Learning From Acquisitions That Fall Apart

John McCann sold The Bolt Supply House to Lawson Products (NASDAQ: LAWS) at the end of 2017.

McCann’s strategy involved learning from the acquirers who knocked on his door. He invited would-be buyers into The Bolt Supply House and listened to what they had to say. He was not committed to selling, but instead wanted to know what they liked and what concerned them about his company.

One giant European conglomerate, for example, approached McCann about selling, but after a thorough evaluation, they backed out of a deal, worried about McCann’s central distribution system. 

McCann thanked them for their time and set to work turning his distribution system into a masterpiece. Eventually, Lawson cited this as one of the many things that attracted them to The Bolt Supply House.  

When it finally came time to sell, McCann commanded a premium, arguing that he had built a world-class company he knew would be a strategic gem for a lot of businesses. He ended up getting five competing offers for The Bolt Supply House and eventually sold to Lawson.

When a big sophisticated acquirer approaches you about selling, the temptation is to decline a meeting if you’re not ready to sell, but hearing what they have to say can be a great way to get some superb consulting, for free. The investment bankers and corporate development executives who lead acquisitions for big acquirers are often some of the smartest, most strategic executives in your industry and—provided you don’t get sucked into a prop deal—hearing how they view your business can be an inexpensive way to improve the value of your company.

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.

Why Start-Ups Stall

Have you ever wondered why startup companies stop growing? Sometimes they run out of potential customers to sell to or their product starts losing market share to a competitor, but there is often a more fundamental reason: the founder(s) lose the stomach for it.

When you start a business, the assets you have outside of your business likely exceed those you have in it, because in the early days, your business is worthless. As your company grows, it starts to have value and becomes a more significant part of your wealth—especially if you’re pouring your profits back into funding your growth.

For most business owners, their company is their largest asset.

Eventually, your business may become such a large proportion of your wealth that you realize you are taking a giant risk every day that you decide to hold on to it just a little bit longer.

95% Of His Wealth In One Business

In 2000, Etienne Borgeat and Olivier Letard co-founded PCO innovation, an IT consulting firm. The company took off and, by 2016, PCO had 600 full-time employees and offices around the world.

As the business grew, Borgeat and Letard started to become uneasy about how much of their wealth was tied up in their business. By 2015, the shares Borgeat held in PCO represented 95% of his wealth.

That’s about the point that aerospace giant Boeing came calling. Boeing wanted PCO to take on a very large project and Borgeat and Letard turned down the opportunity reasoning that the project was so large it could risk their entire company if it went wrong. In the early days, the partners would never have turned down a chance to work with Boeing, but the partners had changed.

That’s when Borgeat and Letard realized the time had come to sell. They agreed to an acquisition offer from Accenture of over one times revenue.

The success of your startup is probably driven by your willingness to put all your eggs in one basket. You’re all in. However, at some point, you may find yourself starting to play it safe, which is about the time your business may be better off in someone else’s hands.

If you need help building the value of your start-up contact us today at 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.

One Way To Decide When To Sell Your Business

How do you know the right time to sell your company? One answer to this age-old question is that the time to sell is when someone else is willing to invest more in your business than you are.

When you start a business, nobody is willing to invest in its success more than you. You’ve already worked a 40-hour week by Wednesday and, if you’re like most founders, you’ve invested a big chunk of your liquid assets to get your business going.

You’re all in.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. As the Bob Dylan lyric goes, “When you ain't got nothing, you got nothing to lose.”

As your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You have reached a point where someone else may be willing to risk more time and money for your business than you are.

Peach New Media 

David Will is the founder of Peach New Media, which he started back in 2000 as a reseller of web conferencing. In the early days, Will changed his business strategy frequently, trying to find an idea with legs. After a number of pivots, he landed on selling learning management software to associations.

The business grew nicely and by 2015 Peach New Media had 40 employees and then received an attractive acquisition offer from a large private equity company. Will was conflicted. He loved his business and treasured the team he had built. At the same time, the acquirer was offering him a life-changing check.

In the end, Will realized that he had become somewhat more conservative as his business had grown and the potential acquirer was willing to make a big bet on integrating Peach New Media into another one of its acquisitions. Will realized he had reached a point where his appetite for risk in his own business was lower than his potential acquirer’s. Will decided to sell.

