Your Exit Plan: The 3 Inarguable Reasons to Start NOW
What is Your Business 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. A business 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 In 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, 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 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. 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 If 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 navigation 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 Planning: It can wait until tomorrow, right?
When asked about succession or exit planning, have you given one of these responses? “I think I will leave my business in three to five years.” “The operation still needs me.” “The business is not ready to be transitioned.” “We are too busy to worry about succession.” “I will easily sell it in a few years and walk away.” “I am just not ready yet.” Or perhaps you know someone who has given one of these answers when discussing their potential exit from the business and retirement? Like starting an exercise program, exit planning can easily wait until tomorrow. However, for the Baby Boomers, tomorrow is here. Business owners born between 1945 and 1964 makeup 25% of the population but own over 60% of the small businesses. The high ownership levels result from their surge into the job market in the 1970s and the lack of room in corporate America to absorb a much larger and better-educated employee population. From 1975 until the middle 1980s, Baby Boomers opened new businesses at a rate never seen before and not duplicated since. Today, over 5,000,000 Baby Boomers are preparing for retirement. Just as when they all went to college, started new businesses, and became prolific consumers, they will create a flood of small business sales in the United States. So, what is exit planning, and why should you do it? Also, how do you do it, and when should you start? Exit Planning: What is it and Why do it? When a business broker creates an “exit plan,” it usually involves listing the business for sale to a third party. An attorney’s planning focuses on the legal documents that allow the transition of a company’s assets to new ownership. An accountant or financial planner will look closely at tax and inheritance issues, and an insurance broker offers products that reduce the risk of interruption or disaster. It is logical then that exit planning is quickly becoming a significant focus of the legal and financial communities. Although boomers are healthier than prior generations, they all have to retire eventually. Tens of thousands of professional advisors are positioning themselves to provide tax, risk management, wealth management, and contract preparation services to this flood of sellers. You may be in your 40s and 50s and maybe thinking that this doesn’t apply to you. After all, you have plenty of time. However, the answer to that question is another question: then why buy life insurance? Anything can happen to any of us at any time. Exit planning is another form of insurance— just as you are making sure your family is being cared for, don’t you want the same for your business and employees? There are many additional benefits to starting exit planning early— the process of getting your business transition ready means making it more attractive to investors. That includes, but is not limited to: maximizing revenue, lowering expenses, increasing efficiencies, eliminating owner-centric processes, getting the business modernized, up-to-speed, and more profitable. All of these will have tremendous benefits for you and your company regardless of your exit timing. Examining the strengths and weaknesses of the business, IT systems, management team, and customer base are good continual improvement practices that make the company more profitable in the short-term and make it much more attractive for a potential buyer. How to Plan Your Exit? A successful transition starts by determining the planned date of exit and the post-tax proceeds required from the business to satisfy the owner. The target proceeds should be achievable in the chosen time frame. If they are not, you can extend the time frame or reduce the financial goal. After determining schedules and financial information, there are essentially three options on whom will take over as an owner: a family member, an internal team sale, or a third-party sale. Discussions with accountants, attorneys, financial planners, and others likely feel similar to a complicated maze that makes you not even want to start the process. A trained advisor will help initiate the process and will engage in constant communication with all of the parties listed above, with your control of the process remaining intact. The most effective and efficient approach to exit planning is to select a single professional who can manage all the others involved. Creating new entities or sale agreements is pointless unless the tax implications are first understood. Planning to reduce the impact of income taxes may be rendered moot if a company is not in a position to sell. Putting the company up for sale may be a disaster if an owner doesn’t understand what buyers are looking for and how much they’re willing to pay. Not only will this process determine the best options for your eventual exit from your business, but it also provides a screenshot of the company. It helps to identify areas of the organization that can be improved and what we can outsource to others to achieve the highest sale value possible. Eventually, the planning also leads to a smooth transition, operationally, so that your business continues to be run in the best manner possible by new leadership. When to Start? NOW! From 2018 to 2023, Retiring Boomers will outnumber GenXers reaching ownership age by 4,000 a day! Studies show that the generation reaching retirement age is 2.5 times more likely to want to own a business than those in their 30’s and 40’s. Thus, this severely limits the small-business buyers in our economy today. It often takes a minimum of 5 years to develop most succession and exit plans—a more realistic number might be as much as ten years. Time and potential buyers will likely be the two most significant challenges for you in this process. Once you have a plan in place, you can implement it whenever you chose. Why wait until it is too late? Get the conversation started with the correct parties now. Are you ready? The single largest transaction and transition of your life deserve special attention.
