Exit Planning Tools for Business Owners

selling a business

The House of Gucci Succession Plan

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By now, you may have seen the movie House of Gucci. Lady Gaga and Al Pacino star in the true depiction of the Gucci family.

The Gucci brand started with two brothers who own the family business equally. Each brother had a son, and each son was to inherit the empire. One of the sons was a ne’er-do-well, who always attracted and found trouble. Despite nobody ever giving him a chance, the viewer could tell his successor ownership was doomed. The other son married the woman who was played by Lady Gaga. The story progresses through time as one of the fathers die and the other goes to jail while the wife rises to power and greed. To complicate the succession plan, lavish lifestyles, poor business decisions, children and divorce ensue.

The Gucci brand has always been iconic, and it remains so today. The movie describes the struggle between the two brothers and their ideas on how to grow the brand. One brother wants to expand into shopping malls across the world, while the other brother believes the idea of having a Gucci store in a mall is despicable. The two brothers who have these opposing views show how difficult it is running a family business with 50-50 ownership.

The two sons are the on-again/off-again heir apparent to the fortune, and eventually they will run or have a hand in running Gucci. The ne’er-do-well son struggles and is really off-base with his ideas, which are very inconsistent with the brand, and he lacks any sense of training or sense of how to run a business. Subplots in the movie describe how the other stakeholders attempt to circumvent his ownership and ultimately the rest of the family.

The other brother is smart, but he has a blind spot in that he has never had to struggle financially. He has never had to know what it was like to lack resources. His approach to management and growth are flawed because of the company culture and his paradigm. The influence of his wife and others around him also taint the management and success of a family run business. He lives lavishly, incurring personal expenses that he funds through the company.

Subterfuge and infighting ultimately become the demise of the family. The business survived but it was sold off for pennies on the dollar and was turned into a publicly traded company and as a result, the family no longer owns the business.

Clearly, the Gucci’s would have benefited from a team of exit planning advisors to help them navigate these waters! Indeed, there was no training of the sons, there was no alignment by the brothers, there was no dealing with the other stakeholders in the family. There was no financial planning, nor personal planning. Other than the brand quality, there was no development of cultural consistency or business attractiveness. There was a lack of management succession, planning and delineation of who does what. Sadly, there are many family run businesses that much less well known, but who lack the kind of exit planning that is needed to successfully pass along the business to the next generation.

House of Gucci illustrates how important it is for families to pay attention to succession and exit planning. I give this movie two thumbs up for the entertainment value of the movie, but two thumbs down on exit planning!

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

Why You Can’t Sell Your Business Overnight

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So why can’t you just sell your business in a couple of months?

Business owners are often told they need to get ready to sell their business, why can’t they just up and sell it? The short answer is that they are unlikely to sell it. Listing the business may be easy, getting someone to buy it, that’s the hard part. According to the Exit Planning Institute, only some 20-30% of businesses sell today.

You might be asking yourself, what actually makes a business part of this group who does sell?

Of course, there may be many answers to this question, but I think the biggest reason can be summed up in a single word: Risk. A business buyer is going to look at several factors when determining if they will buy. These factors lead them to conclude a risk level and they compare that with their tolerance for accepting risk. The higher the perceived risk, often there is a direct correlation with a lower multiple of EBITDA, and thus a lower selling price. In some cases, the risk perception may be so high that the buyer decides there is no price they would pay to accept that risk.

What are some of these perceived risks?

I think for a lot of small and lower middle market businesses, the challenges for a successful sale to an outside party are greater than for larger companies. Larger companies are larger because they sell more products – they need more inputs to sell a larger amount of their product. They need people, processes and management. Usually in a larger organization, the owner is not participating directly in the production or sales of the product, they have an organization that does this. Contrast this image with a smaller company where the owner is directly involved in the production of the product or sales – the greater this involvement, the greater the perceived reliance on the owner. We call this “owner centricity.” The higher the owner centricity, the riskier the proposition is to an outside buyer.

