Exit Planning Tools for Business Owners

management

Selling Your Business in a Buyer’s Market

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For almost ten years I’ve been writing and speaking about the issues facing Baby Boomer business owners as they begin a flood of small business sales. This recent article was syndicated in 16 trade and professional magazines. I reprint it here so readers of “Awake” can share it with their over-50 owner colleagues.

More than 50% of US business owners are over 50 years old, and many of them are looking toward retirement and the process of attracting and vetting potential buyers to take the reins. The differences in yesterday’s and today’s business landscapes are stark—as Boomers were raised in a highly competitive environment, many face the problem of having built companies that won’t attract a new generation of buyers. Three major trends impact the salability of a business. Understanding these trends can help owners transition successfully in a challenging market, and ultimately identify the buyer who will carry their company’s torch going forward.

Why Do Boomers Work So Hard?

Baby Boomers are 2 ½ times more likely to own a business than the generations before or following. Between 1975 (when the first Boomers turned 30), and 1986 the formation of new businesses in America jumped from 300,000 to 700,000 annually. Faced with fierce competition on the pathway to success, many Boomers chose to chase the brass ring by going into business for themselves. New business start-ups have never again reached that level. The result is that nearly two-thirds of all businesses with fewer than 500 employees are in the hands of people who are preparing to retire.

The impact of the Baby Boomers at each stage of life created a one-time surge in many statistics. They tripled the number of college graduates, and brought over 50 million women into the workforce. Between 1970 and 1980 the population of the United States increased by 11%, but the employment base grew by an astonishing 29%. Replacing such a massive segment of the population in the business sector is no easy feat.

The Perfect Storm

BtBB_CoverThere are three major trends that challenge a small business owner preparing to exit. Like the movie “The Perfect Storm,” these three trends; demographic, psychographic and sociographic, are combining to create a Tsunami that will change the entire landscape of independent business ownership.

  •  Demographically, the generation following the Boomers (Gen X) is much smaller. From a supply and demand perspective, there simply aren’t as many available buyers as the number of potential retirees seeking them.
  •  The psychographic profile of the buyer generation is unfavorable. What business owner hasn’t complained about the work ethic of the younger generation? Raised in a forty year period of economic growth (the longest sustained period of expansion in our history) Generation X and their successors (The Millennials) are more likely to choose family first, and perceive jobs and employers as merely the means to a personal end. They aren’t wrong. The parents of the Boomers’ understood the difference between work and personal life. One started when the other ended. In their drive for success, the Baby Boomers mixed the two and created the term “work/life balance”. Younger generations are actually returning to an older set of values.
  •  Sociographic trends favor alternative careers over business ownership. Corporate America is well aware of the issues and attitudes of the younger generations. They have already made many adjustments. Telecommuting, sabbaticals, family leave, and flex time are benefits designed to attract younger workers who have a different set of priorities. Few small businesses have the depth or breadth to allow skilled employees to come and go according to their individual priorities.

Young entrepreneurs have little interest in the service-oriented brick-and-mortar companies that dominate small business. They seek a level of freedom that doesn’t require being on call, schedules driven by customer convenience, or a 55 hour work week. Combined with the sheer lack of prospective buyers, a reduction in the number of small businesses becomes more than likely, it is inevitable.

Yet, many small business owners are depending on their company to fund a comfortable retirement. Their plan goes something like this: “I will work really hard until I am tired, and then I will find some energetic younger person just like me who is willing to commit everything for this great opportunity.”

 Beating the Odds

Fortunately, if you are a successful business owner, you’ve already proven your competitive instincts and abilities. With some planning and foresight, you can still beat the Boomer Bust and achieve your retirement objectives. There are two pathways to succeeding in a crowded sales marketplace.

Build to Sell

Your first option is to build a business that is attractive to your younger buyers. It allows for personal flexibility. It can’t require a huge down payment, since these generations were raised in a “buy-now-pay-later” world, where they are carrying substantial debt from the day they graduate college, and have little opportunity to amass liquidity.

