Exit Planning Tools for Business Owners

leadership

Four Basics of Exit Planning 4: Professional Team

by

Your professional team is the fourth component of exit planning preparation. We’ve already discussed valuation, distance to goal and classes of buyers. Taken together, these basics aren’t enough by themselves to execute an exit plan, but understanding the first three and assembling the fourth will go a long way to ensuring that any plan you develop is practical and achievable.

Many clients say “No problem. I already have a lawyer and an accountant.” But your professional team should be able to offer more than just technical advice.

Any competent CPA can tell you what the difference is between ordinary income tax and capital gains. Far fewer can suggest ways to structure transactions to move income from one tax category to another.

Similarly, most business attorneys can write (or download!) a purchase agreement. Picking a reasonable path through another attorney’s demands for every representation, warranty and indemnification imaginable is another matter.

Your First String Professional Team

There are two tiers of necessity when it comes to team members. On the first tier are those without whom you cannot do a transaction.

  • Transaction attorney: One who knows the ins and outs of transferring a business. This might include converting customer and vendor contracts, required notifications of regulatory authorities, state law regarding notices to employees, as well as the aforementioned contract experience.

exit planning(Suffice to say that your real estate attorney/escrow agent, estate planning attorney or slip-and-fall litigation defender is probably not the guy.)

  • A forward looking accountant. Some business people would say that is an oxymoron. Most accountants, after all, make a living by telling clients what has already happened. Unfortunately, once a transaction is completed it is usually too late to do much tax planning. Look for someone who can make suggestions, and does so in the very first conversation. If he or she says that they will have to analyze the deal (for a fee) before they can share any ideas; move on.
  • A process manager. Whether you are transferring to family, employees, or a third party buyer, your most important job is to keep running a healthy business. The process manager keeps things on track. He or she calls the other professionals to enforce deadlines. Ideally, the process manager knows enough about the technical components of transfer to lend experience and ideas.

The process manager might be an exit planner, a business coach, a consultant, the attorney, the accountant, or anyone else you trust. He or she must acknowledge the responsibility for coordinating the deal and driving it forward. That includes holding you accountable when necessary!

The Rest of the Team

The balance of the team may include some or all of those listed here.

  • Valuation specialist: In a third party sale, it is good to have an objective view of your enterprise value. In a sale to employees, it helps settle concerns about self-dealing. (If you are choosing an ESOP, you may not want to bother. The trustee will have to get an appraisal anyway.)
  • Insurance broker: If you are anticipating some seller financing in a transaction, you may want to insure the lives of the buyers. If it is a staged sale, they might want insurance on you.
  • Financial planner: Someone who can tell you whether your planned proceeds will be sufficient in retirement.
  • Wealth manager: Those proceeds will hopefully be enough to warrant professional investing expertise.
  • Exit planner: Usually, but not always, the exit planner fills the role of the process manager. In some cases, the exit planner is only charged with designing the overall exit strategy.
  • Value enhancement specialist: If your company needs to grow substantially in order to reach your goals, doing what you’ve always done isn’t likely to get you there.

This list probably has you visualizing dollar signs with wings, but I’ve worked on multiple cases in the last few months where a good advisor saved an owner hundreds of thousands of dollars.

  • You wouldn’t choose your high school football team to play Alabama for the NCAA national championship. Nor would you expect ‘Bama to beat the Patriots in the Super Bowl. Selling your business is the championship game of your business career. Why wouldn’t you want the best professional team available?

Four Basics of Exit Planning 2: Distance to Goal

by

Once you understand your company’s value, the next step in planning is to calculate your Distance to Goal. As the Cheshire Cat said, “If you don’t know where you are going, any road will get you there.”

“Any road” is not the way you want to approach the biggest financial event of a career. Distance to Goal calculations require an understanding of where you are now, where you want to wind up, and how long you need to get there. In both industry surveys and my own experience, the majority of business owners have (at best,) only a rough idea of the road they will take.

Calculating Distance to Goal

Where you are now is a calculation of your current liquid net worth. “Liquid” implies assets, such as stocks and bonds, that you can use for living expenses. Your home isn’t liquid. Income property isn’t liquid, but you can apply the rents to your retirement needs. Don’t include the value of your company at this stage. We’ll get to that in a moment.

Next, you need to calculate how much you’ll need for the next phase of your life. That may be  called retirement, but it also might be charitable or community work, satisfying a long-desired wanderlust, or even starting another business. A good financial planner can help you with the assumptions for inflation, longevity and future medical costs.