 When To Sell

The point where a buyer is willing to risk more than you are happens at a different stage for everyone. Let’s say you have a business worth $1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a $10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth $10 million and your business represents the bulk of your net worth. Most would argue $10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a $100 million company? The marginal utility of an extra $90 million is minimal—we all only need so many cars—but the risk is significant. Fewer owners would bet $10 million for a chance at $100 million.

What if your business was worth $100 million? Would you risk it all for a long shot at becoming a billion-dollar company? It is hard to imagine any one person betting $100 million dollars on anything, but if you’re the CEO of a billion-dollar corporation with ambitious growth goals, $100 million is a bet you may be willing to make.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

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.

Growing Fast? Here's What Could Kill Your Company?

If your goal is to grow your business fast, you need a positive cash flow cycle or the ability to raise money at a feverish pace. Anything less and you will quickly grow yourself out of business.

A positive cash flow cycle simply means you get paid before you have to pay others. A negative cash flow cycle is the direct opposite: you have pay out before your money comes in.

A lifestyle business with good margins can often get away with a negative cash flow cycle, but a growth-oriented business can’t, and it will quickly grow itself bankrupt.

Growing Yourself Bankrupt

To illustrate, take a look at the fatal decision made by Shelley Rogers, who decided to scale a business with a negative cash flow cycle. Rogers started Admincomm Warehousing to help companies recycle their old technology. Rogers purchased old phone systems and computer monitors for pennies on the dollar and sold them to recyclers who dismantled the technology down to its raw materials and sold off the base metals.

In the beginning, Rogers had a positive cash flow cycle. Admincomm would secure the rights to a lot of old gear and invite a group of Chinese recyclers to fly to Calgary to bid on the equipment. If they liked what they saw, the recyclers would be asked to pay in full before they flew home. Then Rogers would organize a shipping container to send the materials to China and pay her suppliers 30 to 60 days later.

In a world hungry for resources, the business model worked and Rogers built a nice lifestyle company with fat margins. That’s when she became aware of the environmental impact of the companies she was selling to as they poisoned the air in the developing world burning the plastic covers off computer gear to get at the base metals it contained. Rogers decided to scale up her operation and start recycling the equipment in her home country of Canada, where she could take advantage of a government program that would send her a check if she could prove she had recycled the equipment domestically.

Her new model required an investment in an expensive recycling machine and the adoption of a new cash model. She now had to buy the gear, recycle the materials and then wait to get her money from the government. The faster she grew, the less cash she had. Eventually, the business failed.

Rogers Rises From The Ashes With A Positive Cash Flow Model

Rogers learned from the experience and built a new company in the same industry called TopFlight Assets Services. Instead of acquiring old technology, she sold much of it on consignment, allowing her to save cash. Rogers grew TopFlight into a successful enterprise, which she sold in 2013 for six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) to CSI Leasing, one of the largest equipment leasing companies in the world.

Rogers got a great multiple for her business in part because of her focus on cash flow. Many owner think cash flow means their profits on a Profit & Loss Statement. While profit is important, acquirers also care deeply about cash flow—the money your business makes (or needs) to run.

The reason is simple: when an acquirer buys your business, they will likely need to finance it. If your business needs constant infusions of cash, an acquirer will have to commit more money to your business. Since investors are all about getting a return on their money, the more they have to invest in your business, the higher the return they expect, forcing them to reduce the original price they pay you.

So, whether your goal is to scale or sell for a premium (or both), having a positive cash flow cycle is a prerequisite.

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.

3 Surprising Reasons To Offer A Subscription

You can now buy a subscription for everything from dog treats to razor blades. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.

Why are so many companies leveraging the subscription business model? The obvious reason is that recurring revenue boosts your company’s value, but there are some hidden benefits to augmenting your business with a subscription offering.

Free Market Research

Finding out what your customers want is expensive. By the time you pay attendees, rent a room with a one-way mirror and buy the little sandwiches with the crusts cut off, a focus group can cost you upwards of $6,000. A statistically significant piece of quantitative research, done by a reputable polling company, might approach six figures.

With a subscription company, you get instant market research for free. Netflix knows which shows to produce based on the viewing behavior of its subscribers. No need to ask viewers what they like, Netflix can see what they watch and rate.

For you, a subscription offering can allow you to test new ideas and gives you a direct relationship with your customers so you can see what they like first hand.

Cash Flow

Subscription companies are often criticized for being hungry for cash. Many charge by the month and then have to wait months—sometimes years—to recover the costs of winning a subscriber.