Your technology doesn’t have to be cutting edge, but it needs to be current. Nothing turns off the tech-savvy young buyer faster than a company that is limping along on outdated software or (heaven forbid) paper. Of course, the other attributes of an attractive acquisition; growing margins, a distributed customer base and predictable revenues, are a given.

Hire Your Buyer  

The second option is to hire your buyer. The stereotypes of different generations aren’t universal. Certainly we all know Boomer slackers, as well as young people who are ambitious and hard-working. Lacking capital, many of those younger go-getters would like to own a business but have difficulty seeing how they can make it possible. Identifying such a buyer in your own organization, or even reaching outside and recruiting one, is a viable option if your target date for exiting is a few years away.

Creating your own successor requires a commitment to planning and development, but the financial aspects are fairly simple. A few years of selling equity in small amounts can let your successor build a minority stake. Then he or she can obtain third-party financing for the balance of the purchase so you can maintain control through the process, and take the proceeds with you when you leave.

Remember; “The more you work in your business, the less it is worth.” Everything you do to reduce your business’s dependence on your personal talents, to reduce the time commitment of running it, and to make it easier for any successor (whether internal or external) to take over the reins, also increases its value to any buyer.

You can’t change the factors that create the most competitive selling environment in history.  Understanding what the future looks like, and realizing that your buyer is unlikely to be someone “just like me” is a critical first step in the process.

My 48 page Ebook Beating the Boomer Bust is available as a free download in either printable or E-reader formats here.

Another Lost Generation?

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I had the opportunity to present “Beating the Boomer Bust” twice this week, one of which was recorded for a Texas Public Radio show this weekend. For those who aren’t familiar with the piece, it discusses the massive changes that are unfolding as Boomers retire from their businesses.

As usual, members of the audience said afterwards “I knew all those things, but I never thought through the implications before.”

A quick recap before I get into today’s topic. “Beating the Boomer Bust” is a look at the perfect storm facing retiring owners who plan to sell their businesses. That largest small-business-owning group in history will be selling all at the same time. The number of buyers is about half as large as the number of sellers, and the buyer generation (Gen X) isn’t interested in the type of work that small business entails.

It is that group, the buying generation, that could be facing a demographic squeeze that changes them into a new “lost” generation.

The first Lost Generation is the group born in the decades just before the beginning of the 20th century. The oldest members of that group were in their teens and 20’s during WWI, which decimated the ranks of the young men, although less so in the USA than in Europe. Those who returned were traumatized, and more worried about enjoying life than making their mark on the world.

Enter the Roaring 20’s. The Lost Generation writers, Gertrude Stein, Ernest Hemingway, F. Scott Fitzgerald and T.S Eliot among others, promoted both hedonistic lifestyles and a cynical outlook towards humanity. The 20’s generally bring to mind Flappers, Speakeasies, Gangsters, and a spectacular finish with the Great Depression of 1929.

Many generations have been characterized as wastrels when they are young. The Lost Generation had the added misfortune to reach their productive years, their 30’s and 40’s, just as the economy made it very, very difficult to get ahead. Now, let’s skip forward to Generation X.

What Boomer hasn’t complained about the work ethic of Gen X? Gen X was born and raised in a time of plenty. They have grown up in an economy that was fueled by a giant generation of workaholics, the Baby Boomers. Their values system places a far lower premium on business and financial accomplishment. Self-actualization comes first, accumulating things is secondary.

Disclaimer: Please don’t send comments about “I’m a Boomer and not a workaholic” or “I’m an X’er and work very hard.” No generational generalizations are universally applicable. I get it.

Now they have the added misfortune of being in their 30’s and 40’s when the economy isn’t very receptive to building wealth or rapidly expanding a business.

At first blush, I didn’t think that was a problem. With one X’er for every two retiring Boomers, there should be more than enough opportunity for even the marginally interested to succeed. The more I think about it, the more I begin to wonder whether that will be the case. Two other factors are coming into play, and both are huge.

