Exit Planning Tools for Business Owners

management

Choosing Your Timeframe to Exit

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“My timeframe? Talk to me in about five years.”

When business owners are asked about exit planning, that answer is almost ubiquitous. In fact, a much-quoted 2008 survey of owners by Price Waterhouse Coopers (now PwC – not clear why Mr. Waterhouse warranted lower case) found that 85% of private business owners said they expected to sell in five years.

Clearly, that didn’t happen, since it would have required some  1,500 businesses to be sold daily during that period. (The brokerage industry claims about 9,000 sales a year.)

In fact, when the survey results were broken down, they discovered that 85% of 60 year old owners expected to sell in five years. Among 65 year olds, 85% expected to sell in five years. Among 70 year olds, you guessed it, 85% expected to sell in five years.

Clearly, “five years” is most owners’ shorthand for “I haven’t really thought about it.”

Realistic Timeframes

Exit planning and more importantly, implementing a plan, can easily take five years. That doesn’t include the time thinking about it, talking about it, or waiting for someone to call you up and make an offer.

If you are an owner-centric business (for example, a specialty craft where either you do the work or it is all done under your personal supervision,) you exit plan may be to close down. Even so, respect for your customers and employees suggests that discontinuing the business should take about a year.

Main Street businesses are those where another individual could step into your shoes and make a living. Such companies generally sell for less than $2 million. This is the market where business brokers excel. Expect the listing and sale process to take anywhere from nine months to two years. That is after you’ve done any needed clean-up of your records, contracts and procedure documentation.

If you plan to sell to employees without taking on all of the financing risk personally, allow at least three years to bring them into an equity position and document their ability to run the business without you. For most companies, five to eight years is a more realistic timeframe to accomplish this.

Selling to family members who are already capable of running the business is also time sensitive. A family transition can offer unique tax benefits, but the transfer mechanisms usually need at least five years for maximum benefit.

Selling to a family member who is not yet involved in the business is a much more lengthy proposition. I meet regularly with owners in their 60s who claim that a son or daughter in high school will be their successor. That timeframe requires the owner’s presence until well into his or her 70s or beyond.

Planning Isn’t Implementing

It makes little sense to embark on the biggest financial event of a lifetime without planning. However, plans can be made without rushing right into them.

Too many owners start to plan, only to find that the assumptions they’ve held for years aren’t true. Their estimate of value for the business is way off, or the key employee they assumed would take over has little interest in ownership.

Testing a plan for its practicality helps focus you in a specific direction. Does the business need to grow, improve profitability or take on new lines? Who are the buyers for a business of your size, or in your industry?

Investments in new hires and equipment are weighed for their long-term impact more than immediate need. Even if your target date is a decade away, you’ll start making strategic and tactical decisions based on your ultimate goal.

“Read” my latest book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

 

Internal Transfers: Legacy vs. Lucre

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Lifestyle vs. Legacy

Why would I refer to the results of an internal transfer as “lifestyle vs. lucre?” Lucre is a pejorative term. While it is technically just a synonym for money, most dictionaries draw the parallel to its use in “filthy lucre;” money that is ill-gotten or otherwise dishonorably obtained.

I was honored to present at the Exit Planning Summit this past weekend. One of the things I discussed was the need to help business owners determine whether their personal vision for their company’s future was based on lifestyle or legacy. That’s how I normally term it, and there is no negative connotation attached to either term.

That “lifestyle vs. legacy” decision, however, usually designates the difference between selling to a third party for full market value (lifestyle) and selling to employees in order to preserve the culture and quality of the organization (legacy.)

Legacy vs. Lucre

“Legacy vs. lucre” is my term for the differing motivations in an internal transfer, and it is fully intended to be pejorative.

For a business owner, the greatest appeal of an internal transfer is control. He or she gets to pick the new owners, their timeframe for taking over the company, and how much they will have to pay.

Sometimes, that avenue to exit is chosen because the owner knows he or she can’t get a satisfactory price in the open market. The company just isn’t worth what he wants for it.