If the current owner is deeply active in production, sales or the management of the firm, then an outside buyer will have to replace those functions – they may conclude they will have to do these activities, and there is the rub. They may or may not want to do them, but perhaps more important, they may not perceive that they are able to do those functions. An owner who knows all his customers, an owner who is a gregarious personality and is responsible for attracting new business, an owner who has been at it for decades and knows the industry, the suppliers, the competition – those are all critical owner functions – the problem is that a new owner may not be able to see themselves doing those activities with the same success as someone who has done it for years. If the prospective buyer can’t see themselves as being able to do these functions as well, then they will question whether the business can repeat the sales and profits earned by the original owner. The degree to which this idea is challenged is risk.

A way to reduce this risk might be to reduce the level of owner centricity. To reduce the level of owner centricity, an owner would assess the critical functions of the business and measure the extent of their involvement. Once measured, the owner would undertake the process of implementing a management succession plan to develop written procedures, systems and policies, and begin the methodical process of handing over or delegating the owner’s responsibilities.

I like to think of a business as a mental model that fits inside of a shoebox. The box has systems, policies and procedures, that runs itself. It produces a repeatable process of making money. Imagine that one could reach inside that box and pulls the owner out! Now the owner owns the box that produces the repeatable product and earns a predictable profit. I recently met with a business owner client who shared that he had taken our advice and told his staff that he is no longer coming into the office. (His words were “only call me if someone dies”!) What he found was that the business ran without him, it produced recurring and repeatable revenue and profit streams. A new buyer might perceive that they can own that box, and they may then perceive it as less risky.

Exit, succession and continuity planning is about this process. Reducing owner centricity is one thing an owner can do to prepare for a sale or exit. This is not a quick fix, this takes time. Those who develop and implement an exit and succession plan over time may be able to reduce the perceived risks to a new buyer. You might say, those with a plan have a better chance of selling their business than those without a plan.

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

Personal Vision – Life After the Sale Part 2

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In our last article about life after the sale we discussed identity. Even when business owners are comfortable with who they are, however, there is still the nuts and bolts issue of activity.

A business owner spends 20, 30, or (not uncommonly with Boomers,) 40 years focused on running a business. Unless they’ve built a substantial organization that is run by employees, it likely remains their biggest single time commitment right up until they leave. That commitment is frequently a lot more than 40 hours.

Even if the time “in the office” or “on the job” is less than 40 hours, there are the emails before and after hours, the texts, phone calls from unhappy customers or from employees who aren’t going to make it to work, and just thinking about what comes next, frequently at 2 o’clock in the morning.

Extended Vacation

When asked about activities to fill their week, many owners will say “I’ll have plenty to do!” That isn’t enough. “Plenty” requires some planning if it is really going to occupy the bulk of their work week.

After exiting a business, most owners bask in their newfound freedom. If we presume a selling price that’s substantial enough to allow them a wide range of choices, their first reactions typically include a few lengthy trips. These may range from a long-promised European vacation with the spouse to purchasing an RV to tour the National Parks.

This extended vacation period usually ranges from six months to a year. After that, most owners are looking for something to do. Their grandchildren (and their grandchildren’s parents) are less enthusiastic about having Grandpa and Grandma around too frequently. Travel is too tiring to keep it up indefinitely. Friends are rarely in the same position. Either they are still working and lack the leisure time, or they’ve progressed beyond the extended vacation period and settled down into their own retirement routine.

And as astounding as it may sound to enthusiasts, I’ve heard “I never thought I could play too much golf,” any number of times.

Life After the Sale…and After the Vacation

We use an exercise that brings home just how much the business has dominated an owner’s life. It starts by asking the owner to think a year ahead.

We start with the owner’s “average” work week. Let’s say 50 hours for this example. Then we begin deducting those activities that comprise their impression of “plenty to do,” putting an hourly commitment to each activity.

Regular travel, either for relatives or recreation, still comes close to the top of the list. We ask “How about two weeks away every quarter?” The response is that eight weeks a year is a lot, but could be enjoyable. Then we do the math: 8 weeks x 50 hours= 400 hours of vacation, divided by 52 weeks = 7.7 hours a week. A good start, but we still have 42 hours to fill to replace the business.

