"I Don't Even Know Where The Life Insurance Policy Is!"

The spouse of a small business owner confided to my wife, “I don’t know what I’d do if something happened to my (business owner) husband.  I don’t even know where the life insurance policy is.”  That business owner has no business plan, and more importantly, no written exit plan - and his spouse knows it.

Sadly, this situation is all too common.  Most of us avoid thinking about the possibility of disability or even death.  The “tyranny of the urgent” – customer calls, product problems, financial pressures or a thousand other things – can crowd out genuine intentions for long term planning.  When the unexpected happens, as it all too often does, everyone suffers if proper safeguards are not in place.

Effective business planning allows for the unexpected.  It details how the business is organized, what and where the documentation is, and who should fill the owner’s position if he or she is unable to continue, even temporarily.  Exit planning goes several steps further.  Effective exit planning outlines how and when the business ownership will be transferred, or sold, to someone else.  It provides for appropriate business, tax, legal, financial, and estate planning.  Effective planning means everyone involved with the business knows what will happen next.

The experience of one client emphasizes why planning is critical.  (Names have been changed for privacy).  Tom, the owner, had built a successful multi-million-dollar business.  Lenore, his wife, had long expected that she would take over running the business if anything ever happened to Tom.  It was suggested that Lenore do a trial run.  She agreed to work full time, assisting Tom, for six months.  It wasn’t long before Lenore realized that not only did she not want to work at the business, she did not want to run it – ever! 

That was valuable information for Tom and Lenore.  They knew then that the Owner’s exit plan would not be for his spouse to ultimately own and run the business.

Not long after, Tom was unexpectedly hospitalized with a critical medical condition.  Because of his foresight and effective planning, Lenore only had to be concerned about her husband’s health.  The contingencies they had carefully planned for were covered.  Lenore did not find herself trying to run a business while caring for her husband at the same time.  Their financial needs were covered, and their children, employees, and customers were protected.

A Business Enterprise Institute survey revealed that only 38 percent of business owners think they have identified all the steps necessary to exit their business, and only eight percent had put those plans in writing.

Some questions every business owner should ask are, Would my spouse know what to do next if something happened to me tomorrow?  Do they know where the important documents are?  Would my family be financially protected?  Would my customers and employees be properly cared for? Would my business continue uninterrupted? Would I want it to and would my family need it to?

The demands on any business owner can be overwhelming, but putting off effective long-term planning can be disastrous.  Take steps now to cover tomorrow’s challenges.  The time will come when you will be glad you did.

Contact us today for an exploratory conversation about our STRATEGY RENOVATION® Exit Advisor engagement. Contact information: 301-859-0860 | email@ennislp.com.         

Align Key Employee Incentives With Your Goals For Building Value & Exit

Emily has been in business for 10 years and has plateaued in both revenue and profitability. Her exit planning advisor Mary has learned that she wants to exit in 5 years and how much $$$$ she will need net of taxes in order to exit successfully. An estimate of business value has revealed that her business is worth about 50% of what it will need to be worth for Emily to head off to Hawaii in 5 years in the way she wants to.

There are two employees that Emily would consider key (play a strategic role; unique talents and skills; to the success of the business; would experience harm to the business if they leave) to the success of the business. Currently the two key employees realize the same employee benefits (health insurance, 401k with match, year-end cash bonus) that all other employees are eligible for, yet they have higher salaries commensurate with their roles and responsibilities. There is NOT an incentive plan in place that would be specific in further motivating them (in their strategic roles) to grow either revenue or profitability.

One of Mary’s recommendations for maximizing the sellable value of the business that she emphasizes, is that Emily installs an incentive plan that aligns with her goals of increasing the sale price over the next five years. Emily’s response initially was, “Wouldn’t that be taking more $$ out my own pocket…why would I do that???” Mary describes the following basic elements and structure that serves in alleviating Emily’s astute question:

• Mary explains that the plan would need the following elements to be impactful:

  • The plan is in writing and specific.

  • The plan is performance-based.

  • The bonus is substantial.

  • The bonus serves in “handcuffing” the employee to the business.

• Emily sets a threshold for either revenue or profitability. For example, $500K in profitability.

• Emily creates a bonus pool of 30% of all profitability that exceeds the $500K threshold:

  • She informs the two key employees in writing how they would be rewarded for increasing the profitability of the business. The pool would be split 50/50 between the two key employees.

  • In the following year, an additional $300K (over the $500K threshold) is realized and a pool of $90K is established ($300K X 30% = $90K). Each key employee receives $45K in incentive compensation split between immediate cash or stock payments and deferred compensation.

So, Emily was quick to see how this plan would actually put more $$$$ in her pocket and her exit goals could be attained successfully as the value of the business would increase as profitability increased. And, she understood how it didn’t “take $$ out of her pocket”.

With Emily’s enthusiasm about implementing an incentive plan, Mary made sure they now had an expert on the exit planning team with extensive experience and expertise in stock and cash bonus plans and how they need to be designed and maintained to also meet all IRS/ERISA regulations.

If you want to increase the sellable value of your business, aligning the performance metrics of your key employees with your goals and implementing a well-designed incentive plan can be most impactful. Contact us if you’d like to discuss further: email@ennislp.com | 301-859-0860.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Trust the Process of System Documentation

In business, one key aspect often separates successful ventures from those that struggle to thrive: systems documentation. It's the roadmap, the blueprint outlining how a business operates, from its day-to-day processes to long-term strategies. In a recent ExitReadiness® PODCAST episode with guest Jason Henderberg, we discussed how meticulous system documentation can significantly enhance a business's value, ultimately paving the way for a higher sales multiple.

With over 30 years of experience, Jason has witnessed firsthand the transformative power of systematizing business operations. His advice? "Trust the process."