Don’t Let Your Succession Plan be a Bad Sequel
When movies are made correctly and have appeal, there is no denying the impact. They win awards, inspire the audience, and fill the pockets of the movie studios. However, these blockbusters can also be the platforms for some of the biggest flops on record. After a successful movie the audience wonders what will come next, and the studio wonders how they can keep the franchise going? Good sequels can be important, expanding on worlds and delving deeper into plot lines, but a bad sequel can strain our love for the movie by losing key actors and directors, and recycling plot lines and jokes. One such example is director Allan Arkush succeeding Harold Ramis to direct Caddyshack II, which flopped and earned a 4% score on Rotten Tomatoes. Compare this to the 1980 original classic, which received 74%, and you can see the difference. The same thing can happen in business. Once it is time for a CEO or business owner to retire, the whole company can be put on edge. Many of the employees are thinking about what happens next. Are they left having to find a new job or can a new CEO/owner create the next bright sequel for the company? It might not be possible for the Dan Ackroyd’s of the world to replace the Bill Murray’s in an iconic role, but with the right director they have a better chance to make the role their own and not some cheap imitation of the past. A study from the Exit Planning Institute shows that 76% of business owners plan to transition their business in the next 10 years. However, 83% do not have a transition plan in place. Coincidentally, lack of planning is the number one reason why businesses fail. During succession planning a business needs to be transitional, meaning ready to pass leadership onto another. A business also needs to be transactional, meaning maintaining a high level of value and low debt, so it is attractive to a potential buyer. The Script The key factor that determines a successful succession is planning. One should begin this planning the moment they obtain leadership and/or ownership because succession does not happen only when one retires. The only way to beat the worst-case scenario is to plan for it and pray it never happens. With a thorough plan a company will increase in enterprise value, secure future worth, and reduce potential stress. Without a plan, the decrease in value could be substantial. According to the Exit Planning Institute, 80% of companies are simply not able to be sold and only 8% of companies actually get their asking price. When creating a sequel, the studio needs to consider how popular the first movie was and if a second would generate enough revenue. Then they choose a director, receive a budget, write the script, and cast all the roles before sending the project off for production. The same considerations need to be undertaken in succession planning. This requires weighing all your options for a successor. Most people look just to the C-suite, but is there any outside hire or fresh face in the company that should be considered? You also need to budget. How much is this transition going to cost? Are there going to be other changes that will take place that need to be considered? Next comes the company plan. Is the new successor going to use the same business model or create one of their own? The answers to these questions will help the company become more transition-ready. This means that all the transactional and transferable aspects have been fine-tuned and prepped for the next stage. In a movie you can usually tell when there will be a sequel. At the end of the movie you are left with either a cliffhanger or some unanswered questions. It is also easy to tell when a movie studio was not planning on doing a sequel but decided to release a shameless cash-grab. Typically, the sequels that are released after a movie that seemingly wrapped everything up and left no real questions are the ones that flop. Caddyshack II was a movie that did not need to be made and the director believed that enough people would enjoy it purely for the nostalgia and not notice the absence of all but one of the key characters. This lack of planning left the audience bored and consequently became one of the worst movies ever made. Your Sequel? Only careful planning and a sufficient amount of time can prevent you and your business from becoming a bad sequel. If a studio decides to make a sequel, you need to pick the “director” who wants to continue the growth of the company and lead it into the future. Budget? Focus on making the business more financially attractive so there is sufficient capital, investors, and/or potential buyers. Script? Engage in continual business and succession planning and make sure your key financial advisors, accountant, and lawyer are also involved. Casting? Work with an industry recruiter, consultant, or advisor to make sure you have the right people in the right roles. After all, your team needs to be as transition ready as your business. Succession planning is ultimately about the transaction of your life and not all sequels are bad. The Godfather II is arguably better than the first movie and is considered one of the best sequels, if not movies, of all time. Do you want to be a Caddyshack II or a Godfather II? The choice is yours and now is the time to get started. “Quiet on the set… Action!” SOURCES: PWC Family Business Survey; Exit Planning Institute; and Pew Research Center. The single largest transaction and transition of your life deserve special attention. Are you planning to exit and sell your business? Business Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors position themselves to provide tax, risk management, wealth management, and contract preparation services.