From a starting point (current liquid net worth,) and a target destination (financial needs at retirement) you can calculate a financial Distance to Goal. Now it is time to choose a time frame.

Add the amount you expect to save each year that you continue working to your liquid assets plus the post-tax proceeds of transferring your company at its current value. Do you reach your goal?

Navigating the Path

With this exercise, some owners are surprised to learn that they are on track, and only need to maintain their current path to realize their objectives. Unfortunately, more find that they can’t reach their destination in the desired time frame without some changes.

This simple triangulation, with a solid starting point, concrete destination and a time frame gives you a clear look at the options available to you. They might include:

  • Increase liquid assets: Do you have underutilized real estate? Will you downsize your living quarters once retired?
  • Increase savings: Can you make adjustments in your business or your lifestyle to augment what you are currently saving?
  • Increase value: Would changes in your business make it more attractive to certain buyers? (That will be post #3 in this series.)
  • Increase time frames: Could working a couple of years longer close the gap in your planning?

You can experiment by modeling different scenarios using the free Triangulation Tool at www.YourExitMap.com.

Stephen Covey made famous the phrase “Begin with the end in mind.” If you understand your Distance to Goal, you are better able to choose a road that gets you there.

 

Exit Planning: Ripples and Ripples.

by

Every stone thrown into a pond creates ripples. Every advance in technology does the same.

The late Stephen Hawking said that we were progressing too quickly. Along with other technology and science notables, he argued for a slowing down of development in Artificial Intelligence (AI).

Most current “AI” is actually machine learning. As computing speed increases exponentially, the ability of a computer to calculate, test hypotheses and weigh varying outcomes increases as well. Computers can now beat the best humans at every game ever invented. From Chess to Go, and from Texas Hold ‘Em to Ms. Pac Man, binary geniuses are sorting through billions of possibilities, and even being credited with rudimentary “intuition.”

But Machine Learning isn’t intelligence. A computer can sort through every chess move possible, but has trouble deciding what to do when a person with a bicycle steps out between two cars.  What if the correct answer is to swerve into oncoming traffic? A computer can’t make that call.

Robots on the Roads

That doesn’t mean you can be smug about what is coming. Take autonomous trucks. Clearly they aren’t smart enough (yet) to negotiate narrow city streets, bumper to bumper traffic jams or unload oddly-shaped cargo. That would require some real intelligence. But they don’t have to. They can just take care of the 80% of the easy stuff, long haul driving. Automatically driving great distances on relatively clear roads is completely feasible right now.

What if autonomous trucks were limited to driving from 8:00 PM to 6:00 AM? A few lanes on interstate highways could easily be electronically tagged for higher speed,  and robot-truck only use. They can follow more closely, having both quicker reaction times and the connected ability to “see” what is happening further ahead. A truck that doesn’t have to stop for food or sleep could cover a lot of ground in ten hours of high speed driving. Daytimes would be reserved for human-operated local delivery.

Ripples in the Pond.

How much would that affect trucking and other industries?

There would be far fewer driver jobs, although most drivers would likely be closer to home.

Traffic would be greatly lessened during the day. Good, you say? Tell that to the paving contractors, sign companies, crane operators, orange cone manufacturers, lighting and signal electricians or bridge builders. It could be decades before we have to expand highway capacity again. With the speed of technological advancement, decades could translate into “never.”

Is this good news for truck stops, all night diners, and budget motels? Heavy equipment manufacturers? Civil engineering companies? Public sector spending on highway construction is almost $100 billion every year. For comparison, that’s about the size of the whole digital/streaming TV and video industry.

Returning to the trucking industry itself, I doubt that trucks will remain as “one size fits all.”  Current testing is on models than can be autonomous, but also accommodate a human driver. The latter will go away. Robotic models can greatly reduce size, be more aerodynamic, and weigh less. They would also be more fuel efficient, and could be electric.

Uh oh. Trucks consume almost a quarter of all the petroleum products used in the U.S. That starts the conversation about the impact on oil companies, the fuel distribution network, gas dispenser manufacturers, drillers, pipeline construction, tank fabrication and installation…the ripples continue.

As an Exit Planner, I’m predisposed to look down the road, and to consider the risk in every transfer. Not all scenarios are doom and gloom, and many new industries will be born, most of which I can’t imagine.

I guess my message is that none of us should be smug about the future. If the financial community sees a threat on the horizon, expect lenders and investors to run the other way, fast. We watch the stones. They watch the ripples.

 

 

Succession Planning – Ownership Lessons

by

When selling your business to employees or family, ownership lessons rise to a special level of importance. Regardless of the financial, inheritance, estate or valuation aspects of the plan, the real question is how to prepare your successors to run the company.