That assumes, however, that you’re charging for your subscription by the month. If you’re selling your subscription to businesses, you may get away with charging for a year’s worth of your subscription up front. That’s what the analyst firm Gartner does, and it means they get an entire year’s worth of cash from their subscriber on day one. Costco charges its annual membership up front, which means it has billions of dollars of subscription revenue to float its retail operations.

Loyalty

Customers can be promiscuous. You may have a perfectly satisfied customer but if they see an offer from one of your competitors, they might jump ship to save a few bucks.

However, if you lock your customers into a subscription, they may be less tempted to try a competitor since they have already made an investment with you.

One of the reasons Amazon Prime is so profitable is that Prime subscribers buy more and are stickier than non-Prime subscribers. Prime subscribers want to get their money’s worth, so they buy a wider swath of products from Amazon and are less tempted by competitive offers.

The obvious reason to launch a subscription offering of your own is that the predictable recurring revenue will boost the value of your company. And while that’s certainly true, the hidden benefits may even be more important.

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.

Will Your Business Be More Valuable This Time Next Year?

For many, January is a time of rebirth and resolutions. It’s a month to reflect on last year’s achievements and to set goals for the year ahead.

Some people will set personal goals like losing weight or quitting a nasty habit, and most company owners will set business goals that focus on hitting certain revenue or profit milestones. But if your goal is to own a more valuable business in 2019, you may want to make one of the following New Year’s resolutions:

·      Take a two-week vacation without checking in with the office. When you return, you’ll see how well your company performed and where you need to make a key hire or create a new system.

·      Write down at least one process per month. You know you need to document your systems, but you may be overwhelmed by the task of taking what’s inside your head and putting it down in writing for others to follow. Resolve to document one system a month, and by the end of the year you’ll own a more sellable company.

·      Offload at least one customer relationship. If you’re like most business owners, you’re still your company’s best salesperson, but this can be a liability in the eyes of an acquirer, which is why you should wean your customers off relying on you as their point person. By the time you sell, none of your key customers should think of you as their relationship manager.

·      Cultivate a new relationship with a new supplier. Having a “go to” group of suppliers is great, but an over-reliance on one or two suppliers can create a liability for your business. By spreading some of your business to other suppliers, you keep your best suppliers hungry and you can make a case to an acquirer that you have other sources of supply for your critical inputs.

·      Create a recurring revenue stream. Valuable companies can look into the future and see where their revenue is going to come from. Recurring revenue models can vary from charging customers a small amount for a special level of service to offering a warranty or service contract.

·      Find your lease (and any other key contracts). When it comes time to sell your company, a buyer will want to see your lease and understand your obligations to your landlord. Having your lease handy can save time and avoid any nasty surprises at the eleventh hour in the process of selling your company.

·      Check your contracts and make sure they would survive the change of ownership of your company. If not, talk to your lawyer about adding a line to your agreements that states the obligations of the contract “surviving” in the event of a change of ownership of your company.

·      Start tracking your Net Promoter Score (NPS). The NPS methodology is the best predictor that your customers will re-purchase from you and/or refer you, which are two key indicators of a healthy and successful company. It’s also why many strategic acquirers and private equity companies use NPS as a way to measure the health of their acquisition targets during due diligence.

·      Get your Value Builder Score. All goals start with a benchmark of where you’re at today, and by understanding your company’s Value Builder Score, you can pinpoint how you’re doing now and which areas of your business are dragging down your company’s value.

A lot of company owners will set New Year’s resolutions around their revenue or profits for the year ahead, but those goals are blunt instruments. Instead of just building a bigger company, also consider making this the year you build a more valuable one.

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.

One Tweak That Can (Instantly) Add Millions To The Value Of Your Business

If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

Obsessing Over Your Multiple

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

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

How Profitability Is Open To Interpretation

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

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

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.

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.

How Can Employees Buy A Company?

In some cases, employees are capable of successfully operating a business, but lack the capital to acquire it. This may become the last resort for a seller, who takes a note rather than close the doors. This approach leaves the seller in the role of silent partner, hoping that the employees can maintain the business well enough to pay the debt.

With some reasonable planning, selling to employees can be more pleasant, and better for both buyer and seller than seeking an outside third party to purchase the business. Pricing becomes less of a negotiation, since both buyer and seller agree on the same valuation methodology well before the transaction. The nominal price of the business is less important than the owner’s needs for retirement, and employees’ ability to qualify for financing. 

