Exit Planning Tools for Business Owners

new business

EBITDAC : What is Your Business Worth Now?

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Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

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.

Stop Managing

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Why would anyone advise business owners to stop managing? Management is a proven science. From the time and motion studies of Frederick Winslow Taylor in the late 1800s, to Matthew Kelly and Patrick Lencione’s Dream Manager, we are constantly in search of ways to make employees more effective.

Management trends (some say “fads”) come and go. Wikipedia lists a number of major theories since the 1950s, including Management by Objectives, Matrix Management, Theory Z, One-minute Management, Management by wandering around, Total Quality Management, Business process reengineering, Delayering, Empowerment, 360-degree feedback, Re-engineering and Teamwork.

You could probably throw in a couple of offshoots like ISO 9000, Open Book Management, Six Sigma, Balanced Scorecards and Net Promoter Score. All have metrics (Key Performance Indicators) to measure their effectiveness.

In the 125 years since Taylor, after the introduction of automobiles, telecommunications, manned flight and the Internet, we are still working from the basic framework of time and motion studies. We try to empower people, but that often just means having them track their own production rather than have someone else do it for them. (Delayering)

That leads us to one of the Catch 22s of many business owners’ reality.  Once you have grown an enterprise large enough to require management, you’ve outgrown the skill set that made your business successful.

Small businesses become bigger businesses through their owners’ leadership and creativity. Time isn’t a fungible commodity, you can’t save it or get more of it. In a zero-sum  equation, any increase in one factor means a reduction in others. The more time you spend managing, the less there is left over for leading and creating.

Stop Managing, Start Creating

Last week, I sat in on a panel of three successful business owners who were discussing the value of a second in command. Each mentioned how delegating the management tasks of daily operations had freed them to focus on longer-term objectives, develop new ideas, and improve their personal quality of life. (In case you’ve forgotten, that’s why we own companies.)

A second-in-command to manage the business can’t be undervalued. I recommend Gino Wickman’s Rocket Fuel for a terrific examination about the relationship between a visionary and an implementer. If you haven’t read my own Hunting in a Farmer’s World, subscribe to Awake at 2 o’clock (to the right) for the chapter “I’m a little bit ADD” and see if you recognize yourself. (If you already subscribe, don’t worry. We don’t send duplicate emails.)

There were a number of owners from smaller businesses in the panel’s audience. Their comments were not unexpected. “I can’t afford a hire really top-flight manager.” “What if I get dependent on someone and he leaves?” “How can I find someone who knows as much about the business as I do?”

Those observations are being made by looking through the wrong end of the binoculars. The real question to ask  is “What would happen if I had more time to do what I do best?”

The average business owner estimates that about 20% of his or her time is spent in business development, the long-term creation of new products, services, systems and relationships. If a second in command can take just 30% of your duties, you could increase your business development effort by 150%.

What will happen if you stop managing, and devote 2 1/2 times the effort to growing your business? That’s how much a good manager is worth.

Are you over 50 years old, or do you advise business owners who are?

Sign up for free excerpts of my upcoming book, Your Exit Map: Navigating the Boomer Bust

Business Buyers: The “Buy Now, Pay Later” Generation

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If you are preparing to sell your business, your buyers will likely be members of the “buy now, pay later” generation. Generation X is the first demographic group to be raised in a culture that put little emphasis on savings.

Diner’s Club was introduced as the first “charge card” in 1960. By the end of that decade competition from member cards (American Express and Carte Blanche) and bank-owned revolving finance cards (MasterCard and Visa) began placing millions of cards in consumers’ hands.

credit-cardIn a competitive credit environment, advertising for the revolving charge cards was directed to the pleasures of paying for something after you already enjoyed the use of it. The struggle of saving for a long time before purchasing was portrayed as foolish and unnecessary. In the 1980s and ’90s Baby Boomers on the quest for material success embraced the concept wholeheartedly.

This is the environment that today’s prime business buyers between the ages of 35 and 50 grew up in. Americans reached the height of “buy now, pay later” just after the turn of the century. In the early 2000s, when Generation Xers were between 28 and 45 (the prime consumption age range) Americans spent about 2% more than they earned annually.

That was a great formula for boosting an economy, but a lousy way to amass capital for investment. That credit-fueled boom died a gruesome death in 2008, and many debt-laden Xers haven’t yet recovered.