Focusing on Youth in Hiring is Hurting Your Organizational Health
In the Fall of 1984, Ronald Reagan, at the time the oldest U.S. President in history, was in a fight for re-election. In his first debate with youthful challenger Walter Mondale, he appeared tired and lacking energy. Many began to question his stamina for the job. In the second debate, he was asked a question about his age and being able to function in tough circumstances and in a crisis. Without hesitation, Reagan said the lines that we wish would be used more by older candidates seeking a job today: “Not at all… and I want you to know that also I will not make age an issue of this campaign. I am not going to exploit, for political purposes, my opponent’s youth and inexperience.” He never looked back and won re-election in a landslide. Underlying the humor of Reagan’s response (even Mondale laughed at the time) is the truth in his words. Do we, and organizations in general, consciously and/or subconsciously choose “youth and inexperience” over “experience and wisdom” to our detriment and even to the detriment of the younger employees we onboard? Are we missing training, coaching, mentoring, and even reverse mentoring opportunities that would ultimately lower turnover and benefit the entire organization? Is it time to rethink age in hiring, especially in the current “candidate’s market,” and get away from the misconceptions and perceived costs of hiring older workers and focus on the benefits? In Search of Experience and Wisdom “Age is an issue of mind over matter. If you don’t mind, it doesn’t matter.” – Mark Twain Most can agree that experience and wisdom are good things but there are clearly also times that age and health can lead to poor performance. On the flip side, performance in younger employees could be just as impacted by a lack of training (investment in your personnel), mentoring, and coaching, which could lead to increased turnover and impact the future of your entire organization. We recently placed a 61-year-old candidate into a client that simply couldn’t ignore the fact she would make the entire department better. Instead of age being a negative, this particular person’s depth of work and life experience, high energy, and continual learning mindset, as well as the fact that she had been a coach and mentor to several in the same field for decades became a major positive. She didn’t need training— she was going to become the trainer. The client saw that this was a resource his many Millennials could tap into and concerns over age and longevity in the position were overcome. Too often as business leaders, we look for “shiny and new” over “tried and true.” On the flip side, the disdain that many in the Baby Boomers and gen Xers have for Millennials (and vice-versa) is not a new phenomenon. In fact, saying that Millennials are more prone to leaving jobs and switching companies than previous generations is misleading. They leave jobs because they are young and new to the workforce— and there was probably little in the way of training investment, coaching, and mentoring to keep them there and get them through the rough patches. According to Pew Research and a study they did comparing Millennials to gen Xers, the percentage of 18-to-35-year-old employees who stayed with their employers for 13 months or more was 63.4% for Millennials in 2016 and 59.9% for gen Xers in 2000. In addition, the percentage of these same groups who had been with their employers for 5-years or more was 22% for Millennials in 2016 and 21.8% for gen Xers in 2000. It is easy to form generalizations about generations and blame the Millennial that is leaving for not “having a strong work ethic.” It is also envy and we have all been there. Ask an all-star major league baseball player from the 70s or 80s if he wouldn’t want the salary of even the most mediocre ballplayer today? What about Millennials just entering the workforce out of college? According to Mike Brown, and the “The Class of 2018 Career Report” conducted by LendEDU, 41.3% had already found a job, and of those, only 37% envision staying at that same job for over 3 years. 28% of those who had found a job envisioned staying at their job for up to 3 years, while 25% thought they would last 6 months to a year and 10% said they would leave as soon as something better came along (click here for the full study at LendEDU). The research points to the fact that younger workers are leaving your company not because they are “Millennials.” They are leaving because they don’t see the career path and opportunity they’re looking for, and they may indeed have higher expectations, or they simply need guidance. They may have been thrown into a position without proper onboarding or training and are learning simply by making mistakes, which can be soul-crushing. In a recent Udemy “Workplace Boredom Report,” 46% of employees are looking to leave their companies because of a lack of opportunity to learn new skills. This is when a more experienced and wise counterpart can provide the training, skills, career/life guidance, coaching, and patience that can help them learn the position, see their fit within the company, adapt to the culture, and see a future. Do you have a mentoring program? There is a wealth of company, industry, and subject knowledge in older workers that Millennials can tap into and that employers should value. Programs that enable knowledge transfer and connect younger and older workers have been found to have a high return on investment because of the impact they have on increasing retention rates, promotions, and overall employee satisfaction. There is also a benefit in reverse mentoring in which older executives are paired and mentored in turn by younger employees on technology, social media, and trends. After all, what organization couldn’t benefit from a free exchange of ideas, wisdom, and engagement between employees in different generations? Rethinking
