to fill the remaining time, but remember we are starting with someone who has a lot of plans. Many business owners have none.

Unhappy Exits

According to a survey by the Exit Planning Institute, up to 75% of former business owners are unhappy with their exits one year after selling.

I don’t know of any of my clients who are unhappy with the results. Perhaps that’s just luck, but I like to think it’s at least partially due to my coaching skill. The technical and financial complexities of a successful transition are nothing to sneeze at, but helping an owner be prepared is so much more than that.
Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

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.

Your Exit Plan: The 3 Inarguable Reasons to Start NOW

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What is Your Exit Plan?

If you’ve ever done a business plan for the purpose of raising capital, one of the key questions is “What is your exit plan?” Many business owners think that question is self-serving, intended merely to let the venture capitalists figure when and how they will get their return on investment. In truth, however, that question is far more important.

An exit plan is a strategic plan with an end date. Putting a time frame on your plan, and defining the goals to be achieved by that date, creates a future-focused mindset for the owner. It controls and reduces your tendency to prioritize daily firefighting over long term thinking. It provides you with a yardstick to measure progress. Most importantly, it affects your thinking about almost everything in your business.

Here are the 3 inarguable reasons why you should start your exit plan now.

Reason #1: It’s Never Too Soon

your exit planIn my years of working with business owners, I’ve helped many transfer their businesses to family and employees. I’ve worked with others who sold their companies to a third party for tens of millions of dollars.

Surveys show that many owners have regrets afterward. Others happily move into the next phase of their lives or careers. A few have seller’s remorse. On the other end of the spectrum, some come to the realization that they hated their business owner lives for years. The majority feel that they received a reasonable reward for monetizing their work of decades.

None of them. NOT ONE of them, has ever said “I spent too much time planning.”

It’s likely that the sale of your business will be the most important financial event of your life. There are a few lucky owners who have wealth outside or beyond the value of their businesses, but for most of us monetizing those decades of effort is the culmination of our working careers.

If your exit plan is to transfer to family, you can choose vehicles like Grantor Retained Annuity Trusts (GRAT) or Self Cancelling Installment Notes (SCIN).  These may have to be in place for years to substantially reduce or eliminate taxable proceeds for you and/or your heirs.

In a sale to employees, developing the documentation that shows their assumption of managerial responsibilities over time is a basic qualification for SBA loan approval. That, plus developing their “down payment” equity, punches the ticket for you to walk away with your proceeds in pocket on the same day that you cede control of the company.

In a sale to third parties, the condition of the financial markets at your time of exit will decide the size of your multiple.  Preparing your business with due diligence in mind, and understanding the different classes of buyers, (see my post on identifying a buyer) allows you to better choose the time, method and proceeds of your transition.

Although it is difficult to time the stock market, shifts in acquisition multiples take much longer to develop.  Being prepared allows you to enter the market while prices are at a peak.

Five years is a reasonable planning time. Ten years is better. There is no time frame that’s “too far out” to be thinking about your exit.

Reason # 2: It Changes Your Thinking

It’s difficult to run a business without being reactive. Employee issues, customer problems, and vendor policies can shift your priorities on a daily basis.

When your exit plan is in place, you have a broader perspective. Every decision you make is now in the context of “Does this support my bigger picture?” There are numerous examples.

Hiring: If your exit plan is to pass the business on to your children, then hiring becomes a support function. You look for employees who can fill in areas where your offspring lack the necessary skills, or don’t have an interest.

If you plan to sell to employees, then you are looking for a Successor in Training (SIT). That is someone who shares many characteristics with you. If you are selling to a third party, you want a Second in Command (SIC). That is someone who compliments your strengths, and who can be contractually incented to stay on the job with a new owner. (See my piece on SIT vs. SIC here.) Securing a management team adds considerable value to any company.

Lease vs. Buy: If your plan calls for selling to someone who is likely to relocate the company, or who already has your production capabilities, you may want capital equipment to be easily disposable. A competitor or much larger acquirer may want to leave the equipment out of the transaction. In a Main Street business, you may choose to have a strong tangible asset base for an entrepreneurial owner to use when obtaining acquisition financing.

Real Estate: Should you own your building? Some buyers (say a publicly-traded acquirer) prefer to lease space. In that case, owning your building could provide a post-transition income stream in your retirement.

On the other hand, a relocated company could stick the owner/landlord with a special purpose building that requires significant remodeling to be rentable.

These are just a few of the decisions that are better made in the context of your long term plan. The decisions you are making in your business today all have lasting implications.

Reason #3: A Plan is not an Action

youe exit planIf you are taking a long trip, you likely determine the route before you start out. If it is complex, you may print out the directions. Nonetheless, you are still likely to use a wayfinding app to alert you to problems along the way, like traffic jams or construction.

But everyone understands that printing out the directions isn’t the same as beginning the journey. You might take that step days or even weeks before actually getting into your car.

It’s the same with your exit plan. Choosing your time frame and preferred method of transition isn’t the same as making it happen. Writing it down is a key component of preparation, but it shouldn’t be confused with implementation.

Starting Your Exit Plan

Venture capitalists ask an entrepreneur  “What is your exit plan?” because the answer shows that he or she has thought through the implications of their decisions. They have built the business with a purpose beyond merely growing or getting through the next cycle. It shows that the allocation of resources, the selection of personnel, and choices in product and service offerings are coordinated.

There will be obstacles along the way. Your strategy may shift to compensate for new technology or changing market tastes. As the company grows in your chosen direction, you could just be having too much fun to leave on your originally planned date.

But those changes will be conscious. You will see how new factors fit with your plan, and when they don’t. Course adjustments keep the goal in mind. Alternatively, you understand when the goals themselves have to change.

For years, clients have asked me “What should I do to increase the value of my business?” My answer is always the same. “Exactly the same things that you should be doing to improve your business every day.”

Stephen Covey coined the axiom “Begin with the end in mind.” Yogi Berra said “If you don’t know where you are going, you may wind up somewhere else.”

Your exit plan is the road map to your eventual financial security. It doesn’t have to be a huge undertaking. All plans begin with where you are now. You already have the company, the management team, the customers, and the products or services. You’ve likely thought about how you would like to finish. What’s left is just putting the two together.

The sooner you go through the exercise, the sooner your company will be a component of your exit plan, rather than a distraction from it.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at www.YourExitMap.com 

 

 

 

 

EBITDAC : What is Your Business Worth Now?

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Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.