These are the buyers for your business. Many have grown up believing that personal financial management consists of parsing a paycheck to allow enough for food after their installment payments. The US savings rate has since recovered to a more normal 5%; much of it fueled by Boomers belatedly preparing for retirement.

If you’ve spent the last 30 years or more building a business worth a million dollars, you need to find one of these folks who has put aside at least $300,000 or so to buy it outright (a down payment to qualify for financing plus initial working capital.) There are such buyers, including escapees from corporate life with substantial retirement plans and those who will be inheriting their parents’ savings.

Most buyers, however, don’t have that kind of money. If you want to realize full value for your business, you may want to think about how to accommodate a “buy now, pay later” approach. A buyer who writes a check is more appealing, but good business logic seldom results in complete dependence on a long-shot strategy.

There are four ways to sell a successful business to folks who have no money. The more time you have to implement a plan, the better its chances of success. In order of my preference they are:

  • Best – Sell to Employees. A five to ten year period is usually sufficient to get a “down payment” (25-35%) into employees’ hands via stock incentives. The best scenario is earning the awards by growing the value of the business. In a strong company, the owner can leave with the full proceeds in his or her pocket, and remain in control until retirement.
  • Better – Hire Your Buyer. This is similar to a sale to employees, but you use the equity plan to recruit a more highly qualified individual than you could otherwise attract. It is better in the sense that the buyer may be stronger, but the time up front to make sure he/she is a good fit represents a risk.
  • Good – Finance the Down Payment. For many lenders, including the SBA, stock sold via a subordinated note can qualify as a down payment. It means you walk away with 65-75% of your money, and leave the rest in the business until the first-position lender is comfortable with the stability of their risk.
  • Worst – Finance the Purchase. This is often the scenario for an owner who waits too long to consider the options. Whether the buyer is an employee or a third-party, you sell the company for a promissory note and hope for the best.

You have options, but they disappear one by one as you get closer to your exit. That’s why we encourage planning. Having a plan in place doesn’t require immediate implementation, but it does help when evaluating opportunities.

For more on Boomers and Buyers, you can download my free eBook Beating the Boomer Bust.

Following my own advice, I am leaving on my biannual sabbatical. Awake at 2 o’clock will resume on November 6th. In the meantime, please share it with another business owner. Thank you.

The Seventh Entrepreneurial Sin — Pride

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Every business owner should be proud of his or her business. If you are the founder, you built every system, and probably landed the biggest customers. If you bought the business, you took what was in place and made it fit your vision and style.

But there is a dividing line between pride in what you’ve created and thinking that you are the business. Taking pleasure in seeing people add value and produce wealth is justifiable pride. Thinking that it exists only because of you is “sinful” pride.

(This is the eighth in a series on The Seven Deadly Sins of an Entrepreneur. It starts here.)

pawn to kingPride has characteristics that are easily recognizable in some owners. In meetings, do you do all the talking? Do you complain that you are the only one who has new ideas? Does everyone come to you for the solutions to any and every problem? Worse yet, do you insist on it? Do you reprimand employees for making decisions that, while they might work, aren’t exactly the way you would have done it?

My friend Kevin Armstrong in Vancouver says “The more you work in your business, the less it is worth.” Building an organization that is dependent on you to operate it has one drawback.

You can’t leave…ever. If you are the business, then it is worth nothing without you.

In the worst cases, you can’t take a vacation. Even getting away for a few days requires that you be tethered to electronic communications. Perhaps you’ve built sufficient managerial capacity to keep things going for a few weeks, but upon your return you have to jump-start activity again.

Here’s another axiom, this one from John Brown of the Business Enterprise Institute in Golden, Colorado. “Sooner or later, every business owner leaves his or her business.” In stark terms, you can think about how you want to exit, or you can let it be a surprise.

The virtue that counteracts Pride is Exit Planning. An exit plan differs greatly with the owner’s age, his or her personal goals and the size of the business. In every case, it requires consideration of finances, career objectives, lifestyle ambitions, management development and self-maintaining systems.

Ah, but you are still young. You are still healthy. You still enjoy running the business. Why would you want to think about leaving?

Because thinking about how the business will function without you leads to greater profitability, a higher value for your company, and more personal flexibility in your life. Aren’t those reason enough?

