Exit Planning Tools for Business Owners

management

Exit Planning: Ripples and Ripples.

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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

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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

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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.

 

What’s Wrong with the Buyer Generations?

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Many of the upcoming buyer generations can’t or won’t run Baby Boomer businesses. This is (or should be) of concern to sellers everywhere.

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households.” Attributed to Socrates by Plato.

Elders have been complaining about their offspring for 2,500 years. The complaints change only in the activity bemoaned. “Chatter in place of exercise” is replaced by those damn radios, or automobiles, or television, or rock’n’roll, or cell phones or texting. It’s amazing when you realize that we’ve somehow managed to thrive through eons of generational deterioration.

The Buyer Generations

But one thing is true. Generation X and the Millennials are not attracted, as a group, to many of the businesses run by Baby Boomers. We’ve discussed the macroeconomic trends, demographics, sociographics and psychographics, at length in this column and in my latest book Your ExitMap: Navigating the Boomer Bust.

For the next few columns, we’ll talk about other forces that deplete the number of available and interested buyers, and what you as a seller can do about them. Note that I said “deplete” the number. An attendee at one of my presentations a few weeks ago raised his hand during Q&A and said “There will always be someone willing to buy a profitable business.”

That is probably true, but in any competitive sales situation the challenge is to find and attract a qualified buyer. Most of us do that by targeting our offerings to the buyers we seek, then making certain they are aware of what we are selling. The buyers we seek are those who are willing and able to pay the price we ask. In other words, we play the odds. What we are discussing here is finding willing buyers who are able to pay your asking price.

Regulatory Obstacles

One issue in selling your business is the regulatory environment. Since the 1970’s, Americans have come to accept that basic business qualifications should be legislated. Some 30% of all products and services now require some form of government permission (licenses or certifications) to operate.

When the owner of a business is the sole qualified practitioner for its offerings, he or she has a problem. Selling the business requires either continuing to work in it personally until a new owner is legally qualified, or providing licensed employees with some insurance for the new owner of their retention. (See our column on Stay Bonuses.)

This issue drives many owners’ decision to sell the business to qualified employees. You can include a few licensed practitioners in an ownership group, frequently combining them with non-licensed managers or executives who are more suited to running operations. With a few years of advance planning, an owner can exit with the sale price in hand on the day he or she gives up control.

To be blunt, if you are the only person legally capable of creating, presenting or approving the work of your company, you have a job more than a business. The first step in preparing a saleable enterprise is to make sure it can operate without you.

Death, Taxes and Exit Planning

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(This post was published in the Sageworks/ProfitCents blog earlier this week)

Understanding the Post-Ownership Void

As advisors, we understand that our business clients should be preparing for the biggest financial event of their lives – the sale of their business. However, when we ask, “How are you exit planning for your retirement from the business?” we seldom get a straight answer.

Instead, we get any number of comments like: “I still enjoy my business, I’m not thinking about it right now.” “I have a good company. I can sell it whenever I choose.” “Everything is available for the right price. I just haven’t heard it yet.”

These are all ways of evading the fact that they haven’t thought about their life after the sale of their business, and they don’t want to. Why is having the exit planning discussion so challenging? Because, like planning one’s own funeral or purchasing life insurance, it is frightening to contemplate the end of one’s professional career.

What I Do is Who I Am

Most business owners, particularly founders, find it difficult to separate their business from their own identity. The business is who they are. At family gatherings they overhear, “There’s Bob. He owns his own business, you know.”

The ownership of their business permeates their relationships. They are, “Bob Smith, the owner of Smith Manufacturing.” Not only in their business circles, but also at their church, in their children’s schools and their friendships. The business is their persona.

Contemplating life after ownership is scary. Who am I if I’m not me? Will I be treated the same? Can I command the same respect if I don’t have employees? Will my opinion still matter? Will others see me as successful without the trappings of a company around me?

Some owners have the confidence to leave a business with no concern about how others will perceive them. Most, however, associate retirement on some level with failure. While owning their business, they got a small shot of adrenalin every time they were asked to make a decision, which was usually many times a day. They fear a life without those little rewards, albeit unconsciously.

Understanding this reluctance to explore the void that retirement creates is a vital part of an advisor’s ability to serve their business clients. It’s easy to say, “Okay, I’ll be here whenever you want to talk about it.” But this alone is a disservice. Planning the most important financial event of a client’s life should be a priority, not an afterthought.

Have a Safety Net

When a client avoids the exit planning question, have a safety net. Selling a business is a competitive endeavor. No smart owner would enter a new market without knowing what his competition looks like. Just because someone isn’t thinking about an exit doesn’t mean that he or she shouldn’t do anything today. Getting the conversation started is one of the most valuable services you can offer.