Owners who develop an exit plan for selling the business to employees can begin the transfer while they still hold control of the company. The employees gradually assume substantial ownership. After they learn the responsibilities of managing the company, they can qualify for a loan to purchase the remainder of the ownership. In these cases, the owner does not surrender decision making until his or her payment is completely secure. 

Where an owner seeks retirement funding in excess of what the business is worth today, employees can earn their equity rights by achieving specific sales goals and profitability objectives. This gives them a powerful incentive to assume responsibility for building a business independent of its current owner. 

If you believe that you have employees who are capable of operating the business without you, please contact us. Planning for an employee transfer may take some time, but can have terrific results in building a win-win situation for everyone.

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.

© 2014, MPN Inc.

How To Avoid Disappointment When It's Time To Cash Out

How do you avoid not being disappointed with the money you make from the sale of your company?

Perhaps you’ve heard that companies like yours trade using an industry rule of thumb or that companies of your size sell within a specific range, and you want to get at least what your peers have received.

While these metrics can be useful for tax planning or working out a messy divorce, they may not be the best ways to value your company.

The Only Valuation Technique That Really Matters

In reality, the only valuation technique that will ensure you are happy with your exit is for you to place your own value on your business. What’s it worth to you to keep it? What is all your sweat equity worth? Only when you’re clear on that will you ensure your satisfaction with the sale of your business.

Take Hank Goddard as an example. He started a software company called Mainspring Healthcare Solutions back in 2007. They provided a way for hospitals to keep track of their equipment and evolved into a slick application that hospital workers used to order supplies.

Goddard and his partner started the business by asking some friends and family to invest. The business grew, but there were challenges along the way: Goddard had to fire his entire management team in the early days, product issues needed to be solved and operational issues needed to be resolved.

At times, it was a grind, so when it came time to sell in 2016, Goddard reasoned that he had invested more than half of his career in Mainspring and he wanted to get paid for his life’s work. He also wanted to ensure his original investors got a decent return on their money.

He was approached by Accruent, a company in the same industry, who made Goddard and his partners an offer of one times revenue. Accruent had recently acquired one of Goddard’s competitors for a similar value, so presumably thought this was a fair offer.

Goddard brushed it off as completely unworkable. Goddard had decided he wanted five times revenue for his business. Even for a growing software company, five times revenue was a stretch, but Goddard stuck to his guns. That’s what it was worth to him to sell.

A year after they first approached Goddard, Accruent came back with an offer of two times revenue and, again, Goddard demurred.

Mainspring had developed a new application that was quickly gaining traction and he knew how hard it was to sell to the hospitals he already counted as customers.

He told Accruent his number was five times revenue in cash. Eventually Goddard got his number.

Being clear on what your number is before going into a negotiation to sell your business can be helpful when emotions start to take over. Rather than rely on industry benchmarks, the best way to ensure you’re not disappointed with the sale of your business is to decide up front what it’s worth to 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.

Which is Better, a Financial Buyer or Strategic Buyer?

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.

A strategic buyer is a different cat—usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

Tom Franceski and his two partners had built DocStar up to 45 employees when they decided to shop the business to some Private Equity (PE) investors. The PE guys offered four to six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which Franceski deemed low for a fast-growing software company.

Franceski was then approached by a strategic acquirer called Epicor, which is a global software business with a lot of customers who could use what DocStar had built. Epicor offered DocStar around two times revenue—a much fatter multiple than the PE firms were offering.

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.

How Do I Begin Planning My Exit?

Business owners frequently approach exit planning much like a new fitness routine. They know it is necessary, but it always seems to be something that can be put off until tomorrow.

For the Baby Boomers, tomorrow is already here. Business owners who were born between 1945 and 1964 make up 25% of the population, but own over 60% of the small businesses. This is the result of their surge into the job market in the 1970s, and the lack of room in corporate America to absorb a much larger and better educated employee population. From 1975 until the middle 1980s, Baby Boomers opened new businesses at a rate never seen before, and not duplicated since.

Today, over 5,000,000 Baby Boomers are preparing for retirement. Just as when they all went to college, started new businesses, and became prolific consumers, they will create a flood of small business sales in the United States.

The generation that is now reaching ownership age is much smaller, and less inclined to entrepreneurship than the boomers. They are also being hotly pursued by corporate America, which needs to replace their retiring generation of Boomer managers and executives. These three factors combine to create a “perfect storm” of competitive pressures when marketing a small business for sale.