How about fitness? Getting into shape is often a goal, but working out every weekday only absorbs another 5 hours.

Working for a cause such as serving lunch at the local homeless shelter a few days a week, can use up another 10-12 hours. We still have 25 hours to go, or about half the time currently spent working.

We can still fit in 18 holes twice a week. That’s 8 more hours. At this point, many owners run out of ideas. That still leaves 17 hours a week, or two full “normal” work days.

The objective isn’t to merely fill up the time slots. It’s to illustrate just how big a void needs to be filled to replace the business. Whether your exit is planned for a year from now or ten, it is time to begin thinking about life after the sale.

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.

How to Add Millions to The Value of Your Business – Using EBITDA Adjustments

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As a 5-time entrepreneur who has helped several businesses increase their value, I know what it takes to run a successful business. If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

According to Oberlo, the number of small businesses increased from 32.5 million in 2021 to 33.2 million in 2022. This trend shows no signs of slowing down as more and more people are taking their first steps into becoming an entrepreneur.

In addition to new businesses, many boomer business owners will be heading into retirement within the next decade, adding even more competition for the attention of buyers.

With both of these factors in mind, it is normal for more established organizations to wonder if the increase in new competition will have an impact on the value of their business when it comes time to sell.

While this can be intimidating, there is a process a business owner that is looking to retire can take to ensure a profitable exit.

Obsessing Over Your Multiple

If my 25 plus years of experience has taught me anything, it’s that a business trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can increase its value.

After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on how much you will realize on the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open to Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

How to Increase Your Companies Value in Time for Retirement with EBITDA Adjustments.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year.

You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business.

This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.

Some of the most common EBITDA adjustments relate to:

Rent (common if you own the building your company operates from and your company is paying higher-than-market rent).
Repairs and maintenance.
Start–up costs.
One-off lawsuits.
Insurance claims.
One-time professional services fees.
Lifestyle expenses.
Owner salaries and bonuses.
Family members wages and benefits.
Non-arms length revenue or expenses.
Revenue or expenses created by redundant assets.
Inventories

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries.

Exit Strategies for Small Business Owners: A Summary Guide

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There comes a time for everyone to move on from the business they’ve created– some happier reasons than others. But even if you’re just starting, having an exit strategy for your business will help prime you for success, rather than leaving value on the table when the time comes.

This guide will walk you through the signs to sell, the basics of valuation, options for selling your business, and tips on adjusting to life after the sale.

Before you are ready to sell, it’s important to walk through this process with an experienced exit planner. This will best prepare you, not just for selling your business, but ensuring your personal finances are in order and preparing for life afterwards as well.

Step 1: Signs it’s Time to Sell Your Small Business

It’s essential to be aware of the signs it may be time to sell your business long before it happens. Selling something you’ve created from the ground up can be emotionally and mentally draining. By preparing yourself for the signs it’s almost time to move on, you can save yourself undue stress and time wasted and be prepared for the exit journey.

You no longer enjoy going to work.
Running a business is deeply involved work, taking up a lot of emotional, physical, and mental space. That’s alright as long as you typically enjoy the work you’re doing– but if most days bring dread, you should evaluate your position.

Ask yourself, if you could walk away from your business and be financially stable would you? If the answer is yes, you might be looking to sell.

You feel you are no longer a good match for the company’s future.
Companies evolve, and you may find that you are no longer equipped to be the visionary. In rapidly changing industries, keeping up with the latest innovations can be exhausting. The investment required to stay technologically competitive can be daunting, and a risk you may not want to take later in life.

If you no longer feel Like you can keep up with the demands your business needs to stay relevant, it might be time to sell.

You are bored.
On the other hand, you may find that you’ve learned your business so well that it is no longer stretching you. Your industry has been the same for decades and it will continue to be the same for decades to come.

If you’re someone who needs to be challenged to be fulfilled, selling your business and moving onto another venture might be the solution.

The industry is in decline.
Industries ebb and flow, and many booming fields have died. So it’s critical to have an accurate pulse on the future of your industry so you can ride out profitably rather than leave a business no one wants to buy a few years too late.

Businesses in declining industries still remain profitable for years to come, but it’s important to understand the right time to leave.

