So excited to anno
unce The Exit Planning Coach Handbook.
This represents the assembling of experience in over 12,000 hours of coaching business owners. It was written for advisors but would be useful for anyone who sells to or works with business owners.
The paperback and Kindle versions are both currently available on Amazon. Watch this space for the announcement of the audiobook.
We hope that The Exit Planning Coach Handbook will be a reference work for any advisor who works with owners.
What does being prepared for 2023 mean for business owners who are approaching, at, or already beyond normal retirement age?
It’s become fashionable to pontificate about the “inevitable” recession in the coming year. There is an argument for not talking ourselves into making it happen. Unfortunately, there are indisputable reasons why it is going to occur regardless of whether we discuss it or not.
Inflationary stimulus (including $6 trillion of ”quantitative easing”) in the US, combined with over-dependency on Russian gas supply in Europe and falling industrial production from COVID lockdowns in China have created the proverbial slow-motion car wreck for the world economy. All three will come home to roost for the world’s major markets in 2023.
Just as the result of these failures in leadership is eminently predictable, the impact on businesses in transition is equally plain.
Many owners will look back at 2022 as the year they finally decided that enough is enough. Owners overcame the dot-com crash, 9/11, and the Great Recession. Now a combination of resurgent inflation, supply chain headaches and a lack of qualified workers will tip the scales toward developing an exit strategy.
Lower valuations call for creativity in structuring transactions. Employee buyouts and ESOPs that maximize the benefits of sustainable cash flow can provide owners with income that wouldn’t be available from a hard-negotiated third-party sale.
Seller financing or installment sales may offer flexibility that brings more qualified buyers to the table. Stretching out proceeds as recurring income can help a seller wind up with more in his or her pocket, albeit over a longer time period.
Retaining your top talent will be more important than ever, especially if wages continue to rise. Structured equity sales can act as both an incentive and “golden handcuffs” to ensure that a company’s best employees, and consequently its enterprise value, remain intact through dips in revenue.
Many owners were lulled into a false sense of security by frequent calls from business brokers and private equity groups. They may have postponed their planning in the belief that a transition could always happen whenever they felt the urge.
When the phone stops ringing, they will need cooler heads to help them understand that there are options besides a fire sale. Equity can be retained, and retirement can be secured. Work with an advisor who understands the alternatives to “List it and they will come.”
Companies will still be sold in the coming year. Prices may be lower, but are only falling from the unrealistic high driven by cheap money. It may feel like you are getting less than market value, but multiples have only receded to their historical mean.
If this is the year for you to begin your “second act,” it’s still the same approach as it was before. Being prepared for 2023 is a matter of researching the market, planning the process, and hiring qualified professionals.
In every internal transfer, whether to family or employees, the owner/seller has to make the harvest or grow decision.
We’ll presume that your business has already reached a point where its value meets or exceeds your financial objectives as the owner. If growth is required in order for you to afford your next act, then that decision is less strategic than it is driven by your lifestyle requirements.
If the company has already reached a substantial level of success, however, you may still be tempted to maximize cash flow until your departure. Deliberately reducing your cash flow by starting a process of equity transfer may not sound very appealing. The obvious question is “Why would I sacrifice my personal income in order to finance their acquisition of my company?”
The answer to that question revolves around the strength of your desire to control the process. Although staged internal transfers of equity almost inevitably require that the owners surrender some personal income at the outset, there is considerable psychological value in dictating the timing, method, and eventual proceeds of your exit.
When compared to the listing and sale process of presenting the company to third-party buyers, an internal transfer allows the maximum of owner control. There is no exposing the finances of the company to strangers. It doesn’t require negotiating, sometimes against professional negotiators, or against low-bid opening offers. Since internal buyers are already familiar with the organization, it can circumvent the often excruciating process of due diligence.
IAs a seller, you can look at your up-front funding of initial equity purchases as a sort of insurance policy. No lender will fund 100% of an employee purchase, and family purchases are rarely financeable. Transferring equity to the buyers, whether it is fully paid for or via a subordinated note, allows them to finance the balance of the purchase.
The “insurance” factor is usually understood. In return for sacrificing some cash flow now, an owner can leave on a chosen departure date with 70% or more of the proceeds in hand. The longer you wait, the higher the probability that you will have to owner-finance the entire transaction.