Exit planning is quickly becoming a buzzword in the legal and financial communities. Although boomers are healthier than prior generations, they will all retire eventually. Tens of thousands of professional advisors are positioning themselves to provide tax, risk management, wealth management and contract preparation services to this flood of sellers.

The most effective and efficient approach to exit planning is to select a single professional who can manage all the others in the process. Creating new entities or sale agreements is pointless unless the tax implications are first understood. Planning to reduce the impact of income taxes may be rendered moot if a company is not in position to sell. Putting the company up for sale may be a disaster if an owner doesn’t understand what buyers are looking for, and how much they’re willing to pay.

An effective and lucrative exit plan frequently takes up to five years to plan and execute. It starts by examining the strengths and weaknesses of the business, IT systems, management team, and customer base. With that information, you can realistically set expectations about who a likely buyer might be and how much you will realize after taxes. If you would like to have a preliminary conversation about starting your exit planning process, please contact us. 

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.

© 2014, MPN Inc.

Selling In A Buyer's Market

The demographics of the Boomer transition are not very encouraging for business sellers. We are rapidly approaching the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.

The most generous estimate of the population born in the twenty years following the Boomers is that they are 9 million fewer (69 million vs. 78 million.) More importantly, the bulk of that group was born in the late 1970’s, when birthrates began to rise again following the “Baby Bust” of the late 60s and early 70s.

From 1953 through 1957, over 21 million children were born in the US.  From 1973 through 1977, there were only 16 million new births, 23% fewer. What happens to pricing and competition when there are four sellers for every three buyers?

If the problem was limited to the numbers alone it would still be dramatic. In addition, there are other factors that make the numerical shortfall even more pronounced. The profile of the buyers, and the values and the choices of Generation X, will exponentially increase the gap between Boomer sellers and the people to whom they expect to sell their businesses.

The value system of this buyer generation doesn’t fit the values that are predominant in Boomer entrepreneurship. The concept of devoting 50 or more hours a week to a business, and doing it for 20 years or more, is antithetical to most Gen Xers preferred lifestyles.

From 2018 to 2023 the boomers will be reaching age 65 at a rate of 10,000 a day. About 9% of those aging boomers are business owners. Even if the next generation had the same competitive instincts and work ethic as the Baby Boomers, the number of available buyers would be short by over 200 daily.

Based on the numbers alone, small business buyers will have ample choice in the marketplace. Having had little opportunity to build up savings, they won’t have much cash to put down for a successful Boomer business. This will create a large number of sellers who will be forced to finance an acquisition themselves, rather than walk away from the business with nothing.

Of course, the best Baby Boomer businesses will still find qualified buyers. In order to successfully sell in a competitive market, they will need profitability, systems, and a track record that is better than that of their competitors. If you would like to assess the status of your business and its chances for successful transition, please give us a call.

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.

© 2014, MPN Inc.

What Is An Exit Plan?

Exit planning has become a new buzzword for those who consult to Baby Boomer business owners. Business brokers, wealth managers and other professionals are adding “exit planning” to their marketing messages.  It’s a logical reaction when over 5,000,000 Baby Boomers are preparing to leave their businesses.

Not surprisingly, when a business broker creates an “exit plan,” it usually involves listing the business for sale to a third party. An attorney’s planning focuses on the legal documents that allow the transition of the assets of a company to new ownership. An accountant or financial planner will look closely at tax and inheritance issues, and an insurance broker offers products that reduce the risk of interruption or disaster.

All these are important to the successful implementation of a plan, but each professional focuses on his or her specific skill set. If your shoulder hurts, you could go to an orthopedic surgeon, a neurologist, a general internist, a chiropractor or a physical therapist. Each will have a treatment approach for a painful shoulder. Each will be different, based upon his or her specialty. Each will reduce the pain at least somewhat, although some of them may or may not address the underlying cause.

Similarly, there are many professionals who claim competence in exit planning. Each has a different area of expertise, and what they term as exit planning tends to focus on those areas. A comprehensive exit strategy encompasses legal, tax and risk management issues, but it also examines the operational issues of the company whose value is the underlying driver for everything else.

Before the first document is drafted, or embarking on a plan for spending the money from a sale, the business must first realize the proceeds of a transaction. That means it has to find a buyer who will pay for it. That buyer could be a third party, but it might also be an employee, an employee group, or family members.

