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.

What Happens When a Sole Proprietor Dies Unexpectedly?

A sole owner of a business who has a spouse and/or family has not a few key planning issues that need to be addressed before it’s too late.  “Too late” is the unexpected event of death or permanent incapacity or disability.  To illustrate, let’s use the following story that is based on real-life events…

John Doe owned a very successful commercial real estate development firm.  He regularly met with his Business Advisor and “game planned” aggressive growth strategies that were proving to be successful in building the value of the business.  To the point where John was seriously considering expansion into other geographic areas.  Life was good and the business was growing rapidly!

One evening after meeting with his advisor, John experienced a sudden heart attack and died later in the hospital.  At age 55 he still had family financial responsibilities, yet he had not been as thorough in his personal and family financial planning as he had been in planning to build the business.  It was a time of extreme grief and mourning as well as uncertainty for Jane…

• She didn’t know what to do next.

• She didn’t know if John’s salary would, or could, continue.

• Employees and customers started to leave as there was no plan, and so the business became less valuable and sellable.  This was problematic as Jane was dependent on the sale value of the business as John had limited life insurance and investable assets.

• Due to the high level of uncertainty, there was a lack of peace and stability for Jane and for everyone who was at all dependent on the business.

There were too many things that John didn’t do, and that should have been done, to mention in a short blog post. So, highlighted here are just a few (not an exhaustive list) of the key planning solutions that, if John had put them in place, would have helped in minimizing the agony that Jane and the family experienced…

• Clear written instructions that were aligned with updated and adequate estate planning documents as to how to continue the business.

• A personal financial plan that included a cash flow analysis of how much money Jane would need both short-term and long-term in the event of John’s early death. 

• A written resolution for Jane to continue to receive John’s salary until insurance proceeds were received.

• Plans for the business bank line of credit to continue uninterrupted.

• A current and adequate personal life insurance program.

• Key person life insurance on John that would have provided needed liquidity for the business to provide key employee stay bonuses, etc.

  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.

Answer These Questions if You Want to Accelerate Business Value in 2023

Most small business owners invest in the stock market, either directly or through retirement plans, with the goal of future financial security. However, not every business owner pays the same level of attention to the key drivers behind the value of, what is often the largest asset in their investment portfolio, their business.

In their book Execution: The Discipline of Getting Things Done by Ram Charan and Larry Bossidy, they speak about successful execution as “exposing reality and acting on that reality”.  These questions will help “expose reality” as we begin a new year, regarding your plan for building and growing the value of your business.

 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, is 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 a 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.  The 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 nowhere.

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.

An Exit Planning Checklist for 2023

Each year at this time we publish our “Exit Planning Checklist” meant to serve you in planning for that most significant event as a business owner...your future exit. 

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 can often regret leaving when lacking 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 WHERE YOU ARE.  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. At the core of tomorrow's successful exit plan is today's profitability and plan for growth.

• 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, a current Advisor, or an experienced Exit Planner?

The most important thing you could do in 2023 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until “you're ready to exit” to begin planning, you won't be ready, and neither will your business.  Keep in mind, that "You don't know what you don't know" and like in all other areas of life, that could end up being disastrous. 

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2023 to be as successful in planning your eventual exit as you have been in running your business. 

Following are some easy 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.

A Month on the Beach - A Key Measure of Business Value

Can you leave your business for a month, sit on the beach and leave your phone in the beach bag?  If so, you have attained what few business owners do – a business that can run without you!  Aside from sound cash flow, the creation of a management team is the most significant driver of business value.  When the time comes for you to leave for good, a buyer wants your team, not you!  If you can’t yet take that month, here are a few simple thoughts:

 What is a management team?  This will vary dependent on business size – but it is simply a key group of leaders who can run the day-to-day operations without your oversight.  While they may seek your INPUT, they can sell, and deliver service on their own.  They hold your values, pursue excellence and treat the company as if they owned it!

 The need to delegate.   This is the tough part – you must give responsibility to others.  Every business has four basic functional roles – Executive, Sales, Finance/Admin, and Operations.  Often owners fill each of these roles and thus are critical to everything.  If you can successfully delegate these roles (except perhaps the executive function) to others, you will create a team. 

 Who do you add to the team?   Chik-Fil-A has succeeded by carefully choosing leaders who possess three “C’s”  - character, competency, and chemistry. 

Character – this is the most crucial.  The manager must hold their values and live them out in their daily work. 

Competency  - this is less about specific skills and more about the ability and desire to learn. Environments change and learners adapt.  This trait should also have a dash of “fire in the belly” – the drive to build something.

Chemistry – do they play well with others?  Team members must be team players – readily partnering with others to build a company, and able to lead.

 Look for employees who possess these traits, empower them, and test them.  Slowly give them responsibility and look for the ones that you can’t hold back.  Help them succeed, give routine feedback and get out of their way. 

 How do I build a team?  The first ingredient is time – don’t rush – build slowly and intentionally. It is an ongoing, iterative process.  Here’s where to start:

         Step 1 – make a list of roles you fill / what you do.