I’ve written before about the Luxury of No Resources. When you started out, making mistakes was part of your business education. The company was small, so the mistakes were small. Now you’ve built a substantial enterprise, and your successors can’t afford to learn by trial and error. (Especially if you are depending on them to be successful enough to pay you for the business!)

Experience is what you get when you don’t get what you want. We  learn very little from our successes. (“Hey, it worked! I guess I’m just brilliant.”) We learn a lot more from our failures. (“I sure as hell won’t let THAT happen again.”)

Trial by Fire

For many founders, business started off well because they had customers lined up and some reputation in their field. Their real learning experience came when a large customer defected to a competitor, or there was a recession, or a key employee quit. That’s when we learn fast how to pay attention to the numbers and solve problems on the cheap.

So how do you prepare new ownership without having them go through the same trials by fire? Here are a few suggestions.

  • Segregate a department or division as a profit center. Make the manager in charge prepare a budget, generate independent financial statements and take on all of the HR responsibilities.
  • Use history to teach. Take a past bid, order, customer or product for which you already know that there was a bad outcome. Have the employee make the decision again, and use the historical experience to discuss together whether it would turn out better or worse with the employee’s decisions.
  • Tie one hand behind their back. Task them to train a group of new people, but without your training manager’s help. Have them open a new territory without your marketing department. Help them to understand that the resources you provide may not always be there.

Of course, you will still be there to head off mission-critical errors. Letting them fail with limits on the damage, however, will render ownership lessons that prepare them for when you aren’t there.

 

Business Buyers and Disintermediation

by

In the last post, we discussed the reluctance of many prospective business buyers to deal with the regulatory burden of being an employer or service provider. You may be among the lucky few whose profession doesn’t require licensing. Even better, you may have qualified employees who are able to run the business without you.

There are other issues that concern younger buyers, however. One of these is the threat of disintermediation. That’s a trendy word for what we used to call “bypassing the middle man,” but it applies to many businesses that are being made obsolete by technology.

Disintermediated Businesses

How many business people still rent cars to attend a couple of meetings in a city? With Lyft and Uber, it is frequently easier to call a ride than leave a car in the (expensive) hotel parking for 90% of a visit. I’d be very skeptical of buying a car rental business today.

What happens when (not if) autonomous vehicles become part of daily life? Long-haul trucking will move to non-peak traffic hours, reducing the need for drivers, training schools, highway expansion, truck stops, and perhaps the number of trucks themselves.

Service businesses where the middleman lends expertise (easily duplicated by Internet research) or access to vendors are feeling the crunch already. The warning bell is sounding for mortgage companies, real estate agents, insurance and benefit brokers, employment agencies, printers, publishers, and travel agents.

These businesses won’t go away, but there will be fewer of them, and their margins are eroding.

The rise of robotics and artificial intelligence threatens even the most skilled professions. Legal databases, automated interpretation of medical imaging and free online tax filing are a few examples.

This quote is from a  February 21 essay by Rob Kaplan, President of the Federal Reserve Bank of Dallas.

As I have been discussing for the past two years, technology-enabled disruption means workers increasingly being replaced by technology. It also means that existing business models are being supplanted by new models, often technology-enabled, for more efficiently selling or distributing goods and services. In addition, consumers are increasingly being able to use technology to shop for goods and services at lower prices with greater convenience—having the impact of reducing the pricing power of businesses which has, in turn, caused them to further intensify their focus on creating greater operational efficiencies. These trends appear to be accelerating.

The Impact on Sellers

The overview of the business seller’s marketplace is straightforward. As I’ve been proselytizing for over a decade in my “Boomer Bust” presentations and books, selling a business will be more challenging, but that doesn’t mean any particular business is unsellable.

As with any other competition, the response is to create differentiation from the rest of the pack. There are a few key factors that top the list of appealing differentiators for business buyers.

  1. Build a business that can run without you. The more you work in your business, the less it is worth.
  2. Train effective management. Employees who understand how to run a profitable business are highly appealing to any prospective buyer. In addition, they can provide you with an alternative to a third-party sale.
  3. Upgrade the value-added component of your offering. If the only benefit you offer to a customer is time and place utility, you are probably toast.

There is another factor that may sound counterintuitive. Design your business so that it requires more expensive employees. If low wage workers are the backbone of what you do, you risk losing the technology arms race with larger competitors. I’ll expand on this in my next post.

The population of business buyers is younger, more technologically savvy, and less inclined to long hours than the generation that is selling. Winning in a competitive marketplace demands that you offer what business buyers want.