There are also a few arguments against a growth strategy. The chief one among these is time. If you are pressed for time due to the influence of one of the Dismal Ds, then you may not have the three to five years that it typically takes to build the buyer’s equity to a point with the balance of the purchases financeable.
This essentially leaves you as the seller with two options. Either you can take the risk of financing the transaction yourself or place the company with an intermediary for a third-party sale.
If the buyer is a family member or members, it may be more advantageous to transfer the company via estate planning. Then you are usually limited to drawing such income as the company’s cash flow can support until you pass away.
Of course, these issues are influenced by both your lifestyle goals and legacy intentions. In the absence of outside forces creating time constraints, however, the decision not to grow is seldom favorable for either the seller or the buyers.
There are several factors that strongly favor the decision to grow throughout a transition process.
Overall, business organizations act much like organic entities. They are either growing or dying. Trying to merely “hold the line” against the normal forces of changing markets and competition can be challenging.
Growth provides opportunity. For a seller, the growth in the value of the company may be pushing it towards your retirement goal or simply enhancing your lifestyle options. For the buyers, equity purchased in installments is increasing in value over the course of the transition. They are seeing a tangible benefit for their contribution to the growth.
The transition plan may also build in growth as a prerequisite for any equity purchases. This has the effect of gradually transferring the responsibility for the organization’s success from the seller to the buyers. As they become more invested in the success of the company, the burden of leadership lessons for the exiting owner.
Many owners consider the decision to exit as “the beginning of the end” of their entrepreneurial career. That is a mistake. As advisers, our job is often to help the owners see their exit plan as the beginning of a triumphant capstone to their successful business careers. The decision to harvest or grow is really one between going gently into that good night or kicking off the next act of their lives with a bang.
Owner obstacles to the implementation of an exit plan are often unconscious, but they can be dramatic. Their attachment to the business can be difficult to break. An advisor spends a lot of time and energy developing the vision for life after ownership in the hopes that it is far more attractive to them than their current role in the business.
Yet no matter how well developed that vision is, or how well defined the action steps are, it isn’t unusual to find owners who behave in a way that ultimately sabotages the plan. Sometimes their actions are even intentional, but more often they aren’t. The problems arise in two ways.
“Death from Inattention”
We always ask exit planning clients for two target dates. The first is when they want to be relieved of day-to-day operational responsibilities. The second is when they want to be completely free of any connection to the company.
We tell a client that once we have achieved the first objective, the second may become more flexible. Freed of the task-based duties of running the business, an owner often becomes more strategic. He may start planning for new growth and value creation. She might go back to her role when the business first started, when she was the best salesperson or the designer of novel product offerings.
Owners returning to their core skill set are usually a benefit to the business. The problem arises when they enjoy the lack of responsibility so much that they just become owners in absentia.
There is no strategy. The company drifts along on the backs of the operations managers, but really doesn’t have a direction beyond “more of what we did yesterday.” There are no new initiatives.
Companies are organic. They are either growing or shrinking. The lack of direction may take a while to have an impact, but eventually performance will suffer. Getting owners to re-engage after time away can be exceedingly difficult, but if they don’t, the transition is unlikely to accomplish their objectives.
“Death from Over-Attention”
The second obstacle to successfully implementing a transition occurs when owners have surrendered their task-based duties. In this case, they are unable to define their contribution in the absence of being “busy.” They begin looking for ways to contribute, often where their contribution isn’t needed.
It’s not uncommon to begin demanding more accountability and greater detail than is really necessary. He or she pours over reports looking for errors, anomalies or declining results in an attempt to prove added value.
Another technique used to prove contribution is “seagull management”. An owner may look for opportunities to make decisions, but does it without consulting the managers who are in charge of the function. Because they have always known best, they still know best. What isn’t as obvious is that they are now are working in a vacuum, with little knowledge of what went before. The results are usually not ideal.
A third way owners might evidence over attention is with a “break the rules” mentality. They offer exemptions from policy, or circumnavigate systems because they can. Exercising authority shows who is in charge, even if there is little apparent responsibility.