The Boomers aren’t getting out of the way, and the Millennials are coming on fast.

Boomers haven’t saved enough to retire in comfort. They can’t depend on the government to make it up for them. They are healthier than any previous generation. If 60 is the new 40, why would they (outside of the public sector) suddenly step down at 65? They want to be busy, and they want to be wealthy. Many, if not most, are planning to spend at least a few additional years in that pursuit.

The Millennials (depending on who you ask, roughly the generation born between 1985 and 2005) are coming of age in a difficult environment. Jobs are scarce, finances are lean, and the position of America in the world is changing. All indications are that the Millennials will push harder than the X’ers to get what they want.

Where the X’ers are widely characterized by their sense of entitlement, the Millennials clearly expect their lifestyles to be a direct outcome of their success in work.

So this is what leads me to ask about a Lost Generation.

The Big Picture: 78 million Boomers, still working hard, and delaying their exit from the business arena. 38 million Gen X’ers, with high expectations and lower motivation. 80 million Millennials coming on fast and intent on competing for what they want.

The Small Picture: X’er in his late 40’s who has spent the last 20 years in business telling the employer how he wants his job to fit his lifestyle. He is waiting for a late 60ish Boomer in front of him to get out of the way. When it finally happens, he suddenly finds that there is a Millennial in his late 20’s who earns less and works more waiting to leapfrog him.

If you are a Boomer business owner who can’t find the next generation of leadership among your X’ers (and there are millions of you), start looking at your Millennials while you still have some time to train them.

 

Painting: Han Wu Shen “Young Worker” at paintinghere )

Hunters and Farmers

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Several times monthly, I interview entrepreneurs who are considering membership in The Alternative Board® as a means to improve their business. Part of the process is asking each one what his or her core skills are – the things that made them successful.

Many, and perhaps a majority, start the answer by lowering their voice a bit. “Well first of all,” they say, “you have to understand that I think I’m a little bit ADD.”

No kidding? You started a company because the job you had wasn’t moving fast enough for you. You wanted to have greater say over your environment. You kept looking at other areas that weren’t under your control, and decided to put yourself into a situation where you could control everything. (OK; we’ve all found out that isn’t true.)

You began your business playing all the positions. You were the utility outfielder, plus pitching and then running faster than the ball so you could be the catcher too. You spent, and probably still spend your day caroming from finance to sales to operations, and you think you might be ADD? It’s time to stop acting like we’re handicapped, and start recognizing that some “conditions” have a purpose, and are part of our advantage in owning a business.

A decade ago I found a book called “Attention Deficit Disorder- a Different Perception” by Thom Hartmann. It has been a huge help to me in understanding not only my own behavior, but that of my two ADD-diagnosed sons.

Hartmann’s premise is that ADD isn’t, as it is so often described, a disconnect in your brain’s wiring. It is a group survival trait in the human race, but one that has become less important to the tribe as time passes.

The ADD folks are the hunters. In tribal times, they were the ones who brought in the food. They can focus on a single task, adapt on the fly, sacrifice themselves by going for long periods without rest to accomplish the objective, and ignore obstacles in their way. Without the hunters, the tribe starved.

Eventually the human race learned agriculture. The ability to eat shifted from hyperactive focus on finding food to extended, steady attention to tilling, planting, reaping, and tilling again. In fact, until the 18th century most common people had no way to track the years. Their calendar was merely focused on the seasons of the growing cycle.

But evolution doesn’t move that fast. The hunters didn’t turn into farmers. Doing the same thing year after year is stifling to them, regardless of the necessity of it. There was less room for the hunters in the tribal organization; so they became entrepreneurs.

In the last 15 years hunter behavior has been stigmatized by the farmers. “Good” students sit quietly at their desks. Children shouldn’t run in the house. No yelling. No rough housing. Memorize your lessons. Manage what you measure. Develop systems. Pay attention. Be ISO 9000-, Total Quality Management-, Balanced Scorecard-consistent, every day, every month, every year.

Booooring.