Any third party considering the purchase of a business will do extensive due diligence. Their willingness to pay a premium for a company will depend on its track record of revenue growth, the stability of its margins, and how well-established its systems and customers are. If the company is larger than about ten employees, they will look for supervisory and management talent who will stay after the sale.

Regardless of size, a business that is highly dependent on the owner for revenue or for making all key decisions will be deeply discounted or even impossible to sell. An exit plan should look at these factors, and help to make the adjustments needed to realize full value.

Selling to employees or family is often an attractive option, because it allows the owner to choose a retirement date, and price is less of an issue than financing terms. Unless you are willing to accept a promissory note for most of the price, and feel secure that your successors can maintain payments over a long period, a plan for this kind of exit should begin at least three, and preferable five to eight years before the planned transfer date.

An exit plan needs legal, tax, risk and wealth management expertise to be successful, but it also requires a practical examination of the operational strengths of your business. Selecting one professional to manage the efforts of everyone, and to help keep you on track, is a wise investment.

In America, the average small business owner has nearly 75% of his or her net worth in the company. The single biggest financial transaction of your life deserves special attention. Call us to discuss your options. 

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.

© 2014, MPN Inc.

"The Owner's Trap"

Entrepreneurs can have many reasons for wanting to launch and own a business, but typically "freedom" is a key motivating factor.  And, when your business is sellable, not only do you enjoy increased freedom today, but also in the future when you realize more options for your eventual exit.  You might decide to scale up and become an absentee owner, transfer the business to children or insiders, or sell to a third-party or ESOP.  If you have a sellable business, you have tremendous freedom as an owner, both now and at exit.

John Warrillow, author of Built to Sell and The Automatic Customer, often describes what he refers to as "The Owner's Trap" and how so many business owners today "are stuck"  in the trap with businesses that are not sellable.  Basically, these owners have businesses that are far too dependent on them and they are not experiencing the freedom they signed up for.  You can discover whether or not you're in "the owner's trap" by answering these questions:

1. Does the business slow down when you're not there?

2. Do customers come to you when something goes wrong?

3. Has your revenue plateaued?

If you've answered "yes" to one or more of these questions, and you want to plan to escape the owner's trap, take steps now to implement the following strategy:  First, assess the sellability and value drivers of your business, and then, once you've exposed reality, implement a plan to accelerate the value and sellability of your company.   With increased sellability, you will enjoy much more freedom today and when you're ready to exit.

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 Exit Coach Radio Show

As a successful business owner, you and your business have a great impact on many people including your family, your employees and their families, customers, suppliers, vendors, your community and local economy.  When you eventually exit there is much at stake, but if you plan well your personal goals can be realized, and you can also help the many people who have come to depend on your business continue to flourish.  

I was grateful to be a guest recently on Bill Black's Exit Coach Radio show to discuss all that's at stake when an owner exits and some first steps you can take in planning a successful and responsible exit.  You can listen to the interview here:  Exit Coach Radio

We want to help you plan well for your exit so that you exit successfully.  Contact us at email@ennlslp.com if we can be of service.  You can also access online resources at exitreadiness.com

Do You Have Questions About How Tax Reform Will Impact You And Your Business?

The following Webinar presented by Walter Deyhle, CPA and Stephen Boisvert of Gelman, Rosenberg, CPAs will help you as a Business Owner understand how the Changes in The Tax Law will impact your business and you personally.  

https://www.youtube.com/watch?v=fMQjYJIeb10

 PowerPoint Slides 

The Owner of The Business I Work for Wants to Sell It To Me...Should I Buy It?

Our engagements are mostly with business owners who want to design and implement a plan for their eventual transition/exit from the business.  However, on occasion, we are contacted not by the business owner, but by an inside employee who has questions about potential ownership, or their future in a closely-held business.  Insiders typically include key employees, a child of the business owner, or a co-owner. 

 These insiders have questions such as...

• "The owner has approached me about buying this business...how do I make a good decision?"

• "I would like to own this business eventually, or at least part of it...how do I approach the owner and have that conversation? What should I do if they are not willing to include me as an equity partner?"

• "I have no idea what the owner's plan for succession is, and I'm concerned how it would impact my future...how do I think through that issue?"

• "I have worked for a family business as a non-family employee...and I want to be an owner of the business...what do I need to think through?"