Preventing the Owner Obstacles
We call these “good” obstacles because they typically occur only after some level of initial success in the exit planning process. They are a direct result of relieving owners of the more mundane duties of management, and freeing them up for more effective leadership. Each is preventable with some preparation.
Either issue can be forestalled by including the owner’s next level of responsibility in the planning process. If the owner resists retained responsibilities, then the future become plain. Plans can then include transfer of higher functions to the management team. If the owner insists on retaining a level of day-to-day control, the coaching process should include defined parameters about what reporting is really necessary, and how often it will be presented.
In either case, owner obstacles occur when the owner is crossing the no man’s land between total focus on the business and the time when it isn’t a recipient of their attention at all. Like any no man’s land, it is unfamiliar territory, and some pathfinding is necessary. That is the exit planning coach’s job.
Entrepreneurs don’t use rearview mirrors.
All business owners are goal oriented. From the day you founded or assumed control of your company, you set targets and achieved them. That is why you are successful. You know how to define a goal and make it happen.
If I asked you to tell me the best thing that you did in the business three years ago, you’d likely respond with, “I have no idea.” or “Why would I know that?” or “Who cares?” You are busy looking forward.
I’ve even had some owners get angry. They feel some obligation to know the answer, and that they are somehow failing a test if they don’t. The fact is, no entrepreneur has ever been able to give me a cogent answer about his or her accomplishments in the past.
If I ask, “What do you plan to do in the coming year?” you will share plans to increase sales, hire new employees, or enter into a new area of business. Whether or not you have a formal strategic planning process, you have a pretty good idea of the changes and improvements you want to implement in the future.
An entrepreneur’s vision of “What’s next?” is frequently the most neglected aspect of their exit planning. They may term their goals for exiting in measurable, concrete terms. “I want to retire in five years with ten million dollars in the bank,” is an archetypical example. Others will couch their vision in terms of people. “I want financial security for my family, and continuing employment for my staff.”
All too often, their vision for the future deemphasizes or completely neglects their own individual needs. When pressed to enunciate more personal goals, they’ll often respond with something like, “I guess I’ll just play a lot of golf.”
Playing a lot of golf isn’t a retirement plan.
In a recent survey from PwC, they reported that 75% of business owners have regrets a year after they leave the business. The Exit Planning Institute did a survey ten years ago with the same result. According to Riley Moines, author of The Ten Lessons: How You Too Can Squeeze All The “Juice” Out of Retirement, six months to a year is the typical initial “vacation” period when a retiree catches up on travel and recreational activities.
After that first year, the reason so many ex-owners are unhappy is because they didn’t have a clear vision for their life after the business. Their expectations simply did not take into account the reality of what would happen when they were no longer spending the majority of their time working.
When I ask about their plans for next year, some owners are more specific than others. But none of them ever say, “I don’t know. We may make money, or we may lose money. We may grow, or we may shrink. Whatever happens, happens. It doesn’t matter.”
Why would anyone expect that an entrepreneur who has driven towards goals for their whole life will suddenly be happy without purpose, without identity, and without a plan? It isn’t surprising that so many owners are reluctant to discuss exit planning at all. Life without the daily challenges and decisions that come with running a business seems unattractive. Their vision of the future is unclear.
The success of an exit strategy depends less on the amount of money your transfer generates than it does on your personal satisfaction. Unless you can identify a vision for a “next act” that is more appealing than what you are doing now, business ownership will never be in your rearview mirrors.
As a business owner, you know what it’s like to lie awake at 2 a.m. Maybe it has happened when you are excited and full of new ideas for your business. More often, it’s because you are worried about issues you will face the next day. Sometimes, it’s because you just woke up with the solution to a problem. I’ve experienced all those emotions about my businesses over the years. Awake at 2 o’clock? is where I share them with you, and hopefully help with answers that will let you sleep.
John F. Dini, CExP, CEPA
Small business owners are the Hunters of the 21st century. We are 3% of the US population, and yet we create over half of all American jobs. As Hunters, we may not be inclined to manage by the numbers or stick to systems. Are you a Hunter or a Farmer?
How prepared are you to exit your company?
The Assessment breaks down the four major categories of exit readiness; Finance, Planning, Operations and Revenue/Profit.
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