Exit Planning Tools for Business Owners

management

Will You Be Ready?

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calendar with one pink flag to mark a special dateWill you be ready when it is time to leave your company? A business owner needs to have a basic business strategy to monitor company financials regularly. Several owners consider this a strategy to prepare for exiting their businesses. However, monitoring company financials is like looking in the rearview mirror. What if you could incorporate a business strategy that looks forward and leads to accelerating profitability and increases business value? In addition, this strategy helps lead to less stress, more free time, and ultimately helps take control of a business exit?

The Active Strategy

The Business Strategy is called Exit Planning. John H. Brown, author of How to Run Your Business So You Can Leave it in Style, writes: “Exit Planning is a process that results in the creation and execution of a strategy allowing business owners to exit their businesses on their terms and conditions. It is an established process that creates a written road map, or Exit Plan, often involving efforts of several professionals, facilitated and led by an Exit Planning Advisor who ensures not only the plan creation but its timely execution.”

Unfortunately, most business owners do not employ this strategy. They are personally unprepared, and their business is not ready when it comes time for them to transition. Ultimately, there is less control over the timing of the exit and even less control over the value they receive when they do exit their business entirely.

What can you do?

Consider this when building an exit strategy:

1. Focus – Adhere to the niche the company serves. Buyers place a premium valuation on focused companies that do one thing very well, better than others. Do not stray from the niche because it destroys value.

2. Develop a Management Team & Reduce Owner Dependency – Ensure the management team can carry on without the business owner when the business sells. It is difficult for the business owner to disengage while they still actively manage. But this is precisely when the owner can create more value—because when the business is not exclusively dependent on the owner, it is worth more! Ask yourself, if I leave today for an extended length of time, will the success of my business be impaired? If your answer is yes, you have not created value. You have created a glorified job.

3. Assess Your Business – Prepare an objective assessment of the company’s current position and potential. A simple SWOT analysis is beneficial. Write down the Strengths, Weaknesses, Opportunities & Threats of the company.

4. Ensure the Business Has Adequate Capital – The lending markets are often more willing to lend in good times than in bad times. Are you maxing out your credit lines, or do you have a comfortable margin of credit? Are you happy with your current lending relationship? Evaluate alternatives and review your loan covenants regularly.

5. Clean Up the Balance Sheet – Collect past due accounts or write them off if uncollectable. Review customer credit policies. Clean up inventory and take it off the books if obsolete or unsellable. Diligently track personal expenses run through the business. And lastly, call in loans to shareholders and employees.

6. Obtain Financial Audit of Business – Frequently, the company’s accounting has not grown at the speed of the company’s growth. An audit prepared by an objective third-party accounting firm provides a high level of credibility to the business performance.

7. Protect Key Personnel – Obtain employment and non-compete agreements from key employees. The last thing you want is someone leaving just before you decide to exit. The buyer is looking for continuity of Key Personnel. If you have not already tied your integral people to the business, it may be far more expensive to do so at the time of sale.

8. Identify & Mitigate Legal & Environmental Risks – Working with your liability insurance advisor is essential. Unfortunately, until the buyer brings up the subject, this is often left undone.

9. Review Customer Concentration & Overall Operations – Are your vendor contracts assumable/transferable upon sale? Do you derive more than 20% of your revenue from one customer or client?

10. Build Your Team of Advisors – Establish a strong team of qualified accounting, tax, legal, financial, and investment banking professionals. Invite them together at one meeting to establish your expectations of collaboration around your personal & financial goals. Establish recurring management meetings to monitor progress.

While there are many competing needs for a business owner’s time, working on an exit strategy can result in less stress and more time to do the things you want to do instead of need to do. In addition, an exit planning strategy can also enhance profitability and business value, resulting in a win-win for the owner, the owner’s family, and the employees of the business.

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through Legacy Planning Partners, LLC or CES Insurance Agency.

Jan Graybill is a Certified Financial Planner® (CFP), and holds the Certified Exit Planning Advisor® (CEPA), Chartered Financial Consultant® (ChFC) and Chartered Life Underwriter® (CLU) professional designations. He is a Managing Partner and CEO of Legacy Planning Partners. For more information about Jan, click here.