Managing isn’t nearly as much fun as creating. When I ask business owners what they would do if their company was running perfectly, most answer “Something new.” It’s not that they don’t want a perfect business. It’s that they don’t see any fun in running a perfect business. That’s farmer work.

This is a call to entrepreneurs to stop feeling guilty about what they are, and to start recognizing what makes them successful. The tribe only needed a few hunters to feed everyone. That’s why only 3% of us own businesses, and yet we create 62% of all the jobs in America. The farmers are still dependent on the hunters. They just think that they aren’t.

A Goal isn’t a Finish Line

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I was going over some productivity numbers with a long term client.

“Remember when our goal for this was 2000 man hours?” he said. “Now we are below 1200, and closing in on 1100, and with greater volume!”

Everywhere we looked his numbers were at levels we couldn’t have imagined 10 years ago. I don’t mean numbers he couldn’t have hit back then, but numbers we literally couldn’t have imagined. Some of it is the result of investments in technology, in better systems and in training.Most of it, however, is because he has developed a culture of always, always looking for the next improvement.

Note well that I said he has developed a culture. This business has about 100 employees. As the owner, he knows full well that he is not capable of setting a target and dragging every one of those 100 people to it. He has developed an expectation, at least among his management, that arriving at a goal is merely setting the starting point for the next goal.

I’ve been thinking about how unusual that is.For most small business owners goals are a normal part of managing our companies. Sales goals, production goals, efficiency goals. We work hard to make them, set employee incentives around them, and celebrate when we achieve them. But very few of us start immediately on the next goal. We want to give our people (and ourselves) a break. We are programmed to let people enjoy the achievement; to rest a bit before we start again.

I commented on how unusual it is to have built an organization where the key people look at a goal as merely proof that they can do what they set out to do, and automatically start thinking about what they can focus on next. He smiled, and related a story.

Last week one of his managers had a performance review with an employee. Not surprisingly, performance reviews are a normal and regular part of their business culture. They aren’t avoided, late, skipped or glossed over. They are an expected part of the manager’s job. They, too, have evolved over the years. They are more frequent and more detailed than they used to be.

This employee had been doing a good job. He was dependable, and skilled at his duties. He was an important part of the team, and handled his area of responsibility without problems. None the less, his supervisor had identified a half dozen areas where there was room for improvement. These were listed as goals, with a time frame for their accomplishment.

The employee didn’t object to the content of the goals. He was very unhappy that they existed at all. I’ve done everything you ever asked.” he exclaimed. “I am here every day. I cover all my responsibilities to the letter. I’ve hit every target you’ve ever given me. But you people are never happy. You always want more. I’m tired of it.”

He resigned.

Replacing him wasn’t going to be easy. Training another employee for his responsibilities would take considerable time and effort. The supervisor was faced with a choice between keeping a position covered well, or starting all over with someone new. It wasn’t really a choice. The supervisor informed his manager that the position would be weaker for some time while a new person was brought up to speed. Allowing an employee to opt out of the culture of improvement simply wasn’t an option.

How many of us have the courage to push our employees past “good enough?” How many have given our subordinates the license to tell us that they need to take a step back before they can take two steps forward? In my presentation on “The 7 Sins of an Entrepreneur” we talk about the sin of Sloth as settling for good enough, because the alternative just takes too much effort. Settling for good enough launches a creeping decay in you business. If one employee can hold a position because he or she is just good enough, then why not two? Why not all of them? Eventually you wind up with a company where everything is merely good enough.

The Japanese call it Kaizan, the constant push for improvement. Americans want to take big leaps. We look for giant increases, then fall back until we marshal our strength for another big push. Kaizan is the discipline of looking at everything, all the time, to see how it could be better.

Building a culture where a goal becomes not the finish line but a starting point, takes time and consistency. It isn’t easy but the results, like the progression of the goals themselves, are incredible.

You probably figured this out already, but this company enjoys a level of profitability that most people in their industry would consider impossible to achieve. They, however, consider it a baseline for their next goal.