These questions and others like them are important, as buying or investing in a business is a huge decision.  If a strategic or financial buyer were to express interest in purchasing a particular business, they would insist on a due diligence process for review of financial statements, operations, management team, legal contracts, etc.  They need to consider the risk of purchasing the business, and its future growth potential.

Insider buyers need to conduct their own due diligence to determine if the business is indeed a worthwhile investment.  They also need to give serious and thoughtful consideration to what it means to own a business, whether or not they have the temperament for owning the risk, and whether or not the purchase would align with their personal family, financial, values-based, and legacy goals.

Regarding the issues of not knowing what the succession plan of a sole owner is, and your future ownership potential working in a closely-held family business, you will at some point need to discuss these issues with the owner or owners.  And, although all situations have differing dynamics that impact the timing of such conversations, typically it is helpful to all parties to have these conversations sooner rather than later.

If you're being presented with the opportunity to purchase the business you work in and need help thinking through it contact us.

Exiting on Your Terms and Conditions Requires Accurate Data

An initial and essential step in preparing for your eventual exit from your business successfully is a personal financial GAP Analysis calculating how much money you will need to attain your goals, for the rest of your life post-exit.

Too often business owners rely on a “back of the envelope” or subjective estimate of business value for this calculation, which results in planning that is not helpful and lacks integrity.  And, as the business is often the largest asset in an owner's investment portfolio, it is particularly important.  Meaningful planning requires accurate data.  

For example,  Tom and Jane had $500,000 in retirement and brokerage accounts, personal real estate valued at $1 million, and business real estate valued at $500,000 for a total of $2 million. Tom's Financial Planner Sarah was creating a retirement needs analysis for Tom and his wife and requested Tom provide a value for his business. Tom got back to Sarah with a "rough guess" of $4 million for the business, bringing Tom and Jane's asset total to $6 million.  After performing the needs analysis, Sarah informed Tom and Jane that they "did not have a financial GAP".  Tom and Jane were excited to hear, that based on the value of their business and personal assets, they should be able to realize all of their post-business exit goals!

But wait, what if the "rough guess" on the business valuation Tom provided Sarah was a lot more than the actual value of the business when Tom was "ready to sell and exit"?  What if, when a potential strategic or financial buyer performed their due diligence, Tom and Jane learned that the buyers were only willing to pay $2.5 million due to weak value drivers such as lacking a strong management team, low profitability, and deficient operating systems?  And, the $2.5 million offer was based on a three-year earnout for Tom, meaning he'd need to remain as an employee for that period.  Clearly, this would have a negative impact on Tom and Jane and they would then need to adjust their goals.  Also, in this situation, Tom would not be in control of his exit.

Tom and Jane could have experienced much more control in the years leading up to, and when Tom became "ready to exit" if they had planned with accurate data.  They would have also greatly increased their chances of attaining all of their post exit goals.  

Getting an accurate estimate of value, sooner rather than later, could end up being the difference between attaining or not attaining your post-business goals.  

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 Rich Legacy

Our past client and friend Peter Giglio, Sr, owner of Gaithersburg Garage Door had built a profitable and reputable local business over twenty-plus years in Montgomery County, MD.  Pete and his team were focused on being the best garage door dealer, installer, and service company in the Washington DC area.

Not unlike other successful business owners we work with, Pete had strong core values that guided him through the years in all aspects of business ownership, such as service to others, diligence, and integrity.  He regularly envisioned his team with "The upward spiral"  which begins with "top-notch service to customers" and results in higher revenue and "top-notch compensation" for his team members.  Pete's core value of service to others (i.e., customers/employees) had been anchored in GGD for decades through his frequent communication of the upward spiral.

The upward spiral is just one example of how Pete had been intentional in expressing care for employees, customers, and his family through the business.  Again, like other successful business owners, he was characterized by generosity toward the community and others and strengthened the local economy through job creation, doing business with suppliers and vendors, and producing needed products and services.  Pete also worked hard to foster a peaceful and unified team environment. 