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.

Wealth Management for Business Owners

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businessman watering money to signify growth

Wealth Management Considerations for Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business, into your overall plan for managing your wealth.

 

Key Elements of Exit Planning

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

  • Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?
  • Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.
  • A financial needs and gap analysis with an accurate valuation (not back of the envelope – meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?
  • Personal risk management including asset protection, insurance planning, tax planning.
  • A current estate plan — a business owner cannot do exit planning without doing estate planning.
  • A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.
  • An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

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

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

The Dismal Ds and Exit Planning

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The “Dismal Ds” is an inside joke in exit planning. Every industry and profession has them. In some, it’s “You can have it done well, done fast, or done cheaply. Pick any two.” In planning it’s “Sooner or later, every owner exits his or her business… 100% guaranteed.”

Clearly, that refers to the unplanned but inevitable departure from the biggest D – Death. That isn’t the only D, however. There are others, NONE of which lead to a controlled, lucrative, or enjoyable transition. Most start with dis- defined as “dis– 1. a Latin prefix meaning “apart,” “asunder,” “away,” “utterly,” or having a privative, negative, or reversing force.”

The other Dismal Ds include:

  • Disease – the critical illness of the owner or an irreplaceable employee.
  • Dissension – between partners, shareholders, or family members
  • Disaster – Fire, flood, storm, or accident
  • Disability – An owner’s inability to oversee operations
  • Disinterest – of the founder or next-generation ownership
  • Distraction – When an owner’s focus is elsewhere. (frequently love or bar ownership)
  • Disarray – More simply, bad management
  • Dishonor – financial fraud or other skulduggery
  • Disenchantment – A fancy word for burnout
  • Divorce – a bitter fight over the business asset or its value
  • Debt – Leverage taken on in good times but no longer sustainable
  • Depression – Economic malaise (think hospitality in 2020.)
  • Defection– The poaching or bolting of a key employee, frequently in sales
  • Defenestration – Getting thrown from a window

(Okay, I may have gone too far with that last one, but I couldn’t resist.)

Planning – The Cure for the Dismal Ds

The point is, there are many ways of a forced exit from your business due to circumstances. Some might be beyond your control, but most can be avoided.

  • Disease – Have solid business continuity instructions in place
  • Dissension – Start with a good buy/sell or shareholders’ agreement that makes it plain how disagreements will be handled
  • Disaster – Fire, flood, storm, or accidents can be insured, including for loss of revenue.
  • Disability – Business continuity instructions again
  • Disinterest – Start implementing an exit plan before your business shows the effect. For example, in brokerage, we used to say “Show me an owner who says he is burned out, and I’ll show you financial statements that evidenced the problem three years ago.”
  • Distraction – Don’t buy a bar. Don’t buy another business. Don’t have an affair.
  • Disarray – Get help. Consulting, coaching and peer groups all work.
  • Dishonor – Have an outside party check your systems and security.
  • Disenchantment – See Disinterest
  • Divorce – Settle the value of the business first, preferably before the lawyers do it for you.
  • Debt – Limit your debt to half what your current cash flow can service.
  • Depression – If you have to cut expenses, do so deeply and quickly.
  • Defection– Two words- employment agreements
  • Defenestration – Stay away from the Departed, or Irish, Italian, and Jewish mobsters in general. Alternatively, live where there are only low-rise buildings.

Dismal DsI obviously have my tongue firmly planted in cheek for this column, but my point should be clear. Your business is probably the most valuable asset in your life. Losing it to unplanned events hurts. So even if you are no longer in the picture, you have some responsibility to your family, employees and customers.

A good exit plan, whether it’s for implementation now or years down the road, should take many, if not all of the Dismal Ds into account. All entrepreneurs want control over their future. That is why they are entrepreneurs. Planning isn’t merely an intellectual exercise. It’s all about control.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the author of Your Exit Map: Navigating the Boomer Bust, and two other books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at MPNInc.com/ExitMap. 

 

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