Professional investors craft an exit strategy before they buy into a company. For most entrepreneurs, especially in their first five years, leaving is the furthest thing from their minds. If you are beyond your fifth anniversary as an owner, you should have one eye on the door, even if it’s still a long way off.

Thinking about the business as a separate entity, something that will survive after you’ve moved on, will help make you think in longer, more strategic terms about things like new products, target markets, and developing other decision makers in your organization. It brings up questions many owners ignore, especially “What does my company look like to a buyer?”

Long, long ago I was a manager for a national chain restaurant. They taught me a trick that I still use today. Once a week or so I’d walk out in front of my restaurant and stand with my back to it. I’d close my eyes and think “I am a new customer, who has never been to this establishment before. I’ve never even driven past. I am seeing it for the very first time.”

Then I’d turn around and look at my business for the very first time. I always saw something that could have been better.

Selling a business is a bit like selling a house. You spruce things up so that it looks good. In a business you make sure your financial statements are up to date and easily understood. You tighten up on expenses. You refresh operating procedures.

If you start seriously thinking about your exit now, you’ll naturally regard your business through your buyer’s eyes. To quote one of my own favorite axioms, “The things you should do to get the best price for your business are the same things you should do every day that you own it.”

Thanks for reading “Awake at 2 o’clock”. Please share it with other business owners.

The 7 Deadly Sins of an Entrepreneur

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The Seven Deadly Sins are alive and well in small businesses today. Far from being a hoary religious holdover from the Dark Ages, they are practiced assiduously by entrepreneurs everywhere.

devil dancing in suitThere is something to be said for any concept that catches the public imagination for fifteen centuries. First postulated by Saint John Cassian around 400 AD, the sins were codified by Pope Gregory the Great in the late sixth century, and popularized by Dante Alighieri in “The Divine Comedy” in 1315. They remain present on a daily basis in many businesses  through the 21st century, 700 years on.

The Seven Deadly Sins are Lust, Gluttony, Sloth, Wrath, Greed , Envy and Pride. In a business, they can be divided into Operational, Tactical and Strategic sins.

The Operational Sins are Lust and Gluttony. Lust is present when the owner uses his or her power of position to pull the business in any direction he or she chooses. Gluttony is a tendency to hoard all authority and decision-making for yourself.

The Tactical Sins are Sloth, Wrath and Greed. Sloth in business is settling for “good enough,” when a bit more effort would produce a far better result. Wrath is using adrenalin to replace critical thinking, and reacting to problems by ratcheting up your emotional drive. Greed presents itself as the belief that every issue in the business could be solved by “just a little more.”

The Strategic Sins of Envy and Pride stem from the owner’s personal belief structures. Envy is the belief that no one has the same problems as you do. Pride is a conviction that the company can’t survive on a day to day basis without your special talents.

Christianity, of course, has corrective actions for the Seven Deadly Sins. Each sin has its counteracting virtue. For Lust there is Chastity. For Gluttony; Temperance. The sin of Sloth is counteracted by the virtue of Zeal, and that of Wrath by Kindness. Greed is foiled by Generosity, Envy by Love and Pride by Humility.

When applied to business ownership, the Entrepreneurial Sins also have corresponding “virtues” that can reduce or eliminate their negative effect on your business.

The Operational Sins require behavioral changes. The counter to Lust comes with having a Personal Vision. Gluttony is defeated with Delegation.

The Tactical Sins dissipate in the face of internal organizational  practices. Sloth can be overcome by Metrics; the use of clear goals and objectives. Wrath is far less of a problem in the presence of Planning. Greed lessens when there is objective Budgeting.

Strategic Sins are those that can be defeated with more long range initiatives. Envy falters in the face of Knowledge about your industry and your markets. Pride dies a natural death when you engage in Exit Planning.

The Seven Deadly Sins of Entrepreneurs is a fun way to look at much of what we do in our business. I’ve presented it a number of times as a workshop for local and national business groups, and the idea is catchy enough to have landed me an Easter Sunday television interview a few years ago.

You may not be inclined to New Year’s resolutions (I’m not, myself) but most of us start a fresh calendar with some level of intent to “do better.” We’ll spend the remainder of January examining the indicators of these sins in your business, and what you can do about them.

If you know a business owner who might benefit from correcting one or more of the Seven Deadly Entrepreneurial Sins, please forward this column so he or she can subscribe. Thanks!