So selling to employees becomes a vehicle to get more than fair market value. Of course, no third-party lender will touch a deal for more than the business is worth, so almost by definition such transactions have to be seller-financed.

That is one of the reasons we hear horror stories about selling a business to employees for a note, and having to take it back when they default. Their failure may have been due to a lack of training to run the business, or an unsupportable price. Either way, they were set up for failure by an owner who was more interested in getting a check than in what happened down the road.

Legacy Requires Win-Win

Selling to a third party is an arms-length transaction. Both parties have their own agenda and advisor team. The buyer is perfectly cognizant of Caveat Emptor. The seller wishes to maximize the proceeds, the buyer to minimize his cost. The result is usually something in between.

When selling to employees, the playing field isn’t even. The employees have followed the seller’s direction for a long time. They are accustomed to doing what he says. It’s when the owner takes unfair advantage of his status that legacy turns into lucre.

 

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

The Right Price for Your Business

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“If someone offered me the right price, I’d sell in a minute!” Exit planners and business brokers hear it all the time. “Anything is for sale if the price is right!”

What is the “right” price? Of course, you can fantasize about a windfall from a buyer who has far more money than brains. Some of the fast-talking “business brokers” (the ones who get more revenue from preparing offering books than actually selling companies), will pitch their secret list of buyers in Europe and Asia who routinely overpay for businesses.

In case you didn’t know, the largest advisory firms in Europe and Asia are the same ones we have here. The same accountants, the same attorneys, the same investment bankers and the same consultants. It’s unlikely that they give their wealthy overseas clients lesser quality advice than the ones in North America.

Barring purchase by a lunatic, your business is likely to be priced around Fair Market Value; the arms-length amount that an independent buyer will pay an independent seller.

Beauty is in the Eye of the Beholder

You are the seller, and your company is what it is. Buyers, however, come in a variety of sizes and flavors. Understanding why companies have different values to differing buyers is critical if you plan to maximize your proceeds.

Here is a 2 1/2 -minute video on valuation from our website of free tools for business owners at www.YourExitMap.com.

These are the typical ranges for “fair market value.”

If you are earning less than $500,000 in total salary, profits and benefits from the business, your likely price is between 2.5 and 3.5 times the SDE (Seller’s Discretionary Earnings.) These are “Main Street” businesses; typically sold to individuals.

Once you exceed $1,000,000 in Earnings before Interest, Taxes, Depreciation and Amortization, or EBITDA (but not counting your personal salary and benefits) you are a target for professional investors. These include private equity groups and family offices. In this market, valuations between 4 and 6 times earnings are common. If your EBITDA is over $2,000,000 it could be substantially higher.

Strategic and industry buyers (who may be the same) could pay more, but those transactions are very specific to the situation. In simple terms, the right price is whatever you can get. If the acquirer has a plan to plug your business into an existing customer base and grow it substantially, earnings often become a secondary issue.

The Neutral Zone

The “neutral zone” contains those companies who earn more than $500,000 (SDE) but generate less than $1,000,000 EBITDA. This is a fairly broad range.

Let’s use an illustration. An owner takes a $400,000 salary along with another $250,000 in benefits, and shows a pre-tax profit of $700,000. Clearly that is a healthy small business. In the “Main Street” market the company could value at between $4 and $5 million.

An individual buyer would need at least 25% down ($1,000,000 cash) plus working capital, and be able to guarantee loan payments of about $500,000 a year. That’s well beyond the range of most individuals.

Yet unless this business has a unique product or intellectual property, it is likely of no interest to professional, industry or strategic buyers.

Many of these companies are choosing a staged sale to their management teams. Others choose to kick growth into a higher gear in order to reach the next stratum of buyers and valuation. Either approach will usually take at least five years.

Controlling the Right Price

Some owners are choosing both approaches. They use ownership as a management incentive to achieve growth targets. If the company makes the leap into a buyer market with higher valuations, both the owner and the management team win.

If the company doesn’t attract the target buyers, the owner still has a solid exit strategy from a more valuable company. Getting the right price requires the right plan.

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

Why GenXers Won’t Buy Your Business

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There are six reasons why GenXers won’t buy your business.