Business owners like Pete produce much good for others and the communities in which they live. The legacy being built is rich with significance due to their vision and values, and it requires years of diligence, planning, perseverance, service to others, and risk-taking.  But, the building of a business is just one phase of building a legacy for a business owner.  The way in which that owner eventually leaves the business (successful or unsuccessful) is possibly the more critical phase of a business owner's legacy, as the future well-being of the business (and all the good that comes from it) much depends on how well that owner plans their exit.  Everything the owner has worked to establish through the years that affect their legacy is at stake when they exit.  No matter what exit route the owner chooses to accomplish their goals, the manner in which it is executed will have a lasting and far-reaching effect on their legacy. With our assistance, Pete was able to execute an exit plan that achieved his financial, values-based, and legacy goals, as he successfully transitioned the business to his son and a key employee.

What are your values-based goals for legacy pertaining to family, employees, customers, community, and others?  What have you built and facilitated through your business, and assign great value to, that you desire to see continue as part of your legacy?  Get started planning now for the event that will play a most significant role in determining your desired legacy....your eventual and inevitable exit. 

There is an old Chinese proverb that says, "The best time to plant a tree was 20 years ago.  The second best time is now."  

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.

Why Wouldn't I Simply Use One of My Current Advisors for My Exit Plan?

After convincing a prospective client they need to begin today designing and implementing an exit plan, they might have the following response…

 “Ok, I get it…I need to start planning today…I agree.  But why do I need you?  You’re just one more added expense.  Why wouldn’t I just ask my CPA or Attorney, who I’ve known for 20 years to lead the process?  I’m going to need them in the process anyway…”.  Our response would go like this, “Well, that is true…you might not need us.  You can ask one of your current advisors…and they may be the right choice if they have comprehensive exit planning as a practice and area of focus.  But, consider this also -- are you going to most benefit from your CPA focusing mainly on the tax implications of your exit, or your Attorney focusing mainly on legal and risk management issues…or having them also manage all aspects of the planning process?”

I like to describe our role in Exit Planning with an analogy of someone who has a desire to build a large commercial building.  The newly impassioned real estate developer in the story has the necessary capital and a big vision, but has neither the experience nor the knowledge to construct the building.  In order to make the dream become reality, they will need subcontractors like architectural, electrical, and plumbing experts. All of these experts will need to be coordinated in order to design and implement the plan for construction, and, if the sub-contractors are not well-suited for the particular project, or if they are not effectively coordinated, the project can easily run long and over-budget.  This new real estate developer quickly realizes that a “general contractor” or “project manager” is absolutely necessary, one with knowledge and understanding about each specialty sub-contractor, or the big dream could end in disaster.

Demonstrating a level of intelligence and self-awareness, our new real estate developer wisely decides they are not personally equipped to handle the role of general contractor.  Instead of charging ahead and blindly trusting in their own lack of knowledge and experience, they pursue a long-time friend, the plumbing contractor, asking him to manage the entire project in addition to installing the plumbing.  The plumbing contractor explains that the project will go much better if he is able to focus completely on “what they do best” -- the plumbing.  The plumber also suggests that the developer hire an experienced general contractor to manage the project.  But the developer persists and the plumbing contractor reluctantly agrees to handle both roles – plumbing contractor and overall project management.

By making this decision, the developer is able to minimize professional fees on the front-end because he does not have to pay a general contractor separately.  However, by asking the plumbing contractor to perform a function they are not comfortable with, the project inevitably incurs additional numerous and painful expenses, including:

-       Significant increases in professional fees because the project lacks appropriate coordination and efficiency

-       Contractors hired who were not particularly suited for this specific project

-       Jobs not completed on time and coming in over-budget

-       Processes characterized by relational disharmony and conflict

-       The plumbing contractor is unable to give his full time and attention to the professional installation of the building’s plumbing system so he does not notice small mistakes and details that will eventually cause big problems

-      At some point in the process the developer begins to lose confidence in the plumbing contractor – in both the project management and in the plumbing functions – which has a negative impact on their long-standing business relationship. 

There is an unfortunate ending to our real estate developer story…

A few years after the completion of the project a massive plumbing problem results in enormous financial and reputation cost to the developer and hardship to tenants --- as well as to the plumbing contractor.  Needless to say, in the end the plumbing contractor is no longer the “long-time friend” of the developer.  The developer's goal of minimizing professional fees up front, ended up being tremendously more expensive in the long run.

A business owner’s exit story can end in similar fashion if the experts are not able to focus intently on their area of expertise, and well-coordinated with all other experts.  The difference being that instead of plumbing, electrical or architectural problems, the owner can end up with devastating tax, legal, or finance problems downstream. 

Begin planning today…and with the right experts in the right roles.  Please contact us today if we can serve you in this.

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.