Why Succession Planning is Rarely a Success
The numbers are staggering. 10,000 Baby Boomers hit retirement age every day, and 60% of all business owners are over age 55. According to recent surveys by the Exit Planning Institute, PNC Bank, and Kent State, 80% of business owners have no transition plan or have not documented or communicated a succession plan. Furthermore, 80% of these businesses are simply not saleable, nor do they have a proper talent pipeline to continue on. Of the remaining 20% that are sold, 12% will be sold, but not at the original asking price. The study also discovered that 40% of business owners did not have a plan that covers their forced exit (death, disability, divorce or illness). Perhaps Benjamin Franklin said it best: “By failing to prepare, you are preparing to fail.” Even when succession planning is undertaken by business owners, and 98% of them feel it is important, they rarely have a plan in place. When they actually do have a plan, there are several reasons why they rarely succeed… Many think it is not important and choose to focus on the transition, rather than the transactional nature of a business. If it is family business, sometimes the family grows faster than the business, and there are other family dynamics and emotional components at work that delay or prevent an effective transition. Potential future leaders leave the company looking for greener pastures. Owners simply do not adhere to the plan, and many continue to stay long past their expected date of departure. New leaders are ill-prepared to take over, or simply do not perform to the level of the original owner. A focus on the past or a mindset fixed on, “this is the way it has always been done,” not only cripples future leadership, but puts the entire future of the business in jeopardy. Politics, time, lack of commitment and fear. Not all hope is lost. We have been a part of many succession plans that have been and continue to be successful, and they all share these characteristics… The understanding that effective succession planning is more than just transitioning to new leadership, there are transactional components at work as well. They take an objective investor’s approach to looking at their business… Is the risk at a low level and is there a potentially high ROI? Operational Efficiencies: Are there efficient processes and procedures in place that can be easily managed and communicated? Financial Strength: Looking at the metrics (ratios, receivables, banking situation), is the company operating at a high level and doing more with less? Transition Ready: If the owner should suddenly leave or pass away, how easy would it be to transition to new leadership or potentially sell the business for a high return? Legal and financial preparation? We know from our own experiences, especially in a family business that is often emotionally charged, that succession planning is an extremely necessary, but difficult exercise. In fact, according to the Exit Planning Institute, after transitioning or selling their businesses, owners “profoundly regretted” it after just (12) months. A glut of companies will be transitioning or be for sale for many years to come as the Baby Boomer generation continues to move into retirement. Focus on making your company more transition-ready, and get your advisors (Financial Planners, Attorney, CPA and other key advisors) on the same page to make sure you are financially and legally ready. It is also important to focus on your emotional readiness with a life or executive coach. Also align yourself with a well-trained executive search and business advisory group that can help you find your next leader and management team, as well as help you build your organizational bench strength. Instead of planning to fail, plan a clean transfer to the next generation that has been fully prepared and wants it, or a mutually beneficial transaction or transition to a new owner. After all, succession planning is about preparing for the transition or transaction of your life. Are you ready? SOURCES: PWC Family Business Survey; PNC Bank; Kent State; Exit Planning Institute; and Pew Research Center. The single largest transaction and transition of your life deserve special attention. Are you planning to exit and sell your business? Business Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors position themselves to provide tax, risk management, wealth management, and contract preparation services. BEST Exit Plan Advisor has been trained to manage your team of tax, legal, business, and financial planners to navigate your exit strategy. Click here for our Special Section for more details and a video on how to get started. If you want to see how prepared you are for transition, take the 15-minute Assessment at no charge: There is one indisputable fact – 100% of owners will eventually exit their business. The Assessment is a multiple-choice questionnaire that does not ask for confidential or financial information. Nevertheless, it is a critical first step in starting the discussion and planning process.