Last week I presented a webinar for the Exit Planning Institute entitled “The Perfect Storm.” It looks at six factors impacting the desire and the ability of Generation X buyers to acquire a Baby Boomer business.

The first three, demographic, psychographic and sociographic, are macro trends that make Xer’s unlikely to buy any business that requires capital or more than full-time commitment. .

The last three factors, Regulation, Disintermediation and Entitlements, describe why all businesses are harder to sell today than they were even ten years ago.

The presentation is a bit long (38 minutes), and the quality isn’t perfect.(My apologies for the “dings” when viewers check in. That wasn’t controllable on my end.) None the less, if you are an advisor to owners, or an owner who is planning to sell, you might want to watch this data-based approach to the market forces you’ll deal with.

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It was ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!

 

The Nimble Small Business

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Almost since time began, the nimble small business has been axiomatic. Large corporations are like big ships, the common knowledge goes. They take a long time to change direction.

That is a comforting thought to business owners who choose to see their one-person strategic planning team as a competitive advantage. Like the small furry mammals that survived as the dinosaurs died out, they are adaptable. The nimble small business can react to changes in the market faster, with less bureaucracy, and with greater attention to the customer’s needs.

There is one problem. That “common knowledge” is no longer true. In fact, a new definition of nimble is rapidly becoming the proprietary playing field of giant corporations. Privately held companies, already under increasing competitive pressure, are being squeezed out of their traditional role as innovators.

The Competition for Data

The new player in the big/small competition is data. Companies are in an arms race to understand the buying habits of their customers. It is a race that, by nature, goes to the player who has the most customer contact.

Amazon is the most obvious example. Their prices on any item change on a minute to minute basis. They are adjusted depending on the individual customer’s buying history, time of day, and current sales volume of the product.

I’m guessing that they might also be impacted by geographic area of the buyer, weather in that area, and purchases by family members. If that isn’t the case now, it soon will be.

A friend bought a couple of gas cans for his ranch. The next time he went on the web, he was fed an ad for a gas can holder made specifically to hold those two cans. He bought it, although as he said “It ticks me off to have them know that I want a product before I do.”

That is one less visit to his local farm and ranch store. They’ve been good vendors for years. They let his contractors pick up supplies for the ranch and he pays the next time he comes in. He likes them, but they don’t know what he wants before he does.

Not Just Internet

This capability isn’t limited to Amazon and Facebook. In 2016 General Motors invested $500 million in Lyft. In a recent article, GM’s CEO said that they were preparing for the day when ride sharing reduced new vehicle volume.

They hope to make up at least some of the missing revenue with data sales. If they know where people are going and when, they have a valuable commodity to sell.

Grocery stores are climbing on the data bandwagon. Who knows better what you like or avoid? They can tell suppliers (those who can afford to buy the data) where to direct advertising dollars for the greatest impact.

Netflix now has over 50,000,000 active subscribers. A fortune awaits anyone who can correlate viewing habits with buying patterns. If they don’t have the capability already, I’m sure someone is working on it.

Nimble Small Business

What does this have to do with exiting your business? A lot. Whether you are planning to sell to employees, family or a third party, the buyers are almost by definition younger than you. They understand the value of data.

When they ask how well you know your customers, what will your response be? If you have their names, addresses and emails, that’s a start. If you regularly reach out to them with content that is opened and read, that’s another level up. If you can target them by past purchases, age, location or income, that’s beginning to be nimble.

If you think that greeting them by their first name when they walk in is enough, you are nearing the end of the Cretaceous Period. You want to be with the mammals, not the dinosaurs.

 

“Read” my new book in 12 minutes!

Your Exit Map, Navigating the Boomer Bust is now available on Amazon, Barnes & Noble and wherever books are sold. It is ranked the #1 new release in its category on Amazon, and is supplemented by free tools and educational materials at www.YourExitMap.com.

Now, we have a really cool 12 minute animated video from our friends at readitfor.me that summarizes the book, and helps you understand why it is so different from “how to” exit planning tomes. Take some time to check it out here. Thanks!