         Step 2 – identify what ONLY YOU can do and what you are best at – these may be different.  Identify what you can most easily delegate or are not good at; transfer these responsibilities first. 

         Step 3 – find the right people/teammates – this can include current employees, new hires or reliable vendors.

         Step 4 – prioritize and make a plan to transfer the responsibilities over time.  Seek to remove yourself from all but the Executive function. 

         Step 5 –develop a potential successor – this final step is not for everyone – however it can enable you to sell the business to an insider, or remain as a passive owner.

         Step 6 – invest in the team, measure progress and adjust course as needed.

 Giving up control is difficult but a necessary part of business maturity.  Even if you never get to the “month on the beach”, taking these steps over time will increase value of the company, provide motivation for your staff and give you more options in the future.  It’ll enable you to work ON your business and not just IN your business.

 So, make a plan, start the transition and contact your travel agent!

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.

Deal Momentum, Deal Fatigue, and Pre-Sale Diligence

With the help of her Exit Planning Advisor, Betty has decided that a sale to a third-party buyer would best accomplish all of her goals (financial; values-based; legacy).

The process of quantifying her business and personal resources, with a financial gap analysis, has been helpful to Betty in determining her departure date in six years. She now knows the current fair market value of her business, and how much it will need to increase in value for the attainment of her financial objectives at sale in six years.

Betty now also understands (again with the help of her Exit Planning Advisor) the importance of maintaining “deal momentum” when she eventually enters into a sale transaction.

Betty now knows that all too often “deal fatigue” sets in and damages or destroys deal momentum experienced early in the process. She also understands that deal fatigue is typically the result of a difficult and lengthy due diligence process. Due diligence is defined as the process by which the buyer requests documents, data, and other information pertaining to the business they want to review to identify any potential liabilities or hindrances to a deal getting done. The process of due diligence involves setting up a digital “Data Room” where all requested information is deposited for review.

A key component of Betty’s comprehensive plan for exit is to do everything possible to ensure deal momentum and avoid deal fatigue when the time comes.

Betty also wants to be prepared if a serious and qualified buyer comes calling earlier than her six-year time frame. So, with the assistance of her Exit Planning Advisor, she is going to conduct “Pre-Sale Diligence” systematically over the next 12 months, including the set-up of a virtual data room which she will regularly review and update as needed. This preemptive approach will significantly increase her chances of deal momentum and a smooth transaction experience.

At that point in the future, when Betty’s either approached by a potential buyer or when she takes her business to market, having conducted Pre-Sale Diligence, she will be better prepared, more confident, and less stressed and anxious — all of which lend toward sustaining deal momentum and a successful transaction.

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Contact us if you would like assistance with Pre-Sale Diligence | email@ennislp.com | 301-943-8203

Complete our FREE ExitMap® Assessment and get a 12-page report scoring you in four key planning areas: Finance, Planning, Profit/Revenue, and Operations. It will take about 15 minutes and we do not ask for confidential information.

What's an "Earnout"?

The term “earnout” is often mentioned by an advisor or business owner when describing the terms of a business sale. If an owner has as part of their deal an earn-out, they have been asked by the buyer of their business to stay on for a specified period of time in a senior leadership role within your acquirer’s company. In this role, they will be charged with achieving a set of goals in the future (i.e., revenue or profitability goals) in return for additional compensation for their business. This approach is used when the successful operation of the business being bought is dependent on its owner, and/or the buyer needs to bridge the gap between what they are willing to pay for the business and the amount of money the owner wants for the business.

Earnout terms average somewhere between two and three years in length and are very common in service businesses. The assigned earn-out goals are often linked to revenue and profit, the retention of specific accounts or customers, or any other metric that the buyer considers important and the seller is willing to agree to.

Earnouts at times can work extremely well for both parties. At the same time, all too often it doesn’t work out with the selling owner leaving prior to receiving their earnout. A common reason for an owner leaving early would be the fact that they are now an employee of the company they have invested years in building, and that can be a very difficult adjustment.

We talk a lot about planning to exit “on your own terms and conditions”. Leaving on your own terms and conditions might look like not being forced into an earnout when you sell. If you begin planning your exit well in advance, you can think through what roles you would be willing to play when you leave (i.e, lender, employee, shareholder), and which roles you wouldn’t be willing to play. For example, if there is just no way in the world you’d ever want to be an employee of the business you’ve built from the ground up, at the time of sale you will need a business which does not depend on you — and building a business like that can require a lot of time.

Take our FREE ExitMap® Assessment and get a 12-page report scoring you in four key planning areas: Finance, Planning, Profit/Revenue, Operations. It will take about 15 minutes 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 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, an 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.  

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “sellable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

  • Transaction and professional fees.

  • An asset sale was negotiated and there was income tax on some asset depreciation recapture.

  • $1 million in business debt needed to be repaid.

  • Capital gains and affordable care act taxes.

  • Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a sellable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

If you need help contact us at 301-859-0860 or email@ennislp.com. 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.