During our conversation, he emphasized the importance of documenting systems comprehensively and likened it to crafting a playbook encapsulating every facet of your business, from customer interactions to backend processes. This documentation serves as a tangible asset, offering prospective buyers a transparent view of how the company functions efficiently and profitably.

But why does this matter? It's all about perception and value. Businesses with well-documented systems exude reliability and scalability, qualities that are immensely appealing to potential investors or buyers. When every operation is meticulously outlined, it instills confidence in a prospective buyer and mitigates risk, two factors that can significantly impact the valuation of a business.

Moreover, Jason highlighted the operational efficiencies that stem from system documentation. By streamlining processes and clearly defining roles and responsibilities, businesses can operate more smoothly, increasing productivity and profitability. This, in turn, enhances the industry's attractiveness to potential buyers who seek revenue streams and sustainable and scalable operations. He also pointed out that system documentation is not a one-time task but an ongoing endeavor. As businesses evolve, so too must their systems. Regular updates and refinements ensure that the playbook remains relevant and reflective of the current state of the company. It's a continuous improvement journey that pays dividends in the long run.

But how does one go about documenting systems effectively? It starts with a systematic approach. Strategically identify critical processes within your business and break them down into manageable steps. Document each step meticulously, leaving no room for ambiguity. Visual aids such as screen recordings or diagrams enhance clarity and comprehension. He also emphasized the importance of involving key stakeholders in the documentation process. Who better to provide insights into day-to-day operations than the individuals directly involved? By soliciting employee input at all levels, businesses can ensure that their systems documentation accurately reflects reality while fostering a sense of ownership and employee engagement.

In essence, Jason advises to "Trust the process of system documentation." It's not just a mundane task; it's an investment in the future value of your business. The sooner you start developing a company-wide culture of following best practices, the sooner you will have a safety net in case you need to sell your business during an emergency. So, roll up your sleeves and get to work following his proven methods. The value of your business depends on it.

A Succession Plan or an Exit Plan? Savvy Business Owners Need Both!

One of the questions we often hear from business owners is, “What is the difference between Succession Planning and Exit Planning?  Aren’t they the same thing?”  Surprisingly, they are not.  The next question usually is, “Which one do I need?” The answer is simple.  Whether the business is small or large, family-owned or not, astute business owners always need both.

Nearly $10 trillion dollars in business assets will be transferred globally in the next decade, according to Forbes Magazine.  Baby Boomers selling privately owned businesses or transferring them to family members will comprise much of that $10 trillion dollar transfer.  As the market becomes crowded with owners ready to sell, the advantage will go to those owners who have done their due diligence, considered all of their options, and planned for unexpected contingencies.

Succession Planning

Succession Planning focuses solely on transferring leadership inside the business from one generation to the next.  Succession plans identify key individuals within the organization who can be trained and mentored to someday take over as the existing business leaders exit.  Succession Planning is just one necessary aspect of a more comprehensive exit plan.

Exit Planning

Exit Planning incorporates succession planning with strategies for building transferrable value, reducing tax liability, preparing for unexpected contingencies, minimizing family stresses, and increasing the likelihood of a successful business transfer.  Exit plans also incorporate the personal and financial goals of the business owner, their spouse, and their family.  A prudent exit plan starts and ends with the long term business and personal objectives of the owner.

Plan Ahead for A Successful Exit

Succession plans and exit plans so share an important characteristic – neither should wait.  Business owners who eventually want to sell for top dollar with the least amount of trouble must start the planning process early enough to give it the thought and consideration it requires.   With the proper plans in place, you, the business owner, gains the ability to make critical long-term decisions that will significantly increase the likelihood of selling or transferring the business when you want, to whom you want, and for the price you want.

Take our FREE 15-Minute ExitMap® Assessment and find out how ready you are to exit successfully.

Get 15% off of our ExitReadiness® ACADEMY online exit roadmap course with videos and planning template using code BLOG10.

Exit Planning and Your Heart's Desires

The Problem

As a business owner, you pour your heart into your work, and it has become part of you. But at times, the business you have carefully nurtured for years can become a burden - there's a part of you that yearns to do something else - travel, spend more time with family, enjoy more leisure, or even start another new business. You need clarification. 

So, when it comes to considering the future of your business, where is your heart?

Along with sound financial preparation, a primary objective in a healthy exit planning process is helping the owner identify your objectives after you transition the business. Determining your life's course after you leave your business takes careful thought. The process may involve serious family conversations and consultations with trusted advisors. 

Unlike planning your finances, you are planning what will make you fulfilled and happy is far more subjective. Emotions, hopes, dreams, fears, and uncertainty often cloud clear thinking. The resulting lack of clarity can be paralyzing – so we do nothing. But there are some steps you can take right now to be sure you are on the right track.

Take Action

Grab a pen and do the following:

1. Make a list of what you want to do yet have to have time to do. Consider family, travel, hobbies, and volunteering. Be specific. Prioritize them and set some clear goals. 

2. Considering your business, make a list of things that you...  

a. Do for your business that you want to stop doing...

b. Under the right circumstances, I would like to continue doing...

c. How much time per week would you like to spend on those things you want to continue with?

3. What are the skills you possess that would be valuable to others? How could these be re-deployed?

4. Who else can provide you with input and ideas to plan for the next season of life?

5. What are your fears and concerns when considering the post-business future?

6. Use the list you have developed as a basis for thoughtful discussion with your spouse, advisors, and trusted counsel.

Then, begin to develop a draft plan for near-term (12 months), midterm (3 years), and long-term (10+ years) goals; as with any "strategic plan," assumptions and plans will change. Take small steps to begin what you want to change, and don't be afraid to refine the plan.  

Planning before circumstances force you to act under pressure enables you to strike a peaceful balance between reality and the future heart's desires. You will be able to minimize regrets. The hardest part of effective long-term planning is taking the first step. Start now!

Get started today with our Free ExitMap Readiness Assessment.

2024 ExitReadiness Checklist

As a business owner, your future exit is a significant event. That's why we publish the "Exitreadiness Checklist" annually to assist you in planning.

DECIDE WHERE YOU WANT TO GO. 

Establish Clear Goals and Objectives for Exit and Your Life After Exit.

• When do you want to leave the business? Whom do you wish to transfer/sell the business to?

• What are your values-based and legacy exit goals?

• What is your post-exit life plan? Business owners often regret leaving when they lack a plan for life that replaces the sense of purpose and meaning they experienced in building their business.

• Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS BUSINESS AND PERSONAL EXITREADINESS. 

Without Accurate Data, All Planning Becomes Meaningless.

• Get an accurate Estimate of Business Value. If the business is your largest asset, shouldn't you know what it really is worth to potential buyers?

• Assess your business Value-Drivers and areas of Risk.

• Review your Business Continuity Plan for life transitions and unexpected death or disability to include written instructions. Co-owners should include a review of their Buy-Sell Agreement to ensure alignment with the current goals of all owners.

• Review your Estate Plan to ensure alignment with exit goals.

DESIGN AND IMPLEMENT A PLAN. 

Build Transferable Value and Enjoy a Future Exit on Your Own Terms and Conditions.

• Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.

• Focus on growth and profitability today. Today's profitability and growth plan is at the core of tomorrow's successful exit plan.

• Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.

• Update a strategic financial plan for business growth.

• Do you have the right Team of Experienced Advisors in place for your plan design and implementation?

• Who will manage the exit planning project - you, an advisor, or an experienced exit planner?

In 2024, it's crucial to start planning and seek assistance if you haven't already. If you wait until the last minute to plan your exit, you may not attain your goals for life after the business. Remember, you may not be aware of everything you need to know, and ignoring this fact could have negative consequences, just like in other aspects of life.

Below are suggested next steps:

Contact Us Today for a No-Obligation Exit Planning Exploratory Meeting. 

Take the Free ExitMap Readiness Assessment and get Online Learning and Resources at exitreadiness.com.

Adopt A Scientific Approach To Planning Your Business Exit

In his book, “Think Again, The Power of Knowing What You Don’t Know,” New York Times bestselling author Adam Grant makes a compelling case for “the critical art of rethinking: learning to question your opinions and open other people’s minds, which can position you for excellence at work and wisdom in life.”

In Part One: Individual Rethinking, Grant explains how we often assume the roles of Preacher, Prosecutor, or Politician rather than Scientist in a key decision-making process and how that is often detrimental. Grant describes the following cycles while recommending the RETHINKING CYCLE as a scientific approach:

THE OVERCONFIDENCE CYCLE: Pride > Conviction > Confirmation & Desirability Biases > Validation

THE RETHINKING CYCLE: Humility > Doubt > Curiosity > Discovery

We have found that owners planning for exit who adopt a scientific or “rethinking cycle” approach are much more likely to experience a successful transition out of their business. They indeed humbly realize and proclaim that “they don’t know what they don’t know” and engage help in discovering what they should do and how they should do it. They understand what’s at stake and have intentionally questioned or doubted their convictions and biases, and, with humility and curiosity, they seek knowledge and wisdom from others who can challenge their current thinking. As a result, the chances for a successful exit and the owner’s peace of mind are greatly increased. The opposite almost always proves true on some level for an owner who moves forward adopting “the overconfidence cycle”.

One of Grant’s recommended “Actions for Impact” is to “Build a challenge network, not just a support network.” For an owner planning their exit, this could include business owner peers who have already walked the exit walk, as well as an expert advisor team (those who know that the owner doesn’t) who could serve in challenging the owner’s assumptions, convictions, biases, while providing needed knowledge and insight.

In planning for the most significant event as a business owner, your inevitable exit from the business, you would be well-served in reading Mr. Grant’s book and adopting his proposed RETHINKING CYCLE. Please consider contacting us about playing a role on your “Challenge Network.”

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Are The Key Steps in Creating My Business Exit Strategy?

Creating a business exit strategy involves planning and preparation.

Planning for your eventual transition is a significant undertaking with much at stake. It can take years of planning and preparation to execute a successful plan.

Following are some critical elements to consider when developing your exit strategy:

1. Establish Your Goals and Objectives: Clarify your personal and financial goals for exiting the business. Are you looking to maximize the financial return, ensure a smooth transition, preserve the legacy of the business, or prioritize your well-being? Identifying your objectives will help guide your decisions throughout the exit process.

2. Timing: Determine the ideal timeline for your exit. Consider factors such as market and industry conditions and trends, business performance, personal circumstances, and any external events that may impact the timing of your departure. It is essential to give yourself enough time to prepare the business and maximize its value.

3. Valuation: Conduct a thorough business valuation to determine its worth. Engage the services of a professional business valuation specialist to assess the fair market value of your business. This valuation will help you understand the financial implications of your exit strategy and assist in setting a realistic asking price.

4. Succession Planning: Decide how you want to transition ownership and leadership of the business. This could involve grooming and training a successor within the organization, selling to a third party, transferring ownership to family members, or considering a management buyout. Develop a plan for developing and preparing the next generation of leaders if you choose an internal succession.

5. Prepare the Business for Sale: Take steps to maximize the value of your business before putting it on the market. This may include strengthening essential business functions, improving financial performance, enhancing operational efficiencies, and addressing legal or regulatory compliance issues. Create accurate and up-to-date financial records, streamline processes, and improve the attractiveness of the business to potential buyers.

6. Seek Professional Advice: Establish an advisor team of experienced professionals specializing in business exits. They can guide you through the legal, financial, and tax implications of your exit strategy, provide valuable insight, and help navigate the complexities of the process.

7. Consider Tax and Legal Implications: Understand the tax consequences associated with your exit strategy. Consult with a tax advisor to explore options for minimizing tax liabilities and maximizing your after-tax proceeds. Review any legal agreements, contracts, licenses, or leases that may impact the sale or transfer of the business and address any potential legal issues.

8. Communicate and Plan for Transition: Develop a comprehensive communication plan to inform and involve key stakeholders, such as employees, customers, suppliers, and business partners, about your exit strategy. Consider minimizing any disruption during the transition and ensuring a smooth handover of responsibilities.

9. Personal Wealth and Estate Planning: Review your financial situation and ensure that your personal wealth management and estate planning align with your exit strategy. Work with a financial advisor and estate planner to address wealth preservation, retirement planning, asset protection, and estate distribution issues.

Remember, creating an exit strategy is a complex process that requires careful consideration and planning. It's essential to start early, seek professional advice, and regularly review and update your plan as circumstances change.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Do I Need an Investment Banker or a Business Broker?

Suppose you have decided through planning and analysis that the ideal exit route for you is a sale to a third-party buyer. In that case, a skilled and experienced transaction intermediary will play a key role on your advisor team. Typically clients will have questions regarding the differences between business brokers and investment bankers and which would be best for their situation. Following are some key differences:

Role and Function:

• Investment Banker:

  • Investment bankers typically work for financial institutions and advisory firms. They provide clients with comprehensive financial and strategic advisory services, including mergers and acquisitions (M&A) advice.

  • They focus on more complex transactions, often involving larger companies and higher deal values.

  • Investment bankers help clients raise capital through various means, such as initial public offerings (IPOs), private placements, and debt offerings.

  • They provide strategic advice, financial analysis, valuation, negotiation, and deal structuring services to optimize the transaction's outcome.

• Business Broker:

  • Business brokers are intermediaries who assist in selling small to mid-sized businesses, usually privately owned or family-owned.

  • They primarily focus on facilitating the sale of existing businesses, often in the form of asset sales or stock sales.

  • Business brokers typically deal with businesses with lower market capitalizations and deal sizes.

  • They connect buyers and sellers, assist with business valuations, marketing, and negotiations, and help manage the transaction process.

Clientele:

• Investment Banker:

  • Investment bankers work with giant corporations, institutional investors, and high-net-worth individuals.

  • They are retained by companies seeking to engage in complex M&A deals, capital-raising activities, or strategic financial advice.

• Business Broker:

  • Business brokers work with small and mid-sized business owners who want to sell their businesses.

  • They also work with individuals or investors looking to purchase existing businesses.

Expertise and Services:

• Investment Banker:

  • Investment bankers have deep financial expertise and provide various services, including financial modeling, due diligence, legal and regulatory compliance, and market research.

  • They often have industry-specific knowledge and relationships with potential buyers or investors.

• Business Broker:

  • Business brokers focus on marketing and selling businesses and typically have a strong understanding of the local market.

  • They assist with business valuation, preparing businesses for sale, and handling negotiations. Still, their services may not be as comprehensive as investment bankers.

Compensation:

• Investment Banker:

  • Investment bankers typically charge fees based on a percentage of the transaction value (e.g., success fees). They may also receive retainer fees for their advisory services.

• Business Broker:

  • Business brokers often earn commissions based on the sale price of the business. The commission percentage can vary depending on the size and complexity of the transaction.

In summary, investment bankers and business brokers serve different market segments and offer distinct services. Investment bankers focus more on complex financial transactions for larger companies. At the same time, business brokers specialize in helping small and mid-sized businesses change ownership. The choice between the two depends on the specific needs and goals of the parties involved in the transaction.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Do I Need To Do Now If I Want To Exit My Business In 3 Years?

If you plan to exit your business in three years and you’ve yet to begin preparing, the following are some suggested steps you can take to prepare for a successful transition:

• Assess Business Exit Readiness: Conduct a comprehensive assessment of your business to understand its current strengths, weaknesses, and areas for improvement. Review financial statements, operational processes, customer base, market position, and competitive landscape. Identify any areas that need attention or strategic adjustments to enhance the value and marketability of your business.

• Review your Personal Financial Plan: Create a plan that aligns with your exit timeline while considering your personal financial goals, desired sale price, and potential tax implications. Work with a financial advisor to determine the financial targets you must achieve before exiting the business and develop a strategy to maximize your business's value within the given timeframe.

• Strengthen Management and Key Employees: Identify and develop a strong management team capable of running the business in your absence. Invest in training and mentoring key employees to ensure they possess the necessary skills and knowledge to assume leadership roles.  

• Streamline Operations and Systems: Streamline operational processes and systems to increase efficiency, reduce costs, and improve overall performance. Identify areas where automation or technology upgrades can enhance productivity. Implement standard operating procedures and documentation to ensure continuity and ease the transition for a new owner or management team.

• Diversify and Expand Customer Base: Reduce dependency on a small number of key customers and diversify your customer base. Develop strategies to attract new customers and strengthen existing relationships. Focus on customer retention and satisfaction to enhance the perceived value of your business to potential buyers.

• Protect Intellectual Property and Assets: Review and protect your intellectual property rights, including trademarks, copyrights, patents, and trade secrets. Ensure that contracts and agreements with employees, suppliers, and business partners include appropriate confidentiality and non-compete clauses. Safeguard physical assets like property, equipment, and inventory to maintain value and appeal to buyers.

• Seek Expert Advice: Seek advice from professionals experienced in business exits and transactions, such as exit planners, attorneys, accountants, and investment bankers. They can guide you through the process and provide valuable insights to maximize the value of your business.

• Document and Organize Business Information: Organize and document critical business information, including financial records, contracts, licenses, permits, legal documents, and operational procedures. Ensure that all records are up-to-date, accurate, and easily accessible. This will facilitate the due diligence process and instill confidence in potential buyers.

• Prepare an Exit Strategy: Work with your advisors to develop a comprehensive exit strategy tailored to your goals and circumstances. Determine the most appropriate exit option for you, whether selling to a third party, passing the business to a family member or key employee, or pursuing a merger or acquisition. Outline the steps and timeline for executing your chosen exit strategy.

Remember, planning for a business exit takes time and careful consideration. By starting early and taking proactive steps, you increase your chances of achieving a successful transition and maximizing the value of your business. Regularly revisit and update your plan as you approach the exit date to ensure it remains aligned with your goals and the market conditions.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

A Growth Plan Helps To Maximize Your Business Sale Price

Every sale of a business requires negotiation.  The buyer is purchasing the future potential of the company and is aware that they can only learn so much in a due diligence process.  The seller’s strong management team, documented procedures, and portfolio of recurring revenue clients, and other value drivers will move a buyer forward. And, if a seller wants to further strengthen their story at the negotiation table they will be prepared with a documented strategic plan for future growth.

What’s in a Growth Plan?

An effective growth plan is far more than numbers on a spreadsheet.  It addresses these key questions:

• What will our revenues be in the next three to five years?

• Who will our clients be, and what new markets will we pursue?

• What services will we continue to sell, discontinue?  What new services will we offer?

• What is the profitability of those products?

• What resources are required to accomplish our goals?

• Who will be responsible for each element of the plan?

The Effect of a Proven Growth Plan…

Demonstrating that the management team not only exists but can perform.

• The position of the company in the market is clearly understood.

• The projected cash flows are credible.

• Enables a higher starting point for negotiation.

This last benefit is perhaps most significant.  As we all know, the value of a company is a function of Cash Flow/EBITDA,  and this is the starting point for negotiation. 

Now consider two companies…

Both Company A and Company B have a $ 2M EBITDA and a multiplier of 5x.  The value = $10M.

Both companies say they plan to grow to $4M EBITDA in the next 5 years.  However, Company A has no track record, but Company B has demonstrated growth plans.  And they have defined this growth plan as thoroughly as they have in past years. 

While Company A has little basis to start over $10M ($2Mx5), Company B may have a credible basis to start negotiations at $20M valuation ($4Mx5). In a competitive market, developing and executing on growth planning will position your company to maximize its value at sale.   

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

The Emotional Aspects of Your Eventual Business Exit

“The emotional aspect of an exit and transition is what’s hardest (paraphrased)”. This was a statement made by one client to another at a recent charity golf event. While listening to the conversation I was freshly reminded about what’s at stake when and how an owner leaves their business, that perhaps took them decades to build.

The client making the statements described in some detail how the “emotional piece” resulted in inertia and procrastination around creating a plan for his eventual exit. He knew he needed to put a strategy in place, but was simply having a difficult time facing tough transitional realities. Emotional realities included his brother (partner) who helped him build the business transitioning out now, and in a few years exiting the business completely himself while transferring ownership to his two children. That was a lot of “emotional stuff to work through” and he was having a hard time getting his mind around it all. What they learned during our planning process was that the practical or technical elements of their exit plan were “the easy part” compared to the emotional challenges of leaving a business that had become “a big part of who they were.”

He went on to say how essential our ongoing conversations were that clarified his dreams and desires while helping to navigate the emotional “roller coaster”. Having an objective third party to help him and his brother think through all aspects of the different transitions and conduct the “emotional conversations” was essential for their respective goals for exit to be accomplished. For quite some time they had talked about doing something but it wasn’t until they engaged in third-party coaching and assistance that they were able to move the ball down the field toward the goal line.

The moral of the story is to expect that there will be significant emotional considerations that can be the source of inertia in creating a plan for one of the most significant and impactful events of your life. You will be wise in getting the skilled planning assistance required to help you move forward emotionally and practically in accomplishing your exit dreams and goals.

For assistance, you can reach us at email@ennislp.com or 301-859-0860.

Planning Ahead for Exit has Many Benefits

The truth of the matter is, every small business owner will eventually transition from the business.  While most have spent much time working in the business, and at times on the business, they have not given much thought to what to do after the business.

Whether you love your work so much that, in a manner of speaking, you’d be happy to die at your desk, or you’d like to devote much more time to your golf game, every small business owner needs to consider how they plan to exit.  And planning ahead has significant benefits.

There are three major objectives that a business owner should consider prior to reaching the point where they must exit the business.

• Timing of your exit – When do you want to leave?

• Financial needs after exit – how will you support the post-exit lifestyle you desire?

• Who's going to take care of your baby and run the business when you're not there?

1.     When do you want to leave the business? Unless you want to die at the desk, you’ll want to consider at what point you desire to make the transition.  Pick a time frame and begin considering the implications of that time frame.   When do you back out of the day-to-day operations?  How long do you take to do this...years or months?  Can I effectively transfer the company to whom I wish to transfer it within that period of time?  How long will it take to train my successor or children to be owners?  Will I be able to realize my financial goals within that time frame?  Will market conditions lend toward a successful sale to a third party?  The time frame you decide on is a key driver.  And, it's essential to establish at least a target date, or you could end up on the perpetual "I'm going to leave in around five years..." merry-go-round.

2.  What income do you need?  Depending upon the success of the organization, answers to this question vary widely. You may not require any income from the business and would happily pass on the business to family members or key employees without any benefit to yourself.  However, The large majority of owners require some type of income either from the business at the sale or a residual income stream from the ongoing operations of the business. There are a wide variety of approaches to defining how a payout can occur, as well as the timing of it. Engaging tax lawyers and accountants at this point is significant to walk alongside your financial planner to plan out the remaining years so that you can enjoy the standard of living that you desire as well as pass on value to your children, your state, or your favorite charity.  As much as we all enjoy supporting our local and federal governments, wise tax planning in this phase is very significant. Making the wrong choice can result in significant tax consequences, hindering your ability to use the value that you have built into the company.

3.  Who's going to watch over your company?  Hopefully, you have enjoyed working in your business and there is a sense of giving up "your baby" to someone else.  The choice of a successor is a significant, and often emotional decision.  There's the emotional aspect of giving up your hard-won successful business, as well as a desire to take care of those faithful employees who have served over the years in your company.  Several options exist, from passing the business on to two children, selling it to key employees, selling it to a trusted third party, or even an employee stock ownership program.  So significant factors come into play here - the most critical being who actually has the skills, knowledge, and temperament to own and run the company as well as you have.

Should a business owner have family in the business, the above questions become even more significant. Taking the time to thoroughly discuss your goals and desires with your spouse, children in the business, and children not in the business are all very significant.  It's often been said, that on our deathbed we do not desire to have another day in the office, but another day with our family.  Planning ahead enables conversations to be had so everyone's expectations are clearly understood prior to the day when the transition actually occurs.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

What Role Will You Be Willing To Play Post-Sale?

A key element for an exiting successfully on your own terms and conditions is realizing the role(s) that you’re willing to play post-sale or transfer.

John sold to a strategic buyer and an earn-out with John working as an employee for 3 years as part of the deal. He had not planned in a way to avoid this, and after 2 years decided to forfeit the balance of his payout and leave because he was finding it too difficult to work for the new management.

Due to the small size of her business, Susan’s only option for a third-party sale was someone interested in “buying a job”. Susan did the deal and was forced to self-finance the deal and be a lender. After three years into the deal, the new owner was no longer able to make loan payments due to the weak performance of the business.

Bob planned for and was able to sell a majority stake in his business (that had very strong revenue, cash flow, and growth potential) to a financial buyer. In creating and implementing his comprehensive exit plan, Bob had decided he would be willing to be a partner in order to have a chance at “a second bite of the apple” years later.

In completing her sale to a key employee group, Sarah was willing to continue involvement as a consultant and her agreement is for 3 years.

It’s important to understand these roles and decide which of them you’d be willing to assume when selling or transferring your business. Each role is common to transactions of small businesses and at times unavoidable. However, with the right long-term planning, you might be able to avoid a role or roles you’d rather not play. For example, if you have built a business with significant revenue, a proven next-level management team, and a credible plan for future growth, you may avoid an earn-out. So, understand what roles you would be willing to play, and get started today planning for your exit because the more time you have the greater chance you will be in control when you leave.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Seven Questions Every Small Business Owner Should Answer

A company with strong value drivers can demand (and receive) a higher multiple on the same amount of EBITDA than can a company with average value drivers.  — John Brown, The Business Enterprise Institute (BEI)

Almost all of us consider the future and invest in the stock market either directly or through retirement plans to position ourselves and our families for the inevitable future.  While the above quote refers to investing in the stock market, the principle applies to your small business.  As you look ahead to the future, every small business owner should pay careful attention to the value drivers behind the business – ensuring the business portfolio increases over time.

In their book Execution, Ram Charan and Larry Bossidy speak about successful execution as “exposing reality and acting on that reality”.  So, as you consider your business investment, ask yourself the following “Value Driver questions:

 1.         Do I have a healthy management team?   It's often been said that people are our most valuable resource. Experienced leadership, that understands the business, as well as the culture of the organization, are critical to the ongoing success of the business. This is also one of the key factors behind developing business value when it comes down to selling your business.   Cultivating these employees, and ensuring that they remain even after you sell the business is significant to the events or buyer/owner of the business

2.         How effective are my operating systems?  Human resources, personnel recruitment and training, asset control, production control, and performance reports are all the key ingredients of healthy operations within any organization. If these internal mechanics are not running well, this could have significant negative consequences on the value of the organization.

3.         Are my margins equal to or better than the industry average?  If not, what actions can will it take to get them there?

4.         How diverse is my customer base?  Having one's eggs in one basket is always a risk. Having a key single customer that has more than 10% of total sales obviously is a downside for a business. Long before being ready to sell it is helpful to take a look at this and pursue diversification.

5.         Is my facility in “ship-shape”?  - keeping our home reflects our values, and our priorities. Similarly, keeping our business facility in sharp condition reflecting professionalism and effectiveness is critical to establishing business value. It was so into an outside third party, first impressions are significant. They were plucked attention to the small details.

6.         What is my growth strategy?   The roadmap for growth needs to clearly laid out, risks identified, and goals established.  Future cash flow, value and well-being of your employees is dependent on a vision for the future codified into actionable steps.  The plan alone will not get you there, but no plan will get you no-where.

7.         Do I have control of my numbers?  At the end of the day, you need to understand the financial health of your business.

Exit planning should begin the day you start your business.  And, at the core, or center of exit planning is maximizing the value of your business.  Just as you manage the value of your 401k or investment portfolio, investing time, energy and thought into building the value of your business will position you to exit in the manner you desire.  Get started today by exposing reality and assessing your business value drivers.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Expensive Sentences When Planning Your Exit

Following is a post that we’ve published in the past that we believe is good to be reminded of annually.

Following are just a few examples of “Expensive Sentences” mentioned by my friend Jack Quarles in his book, Expensive Sentences, Debunking the Common Myths that Derail Decisions and Sabotage Success.

“It’s too late to turn back now.” 

“We’re too swamped for that now.” 

“We can probably do that ourselves.” 

“It’s too crazy busy around here to make changes.” 

Jack explains how conversations and discussions containing expensive sentences most often lead to decisions that negatively impact the future of businesses, families, individuals, and nations.  And, how the faulty logic and false constraints of expensive sentences can lead to derailed and expensive decisions.  He describes how conventional wisdom such as “You get what you pay for” or “We can’t change horses in mid-stream” can be a costly and destructive trap.  Jack paints a picture as to how we can over time drift away from a disciplined analysis of a decision, and instead be drawn by a “particular idea as if pulled by gravity.” 

When it comes to Exit Planning, or designing and implementing a plan to successfully and responsibly exit from a business, there is a seemingly endless list of expensive sentences….

“I’m not ready to exit yet…I will begin planning when I’m ready “ 

“I have a pretty good idea of how much I’d pay in taxes”

“I am confident my key employee would be a good owner”

“I am confident I can sell my business for enough to live on for the rest of my life” 

“Yeah…I think we arranged it so that my spouse will get the business if I die” 

“I’m not worried about my employees leaving if I die or sell the business…I have been good to them and they’re very loyal”

“One of my friends, who is in the same business, sold for $$$$...I’m sure I will be able to sell mine for at least that much…I don’t need an outside valuation”

“I don’t need a personal financial needs analysis.  I have a good idea of how much $$$$ we would need”

“I am confident I can sell my business when I want or need to”

It’s expensive sentences like these that result from common owner misperceptions and can result in bad and expensive exits.  The author of EXIT PLANNING; THE DEFINITIVE GUIDE, and Founder of the Business Enterprise Institute, John Brown, says the following: “…your misperceptions create complacency and inaction when you should be pedaling as fast as you can.” We would agree with John Brown and would add that complacency and inaction are always expensive and at times destructive when it comes to a business exit.

Business Owner Exit Planning employs a process of assessment and analysis that will reveal expensive sentences and owner assumptions (that are then tested) helping you to instead leave on your own terms and conditions and realize a successful exit. Start planning today.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

Exposing Reality and Execution in Planning Your Exit

A business book that I read the book when it was first published, and find helpful to revisit regularly, is Execution: The Discipline of Getting Things Done by Larry Bossidy and Ram Charan. The authors’ definition of “execution” is particularly insightful and helpful when considering how an owner should build a business that is transferable, and in planning their eventual exit from the business

“Fundamentally, execution is the discipline of systematically exposing reality and acting on it.”

Successful business owners understand that they need to be personally and deeply involved in facing reality, and they are systematic in exposing it.  They understand that execution is essential in closing the gap between desired results and current reality, and consider the discipline of execution as being their major responsibility.  

However, In helping business owners plan for their exit, we observe a consistent pattern of misperceptions and lack of intent in exposing reality. Common misperceptions include:

• Overestimating the sellable value of their business

• Underestimating how much $$$$ they will need or want after they leave the business

• Overestimating the rate of return they will receive on invested assets

• Underestimating the impact of taxes on sale proceeds

• Overestimating their personal and business readiness for a successful exit

• Underestimating how long it takes to prepare for a successful exit

When owners don’t systematically expose reality in planning for their exit, there is much at stake including their personal goals and objectives and financial future. We like to say that “meaningful planning requires accurate data.”

So, begin now identifying the gap between your desired exit results and your current reality. Following are a few steps you can take to get started:

• First, get skilled help with clarifying your desired results: When do you want to exit? To whom do you want to sell/transfer the business? Any values-based or legacy goals?

• Have a valuation professional quantify the sellable value of your business.

• Have your financial advisor perform a current financial needs analysis using the estimate of business valuation in their calculation.

You can also take advantage of our FREE ExitMap® Assessment which will provide you with a 12-page report scoring you in these four key planning areas: Finance, Planning, Profit/Revenue, Operations. It will take about 15 minutes of your time and we do not ask for confidential information.

ennislp.com | email@ennislp.com | 301-859-0860

Can Engagement, Leadership and Culture Really Improve the Outcomes of a Business Exit?

All business owners live in the tension between people and profits. Often times it seems like these two aspects of our businesses can sometimes be in direct opposition to each other. It’s easy to feel like a $10K investment in our people is just a $10K reduction in profits. That people and profits are a zero-sum game, with one side winning and the other side losing. But I want to lay out some data for you and see what you think about how investing in your people could actually benefit you in the sale of your business.

Most companies operate from this mental framework:

Revenue – Variable costs – Fixed costs = Profit

In this scenario, fixed costs include things like building expenses, payroll, etc.

Most business owners assume that the best way to increase profit is to increase revenue and decrease variable costs (like COGS) and reduce fixed costs (like payroll).

This viewpoint is not entirely wrong, it just fails to take into account the human factor. We all know that people are the wild card in business. I often say “if it weren’t for people, business would be easy”. The people who work for you are not machines that can be dialed up to maximum efficiency from 8 a.m. to 5 p.m. for the 261 working days a year. In fact, if your company is like the average company in the U.S. then only 30% of your employees are operating at full capacity. The term most commonly used for these employees who are connected to their work and are operating at their full potential is engagement. Employees who are operating somewhere below their full potential are referred to as disengaged or actively disengaged.

What if instead of 30% of your people operating at their full potential, 60% of the company was operating at full capacity? Do you think this would have a positive impact on the revenue and profitability of the organization?  

Well, let’s look at some numbers. According to the most recent data, disengaged employees have 37% higher absenteeism, 18% lower productivity and 15% lower profitability. When that translates into dollars, you're looking at the cost of 34% of a disengaged employee's annual salary, or $3,400 for every $10,000 they make.

 So think about it this way, the average salary in the U.S. is $47,000. If you are leaving 34% of that average employee’s productivity on the table due to low engagement you are losing close to $16,000 per-year per-employee. And that’s just for your average employees. If you apply that to your managers and higher-level employees working in the $80,000 salary range you are looking at over $27,000 in human capital (think payroll) waste per year. Not to mention that employees who work for disengaged managers are 4x more likely to be disengaged themselves. Take those numbers (somewhere between $16,000 and $27,000 per year) and multiply them by the number of employees you have working in your organization, and all of a sudden addressing the issues associated with a disengaged workforce becomes a top strategic priority. Especially when you consider that an extra dollar of sales is only equal to 50, 40, 30 cents or less contribution to your profits (after you take out taxes and COGS, etc.), but a dollar saved that you are already spending equals a full dollar of contribution to profits.

Just think about all of the potential things that you could be working on to increase the value of your business over the next 12-24 months and ask yourself where addressing engagement stacks up in comparison to all of the initiatives you have lined up for your exit. How much bottom-line impact could address any engagement, leadership and culture issues that might exist have on your business, even if you only recovered 50% of the human capital waste in your organization? And again this does not even account for the losses that you experience from employee turnover. In a study conducted in 2018, 52% of employees who left their company said their organization or their managers could have done something to keep them from leaving. Yet most employees who leave companies do so without ever having a real conversation with their managers or organizational leaders. This statistic indicates a huge gap in the trust that exists between most managers and employees. And by the way, one more stat. that might be interesting; 47% of an employee’s engagement in their work is driven by the strength of their relationship with their leader.

So what are the advantages of high employee engagement beyond just mitigating losses? According to Gallup, organizations that are the best at engaging their employees to achieve earnings-per-share growth that is more than four times that of their competitors. Compared with organizations in the bottom 25% of engagement, organizations in the top 25% of engagement realize substantially better customer satisfaction, higher productivity, better retention, fewer accidents, and 21% higher profitability. Engaged workers also report better health outcomes.

So what if by investing in your people with some of the profits you have now, you could improve their health and happiness, improve the efficiency of the payroll costs of your organization, and simultaneously see higher profits. This is what we call a positive-sum game. All parties win.

So the question is, do you think having a healthy team of employees makes your company more attractive to a potential buyer? Do you believe that a healthier workforce can really be more productive and profitable?  Do you think a healthier and more engaged workforce might improve the multiple of EBITDA that you receive at the sale of your business? How much would it be worth to you to gain an extra 1x of EBITDA?

So as you prepare to move toward the next chapter in the life of your business I encourage you to challenge the way you think. I challenge you to consider the potential impact of investing in the engagement levels of your employees, the development of your managers and leaders, and solidifying your organizational culture. Do you think of these as costs that will decrease your profitability, or as investments that will ultimately create positive outcomes, both for you and for your employees?

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Guest Blogger Alan Kemper holds a BS in Management from Georgia Tech, a MBA from Auburn University, a Doctorate of Business Administration from George Fox University and a Lean Six Sigma Blackbelt from Georgia Tech. He is the President of LEAD Workforce Consulting and speaks and consults regularly on the power of engagement, leadership and culture on organizational outcomes.

Contact us today and ask about our Surveys for Work and Well-Being and Values In Action.

Understandable Reasons for Owner Exit Plan Procrastination

There have been not a few surveys of small business owners conducted that revealed a majority of the owners polled believed they needed a strategic plan for their eventual exit. Over 75% indicated they wanted to sell in the next 10 years, 90+% knew they needed a plan, while only about 20% had a written plan for what is inevitable…their eventual exit from their business.

So, why the procrastination? Well, we’ve observed the following reasons for putting it off, or not planning at all. And frankly, the reasons are understandable.

• The owner’s current advisors may not be raising the issue. So an owner understandably questions how important it is to plan, or as a result, they don’t know who to talk to.

• There are common misperceptions about an owner’s business and exit including:

  • Their business being attractive and worth more than it is, and easily sold.

  • The assumption is that sale proceeds will be enough for what’s next after the business. Often not adequately taking into consideration tax ramifications.

  • Business cash flow will be sufficient for supporting any future sale transaction.

  • The successor (s) are ready and willing to take over the business and that it will be a simple process to make that happen.

  • How long it would actually take to design and execute a plan for a successful exit.

• Uncertainty or fear:

  • Exposing and facing reality about the value and transferability of the business.

  • A needed change in the role of the owner. Delegating to others.

  • Life after the business. What will I do next? The business is a big part of my personal identity.

  • Fear of not being able to find a willing buyer or successor.

  • Fear of making a bad exit decision.

• The time and financial investment required to design and create a plan.

  • I need to focus on building and growing the business today! (NOTE: this is actually a core focus in a successful exit plan.)

So, in that there are many understandable reasons, including these and others, not to plan or to put it off, an owner needs to decide if the benefits and return on the investments of time and money would outweigh their reasons for procrastination. They need to think through what would be at stake in their particular situation.

Such as:

• Life after the business…

  • Financial security? Time with the family? Travel? Personal goals? Health and wellness? Launch a new business/enterprise? Social impact? Other?

• As the owner exits…

  • Maximizing value and minimizing taxes? Leaving on your own terms? A tangible expression of care and gratitude for employees? Family harmony? Social impact? Other?

• Life in the business…

  • Freedom and control? Income and/or building wealth? Influence? Social impact? Other?

If you conclude that you will plan, but not right now, then be aware also of the age old problem of “not knowing what you don’t know” as it pertains to the time it takes to design and implement a plan that will successfully and comprehensively accomplish your goals. The following quote by John Brown in his book EXIT PLANNING: THE DEFINITIVE GUIDE supports the exhortation to begin planning now:

“I can almost guarantee that it will take far longer to prepare and implement your successful exit strategy than you expect.  Only a few businesses (I calculate 200,000 out of 7,000,000) are capable of being transferred today in a manner that achieves the Owner’s goals and objectives.” 

If you are uncertain about the need for planning, we will begin with helping you decide if what’s at stake outweighs your reasons for not planning. This is important because it will help you strengthen your conviction one way (plan) or the other (not plan).

Contact us today if we can help you in deciding if planning is right for you.

Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.