There are more exciting opportunities available.
Opportunities are everywhere for both you and your company. Perhaps you are ready for your next venture, or your company has the chance to leap ahead through a merger or acquisition.

Your business is failing.
While not ideal, sometimes it’s time to sell a business because it’s simply not working out. There is nothing wrong with selling a business that isn’t turning a profit. There are a variety of factors that impact the success of a business.

Lack of industry experience, lack of funds, among other aspects that are out of your control can hinder a business ability to succeed.

In this case, selling your business to someone who can fill the gaps can see that business thrive in a way that you might not have been able to.

Step 2: Getting a Business Evaluation Before Selling

Once you’ve determined you need to sell your business, it’s time to get your affairs in order and determine a fair price or outcome. Whether you’re selling for a buyout, merger, IPO, or another method, it’s critical to know what the business is worth.

Seller’s Discretionary Earnings (SDE)
Most small businesses will value their business using SDE rather than EBITDA because small business owners often have a more personal stake in their company’s finances. Like EBITDA, SDE represents the company’s net profit with a lens for the future owner to understand how they will benefit from the sale.

Organize Finances and Reports
It is important to make sure your books are kept up to date and closed regularly. Keeping your books on a tax basis will not help you when it comes time to sell. It is a good idea to have an independent CPA firm “review” your financials for the 3 years prior to when you plan to sell. An independent accountants review gives the buyer more confidence in the numbers.

Compare Other Businesses in Your Industry
Before meeting with potential buyers, know what your business is worth by industry standards. Intangibles like a promising future (or a declining industry) can significantly impact the real value of your business.

Boost Your Business Value to Maximize Returns
Before selling, there might be gaps in your business that need to be addressed. Depending on the issue, negative aspects of your business can impact the overall return you will receive. Boosting sales, updating equipment, having solid management in place, and key employees under agreements after you leave are all initiatives that will increase the value of your business in the eyes of a buyer.

Step 3: Looking at Your Selling Options

Now it’s time to consider the methods of sale available to you. Some offer you an opportunity to keep a hand involved with the business, while others allow for a clean break. Pick your strategy carefully based on your values for life after the sale.

Merger or Acquisition: Sale to another company. This route offers price negotiation, but is a slow process with only 20% of deals close on average.
Sell Stake to Partner or Outside Investor: Choose your successor through a buyout of shares from someone internal (can be great for a smooth leadership transition and culture) or an outside investor (excellent for bringing in seasoned talent and disrupting an unhealthy company culture).
Create an initial public offering (IPO): a potentially high payout, but is an expensive and complex process. Most small businesses never achieve the required scale for a successful IPO.
Pass business to family members: Create a legacy that continues to provide for your family while giving you a chance to move to the next big thing. Tax laws will vary for inheritance, trusts, and other methods.
Liquidate: Officially dissolve the business. This is unlikely to be a profitable route.

Step 4: Adjusting to Life After Selling Your Business

Many business owners feel a sense of “now what?” after selling their business. Those who do not have their next adventure in mind are at risk of feeling depressed or directionless. So while it’s difficult to move on, begin fostering new ideas before the final sale so you can avoid feeling that loss.

Prepare for change in income stream.
Your finances will likely change significantly with the sale of your business. Most business owners underestimate how much the business “supports” their lifestyle. It is imperative that you work with a Financial Planner and have clear visibility into your financial future.

Give time for reflection and potential grief.
The sale of your business is a natural time for reflection on a significant era of your life. Give yourself time to process the lessons you’ve learned, the hard times you navigated, and the successes you built. Even with a profitable sale, you may experience symptoms of grief.

Spend time with friends and family.
Many business owners work far more than 40 hours a week. Set aside time to reconnect with friends and family while you don’t have anything on your plate.

Be a “whole person.”
Remember that “business owner” is simply one aspect of who you are and what you have to offer. Keep hobbies and relationships alive, explore new things, and reflect on your values of a good life.

Start the next venture.
Whether you’re on to the next company, charitable ventures, or retirement, give yourself something to look forward to before you finalize the sale of your company.

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries.