Exit Planning 101: WEBINAR SERIES ANNOUNCEMENT

Understanding the What, Why, and How of Getting Starting on Building a Successful and Comprehensive Exit Plan

•  Have you been considering an exit?

•  Tired, overworked, not doing what you are best at?

•  Are you trying to determine what “number” it will take to get to a successful exit?

Join our holistic & comprehensive exit management team as we help you understand and begin to take action on building a strategy for the future. Often business owners are overly focused on exit planning as the number that they will get for their business. It’s also often true that the “number” isn’t realistic, won’t support their needs in retirement, and doesn’t take into the costs of selling the business (taxes, advisors, etc…). Then there is the plan for the future, post-sale…what will you do? The reality is that a successful exit strategy involves a multi-year process, and looks at all aspects of your business and personal resources. Exit planning also involves preparing the business and your team for the transition which requires time, patience, and the “right people on the bus”. So where to start?

We invite you to join our multi-part webinar series, including a summer reading/learning session while you’re off taking a vacation this summer (and if you are saying “what vacation?” you REALLY need to join us!). Even if you can’t make every session or are more focused on a particular aspect, please sign up so that we can include you in our community to share resources and ideas.

To become part of this Exit Planning Mastermind Group, please RSVP to Carolk@OmegaWealthManagement.com

We look forward to connecting with you to build a real exit plan for the future!

MEET YOUR EXPERTS:

Lisa A. K. Kirchenbauer, CFP®, RLP®, CeFT®

Lisa is the Founder & President of Omega Wealth Management, LLC in Arlington, Virginia. Omega specializes in helping their clients integrate their values, vision, and wealth for a life without regrets. Specializing in working with successful entrepreneurial and executive families, as well as women in significant transition, Omega brings a holistic, and comprehensive 360° approach to helping their select group of client families coordinate and strategically manage their wealth across everything from tax planning to investment management and legacy planning. Omega utilizes a unique business model to especially support business owners who may have much of their wealth tied up in their business but still need all the wealth planning advice other clients need.

Corby Megorden, CEPA, CCEA, FMVA, CBCA

Corby is a Principal of ENNIS Legacy Partners, an Exit Planning Firm that specializes in supporting the owners of small- to mid-sized businesses plan their exits. He focuses on the Value Creation aspects of the Exit Planning process, helping owners maximize the quality and value of their businesses prior to sale.

He has decades of executive experience helping organizations identify and successfully navigate the challenges of growth, risk, and change. His expertise covers operations, program management, and financial development and has been tested in a variety of contexts including non-profits, industry, and the military. As the VP of Operations for TeleCommunication Systems, he created corporate financial management, contracting, budgeting, and corporate merger processes, helping guide the company from startup to an $80M publicly traded company. As Administrator of a 4,000-member church, he

developed structures, processes, and procedures to manage finances and operations through periods of rapid growth, economic challenges, and radical organizational change, bringing stability and maintaining the fiscal health of the church. He is a retired Captain with the US Naval Reserves.

Walter H. Deyhle, CPA/ABV/CFF, MAFF, CExP™, CEPA

Walter provides tax preparation and planning, business valuation, forensic analysis, and exit planning consulting to the firm’s clients including individuals, government contractors, international financial holding companies, wholesale distribution companies, retail stores, professional practices, consulting firms, and partnerships owning real property. He and his team are skilled at addressing particularly complex tax issues with clients concerning investments, estate, and gift taxes as well as consulting for mergers, acquisitions, liquidations and reorganizations, divorce settlements and litigation, public offerings, and buy-sell agreements.

A senior tax partner and former director of the firm’s tax division, Mr. Deyhle provides in-house computerized preparation of individual, corporate, partnership, estate and trust, and nonprofit tax filings. He holds the designation of Accredited in Business Valuation (ABV) by the AICPA, as well as the CExP™ designation from the Business Enterprise Institute and the Certified Exit Planning Advisor designation by the Exit Planning Institute.

Thoughts About Family Business Transfers

You might think that a transfer of your business to a child or family member would be the easiest exit route to facilitate. Whereas statistics reveal that only one-third of all family businesses pass successfully to the next generation, and only 10% to the third generation.

Owners considering a transfer to children often run into these obstacles, among others:

• The children not getting along with one another

• The children not interested in the business and with different career goals

• The children don’t have the same skill, ability, or temperament to be a business owner as the parents do

• Fairness in transferring wealth to both children active in the business and non-active

• The children want ownership and control of the business before their parents have achieved their financial goals

• The business is strong and large enough to support a transfer while also providing for the financial goals of the parents

All business transfers are challenging, but family businesses face especially significant challenges. However, with the right pre-planning, the obstacles can often be overcome and a successful transfer can be realized.

Following is a basic set of questions for evaluating whether or not a family business transfer is the best exit route for you and your family:

• How much wealth do want to keep? How much cash will you need post-transfer of the business?

• Do you children desire to be owners? How capable and prepared are your children for ownership?

• Is your business prepared for a successful transfer? Are growth and cash flow steady and increasing? Is the business large enough to support all children (if applicable) financially while providing each with areas of responsibility?

• Are you ready? Financially? Most business owners are unhappy within two years of leaving their business — do you have a plan for life after the business? Do you have a plan to minimize taxes in transferring the business? Do you have a plan to treat all children (business active and non-active) equitably?

• If applicable, can your children share ownership? Do you have any concerns pertaining to their relational harmony?

• What contribution do you want your business active child or children to make? Pay for all or part of the business? “Sweat equity”? Is their future ownership actually contributing to your retirement plan?

• Define fairness: What does “fair” mean to you and your spouse? To your business active child? To your non-business-active child? Do you need help with defining fairness?

• What is your contingency plan if transfer to family doesn’t work out? Sale to other insiders or ESOP? Sale to third-party?.

There is much at stake when and how you leave your business, and never is that more true than when transferring your business to children or family. You would be wise to be as thorough and detailed in your planning as needed well in advance of your eventual transition. For every question listed above, there can be ten or more “drill-down” questions. As always, please let us know if we can be of assistance.

email@ennislp.com | 301-859-0860

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

Four Steps to Finding Your Sell-By-Date

Most business owners think selling their business is a sprint, but the reality is it takes a long time to sell a company. 

The sound of the gun sends blood flowing as you leap forward out of the blocks. Within five seconds you’re at top speed and within a dozen, your eye is searching for the next hand. Then you feel the baton become weightless in your grasp and your brain tells you the pain is over. You start an easy jog and you smile, knowing that you did your best and that now the heavy lifting is on someone else’s shoulders.

That’s probably how most people think of starting and selling a business: as something akin to a 4 x 100-meter relay race. You start from scratch, build something valuable, measuring time in months instead of years, and sprint into the waiting arms of Google (or Apple or Facebook) as they obligingly acquire your business for millions. They hand over the check and you ride off into the sunset. After all, that’s how it worked for the guys who started Nest and WhatsApp – right?

But unfortunately, the process of selling your business looks more like an exhausting 100-mile ultra-marathon than a 100-meter sprint. It takes years and a lot of planning to make a clean break from your company – which means it pays to start planning sooner rather than later.

Here’s how to backdate your exit:

Step 1: Pick your eject date

The first step is to figure out when you want to be completely out of your business. This is the day you walk out of the building and never come back. Maybe you have a dream to sail around the world with your kids while they’re young. Perhaps you want to start an orphanage in Bolivia or a vineyard in Tuscany.

Whatever your goal, the first step is writing down when you want out and jotting some notes as to why that date is important to you, what you will do after you sell, with whom, and why.

Step 2: Estimate the length of your earn-out

When you sell your business, chances are good that you will get paid in two or more stages. You’ll get the first check when the deal closes and the second at some point in the future -- if you hit certain goals set by the buyer. The length of your so-called earn-out will depend on the kind of business you’re in.

The average earn-out these days is three years. If you’re in a professional services business, your earn-out could be as long as five years. If you’re in a manufacturing or technology business, you might get away with a one-year transition period.

Estimate: + 1-5 years

Step 3: Calculate the length of the sale process

The next step is to figure out how long it will take you to negotiate the sale of your company. This process involves hiring an intermediary (mergers and acquisitions professional, investment banker, or business broker), putting together a marketing package for your business, shopping it to potential acquirers, hosting management meetings, negotiating letters of intent, and then going through a 60 to 90-day due diligence period. From the day you hire an intermediary to the day the wire transfer hits your account, the entire process usually takes six to 12 months. To be safe, budget one year.

Estimate: + 1 year

Step 4: Create your strategy-stable operating window

Next, you need to budget some time to operate your business without making any major strategic changes. An acquirer is going to want to see how your business has been performing under its current strategy so they can accurately predict how it will perform under their ownership. Ideally, you can give them three years of operating results during which you didn’t make any major changes to your business model.

If you have been running your business over the last three years without making any strategic shifts, you won’t need to budget any time here. On the other hand, if you plan on making some major strategic changes to prepare your business for sale, add three years from the time you make the changes.

Estimate: + 3 years

Figuring out when to sell

The final step is to figure out when you need to start the process. Let’s say you want to be in Tuscany by age 50 and budget for a three-year earn-out, which means you need to close the deal by age 47. Subtract one year from that date to account for the length of time it takes to negotiate a deal, so now you need to hire your intermediary by age 46. Then let’s say you’re still tweaking your business model – experimenting with different target markets, channels, and models. In this case, you need to lock in on one strategy by age 43 so that an acquirer can look at three years of operating results.

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.

Build and grow the right way...

Like most successful small business owners, George had invested much of his life and resources in his business over the last twenty plus years and realized personal prosperity and respect within the marketplace.  The business had been profitable, with revenue generally stable and increasing, and George continued to see his personal standard of living increase.  

At the same time, George had an ongoing irritant, and that was his inability to "really take a vacation".  George and his wife Susan were able to "get away" a few times each year, but it was seldom more than a week, and he most always remained tied to the business in some way or another while he was gone.  His phone and computer would still see a lot of action on "vacation".

Five years ago, George was "ready to sell the business and retire".  They now had four grandchildren they wanted to spend time with, they wanted to travel, and simply "enjoy life" while they were still very healthy.  George's transition from being "all in" to "I'm done" happened quite fast, surprising both George and Susan.  Coincidentally, around that time, George was approached by a couple of potential buyers interested in purchasing his company.  George was excited that he would now sell his company and he and Susan would be free to do all they wanted to do.

George experienced what he called "a sad awakening" when the most serious buyer made an offer that was significantly less than what George and Susan needed, along with an "earn-out" requirement.  George would have to remain on as an employee for three more years in order to earn 25% of the proposed sale price.  The potential buyer pointed to areas of risk including "the business still runs too much through you George", a lack of management team incentivized to remain during the transition, an inability to produce requested financials in a timely manner, and an unproven growth strategy as reasons for the low offer.

George had a huge decision to make, take the low offer and adjust downward the plans that he and Susan were looking forward to, or, reject the offer and invest more years in building his business the right way for a successful sale in the future.  Not an easy decision considering a few days ago both he and Susan were envisioning travel and "grandkid time" becoming reality within the next few months.  As George is now an employee working hard to earn the balance of his reduced payout, and Susan is doing much of the grandkid time by herself, he came to understand the hard way that you can never start too soon in building your business the right way for a successful 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.  

"I want to sell my business in 1-2 years..."

Many baby boomer business owners are thinking they "are ready" to leave their business in next 1-2 years and begin their retirement or third act in life.  With the economy growing and the number of investors seeking quality businesses to buy, many are thinking it could be an opportunity to "sell high" and accomplish their financial goals.

If indeed there is a desire is to sell within 2 years, and minimal or no exit planning and pre-sale due diligence has been achieved to this point, following are a number of the key planning issues that should be addressed in the first 60 days:

• Establish owner-based exit goals (desired buyer, sale-price, values-based goals, etc.) and do whatever possible to prepare for life after the sale. Survey data indicates most business owners are not happy in life two years after the sale of their business.

• Select a transaction intermediary (Investment Banker or Business Broker).

• Get an estimate of business marketability and value.

• Begin tax planning and pre-sale due diligence.

• Assess and, if possible, enhance business value drivers.

• Take steps to protect the value of the business during transfer (i.e., employee incentive plans/stay bonus).

• Select the remaining needed members of your Deal Team (i.e., CPA, M&A Attorney).

• Review your estate plan and business continuity arrangements.

• Make decisions pertaining to a plan for communicating your plans to employees.

This is not an exhaustive list and only represents what should happen in the first 60 days.  There is much more to do throughout the 2-year period to give yourself the best chance at a successful exit.  So, an immediate priority should be the selection of a trained and experienced Exit Planner to assist with the management of the exit planning project.  Typically someone is going to engage a knowledgeable project manager or general contractor to manage the process for building their "dream house".  In selling a business, there is much more at stake than building a dream house.

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

“It’s too late to turn back now.”  “We’re too swamped for that now.”  “We can probably do that ourselves.”  “It’s crazy busy around here.”  These 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.

Jack explains in his book how conversations and discussions containing Expensive Sentences lead to decisions that impact the future of businesses, families, individuals, and nations.  How the faulty logic and false constraints of expensive sentences can lead to derailed and costly 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 very 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 supply of “expensive sentences”.

Such as:

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

“I am confident our business would be very attractive to a strategic or financial buyer”

“I know what my business is worth…I don’t need a valuation”

“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 when I die” 

“I’m not worried about my employees leaving if I die…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 a financial needs analysis.  I know about what we would need.”

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

Business Owner Exit Planning employs a process requiring analysis that results in a strategy that will allow you to exit successfully and responsibly.  Avoid the costly and destructive trap of expensive exit planning sentences and begin the exit planning process 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.

Should You Use Your Business Equity For Compensation?

It can be tempting to offer shares in your company to finance its growth. These days, there are plenty of investors chasing promising new companies and, in today’s tight labor market, employees are getting more brazen in their demands for equity-based compensation. However, using equity as a form of currency dilutes your position and may not be necessary with a pinch of creativity.

How David Hauser Bootstrapped His Way To a 9-Figure Exit

David Hauser has been an entrepreneur for most of his life. He had a number of small money-making ventures in high school and studied entrepreneurship at Babson College. He started a web design business after graduation, followed by an internet advertising company.

Through his early experiences in entrepreneurship, Hauser discovered that one of the most frustrating parts of starting and growing a small business was acquiring a phone system. Back in the late 1990’s, big companies used a PBX system to route calls throughout a switchboard, but a PBX system was prohibitively expensive for most small companies to acquire and maintain.

Hauser and his friend Siamak Taghaddos imagined a “virtual PBX” which allowed small business owners to leverage the internet to create a phone system without having to buy any of the hardware.  They built a crude version of the technology, named their new company GotVMail (later rebranded as Grasshopper), and launched in 2003.

By 2004, they had acquired their first few customers and could see that in order to scale they would need to buy servers and a lot of advertising to drive demand. The venture capital markets were starting to thaw after the dot com bust of 2001 but Hauser chose not to raise venture capital. Instead, they clung to their equity and bootstrapped their little business.

Instead of ordering servers from Dell, Hauser found a local computer company and sold it on his vision for the future. Hauser asked the owner to make a server for him below cost arguing that if Grasshopper achieved its vision, Hauser would soon buy many more. When Howard Stern moved his show to satellite radio, Grasshopper offered to support Stern’s new medium in return for major concessions on the price of a commercial.

Grasshopper also offered discounts if customers paid for a year’s worth of service upfront, effectively turning its customers into financiers of the business. Despite its growth from start-up to $30 million in revenue in just 12 years, Hauser was able to retain the majority of the equity in his business, which he sold to Citrix in 2015 for $165 million in cash and $8.6 million in Citrix stock.

As the story of David Hauser illustrates, owners who focus on value building will guard their equity. Rather than selling their friends and family cheap shares or giving every new employee options, they use other forms of financing to start and grow their business.

Rather than thinking of your shares as a currency to distribute lavishly, consider your stock as the essential ingredient to building value.    

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 Bother Doing It The Hard Way?

Whether you want to sell your business next year or a decade from now, you will have two basic options for an external sale: the financial or the strategic buyer.

The Financial Buyer

The financial buyer is buying the rights to your future profit stream, so the more profitable your business is expected to be, the more your company will be worth to them. Strategies that are key to driving up the value of your business in the eyes of this buyer include de-risking it as much as possible, creating recurring revenue, reducing reliance on one or two big customers, cultivating a team of leaders, etc.

The Strategic Buyer

The alternative is to sell to a strategic buyer. They will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.

For example, Nick Kellet’s Next Action Technologies created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Technologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.

Kellet knew the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product. Kellet found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.

Preparing For Every Eventuality

The question is: why bother making your business attractive to a financial buyer when the strategic buyer typically pays so much more?

The answer is that strategic acquisitions are very rare. Each industry usually only has a handful of strategic acquirers, so your buyer pool is small and subject to a number of variables out of your control; the economy, interest rates, the competitive landscape and a whole raft of other variables can all impact a strategic acquirer’s appetite to buy your business.

Think of it this way: imagine your child is a promising young athlete who’s intent on going pro. You know that becoming a professional athlete is a long shot, fraught with unknown hurdles: injury, the wrong coach, or just not having what it takes to compete at the highest levels. Do you squash her dream? No, but you do make sure she does her homework, so if her dream fades she has her education; you make sure she has a back-up plan.

The same is true of positioning your company for an exit. Sure, you may want to sell your business to a strategic buyer in a spectacular exit, but a financial acquisition is much more likely, and financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.

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.

Focus On Driving Your Multiple

The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?

Profit × Multiple = Value

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

What Drives Your Multiple:

Differentiated Market Position - Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.

Lots of Runway - Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.

Recurring Revenue - An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.

Financials - The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.

The You Factor - The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.

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.

Sole Ownership and Planning for The Unexpected

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” being the unexpected events 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 they “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 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 not a 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 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 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.

Subscribe to our podcast (scroll to end of homepage) and get a complimentary copy of our Business Continuity Instructions fillable PDF . 

Is Your Brand a Successful Business Growth Tool?

There is one key question every business should ask when it comes to their branding:  Does your brand enable your prospective clients or customers to see themselves in your experience—in your services or products?  If your prospects see themselves in your experience—they will become part of your experience.  If your brand doesn’t accomplish this both visually and verbally then your brand isn’t doing its job. 

How can businesses ensure that their brand is accomplishing this critical goal?  This is achieved through a value proposition-based brand.  The foundation of an engaging, effective, brand that drives business growth is a company’s value propositions.  They answer the questions: 

• Why choose your company? 

• What sets you apart from the competition? 

• What unique assets do you provide to your clients or customers? 

• What unique assets do you provide to the community (the giving-back component)? 

If the answers to these questions are showcased both visually and verbally through your brand, you can be assured that your prospects will see themselves in your experience and be drawn to become part of your experience.

Engaging, effective branding combined with proven technology, compelling content, engaging design, and a results-driven outreach strategy fuels vibrant and sustainable business growth. 

Liz Johnson, President & Principal Consultant, Mountain View Marketing. If you have questions or would like additional information, please reach out to Liz at liz@mountainviewmarketingllc.com . 

How Can A Charitable Lead Annuity Trust (CLAT) Help Me Attain My Business Exit Goals?

Minimizing taxes, based on our experience, seems to be a “core value” shared by most, if not all, business owners. And, seldom are they more cognizant of potential tax burdens than when transacting a sale of their business. Many owners are also characterized by generosity toward others through charitable giving.

A CLAT, or Charitable Lead Trust, is an Irrevocable Trust designed to provide financial contributions to one or more charities for a specified period of time, with the remaining assets eventually being distributed to family members or other beneficiaries. A CLAT also provides an owner with estate and income tax benefits that can be particularly helpful in the year of a business sale. For example, our fictional business owner Sarah successfully sold her business this year. Following are a few key data points:

• The payout in the year of sale is significant as she is in control exiting on her own terms and conditions. She built a sellable business.

• As a result of the large payout this year, she also has income and estate tax problems. Her exit goals include minimization of both income and estate taxes.

• Not only has Sarah been impactful through her business, but also through her generous and strategic giving to favorite charities through the years. She wants to increase giving with sale proceeds.

• Along with personal values that she wants to transfer to heirs as part of her legacy, she also has financial legacy goals. So, she would like for a portion of her charitable trust assets to eventually return to her family and beneficiaries.

• Due to her comprehensive planning process, Sarah has been able to sell her business on her own terms and conditions and have strategies in place to accomplish her tax minimization, charitable giving, and legacy goals — one tool playing a role in her strategy is the Charitable Lead Annuity Trust (CLAT). Sarah’s Charitable Lead Annuity Trust will provide her with both income and estate tax benefits, and work to accomplish her charitable and legacy goals.

If you’re a business owner like Sarah in the year of selling your business and have goals of minimizing estate and/or income taxes, charitable or philanthropic goals, and financial legacy goals, establishing a CLAT could play a key role in your comprehensive plan. Also, the current interest rate environment is particularly suited for CLATS as they are most effective when rates are low.

Check with your estate planning attorney and/or CPA, or contact us to see if a CLAT would be the right strategy for you. You can also learn more in our ExitReadiness® PODCAST episode with Estate Planning Attorney Jonathon Morrison of Ryan Frazer Goldberg & Arnold.

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.

Accelerating the Transferable Value of Your Business

At the heart of an effective and successful plan for a business owner's exit is what we call transferable or sellable value. The transferable value being the value of your business apart from you the owner or what someone is willing to pay for the business without you.  

Following are a few sample questions for gauging the strength of your business transferable value:

"Can I really take a vacation from my business?  If so, for how long?  Would I be on the phone or my computer much of the time I'm away?"

"Do we have the right incentives in place to motivate, reward, and retain key employees even through a transition of the business?"

"Do we have a management team in place to take us to the next level of growth?"

"Are our operating systems strong and could they support future growth?"

"When was the last time we had either a legal or HR audit?"

"Do we have recurring revenue?"

And, because potential buyers are buying future cash flow, right at the top of the list of questions would be, "How strong is our EBITDA or free cash flow, and do we have a plan for growth?".  

The following sample scenario depicts the impact of strong cash flow and revenue growth on business value:

Today: 

Revenue = $ 2,500,000

EBITDA =   $ 250,000 (10%)

Biz Value Multiple of EBITDA = 4 X

Business Value = $ 1,000,000

End of Year 5 with Revenue and EBITDA growing at 10% (8% after inflation)

Revenue = $ 3,673,000

EBITDA = $   367,000 (10%)

Biz Value Multiple of EBITDA =  6X

Business Value = $ 2,200,000

NOTE:  The multiples used are for illustration purposes only.  For a business of this size, multiples are often lower.

So, if your post-business or legacy plans are contingent upon the future sale of your business to a potential buyer, the following are some action steps you should take as soon as possible to know how to increase cash flow and growth:

1. Get an accurate current valuation of your business. Find out what your business is really worth now. Meaningful planning requires accurate data.

2. Get a personal financial needs analysis. Find out how much you will need to do all you want to do post-exit. Not back of the envelope but a legit financial plan that considers taxes, cash flow, goals, etc..

3. Perform a financial GAP Analysis. Subtract what you have (personal assets and business value) from what you will need. If there is a GAP, it will represent the amount your largest asset will need to increase in value, unless you have other assets with greater growth potential.

4. Assess the strength of your value drivers and design a plan to accelerate value and growth.

It takes financial resources and planning to accelerate the value of your business, so the more time you have to budget, plan, and execute the plan the better your chances of a successful exit or transition.

Contact us today for help with accelerating the value of your business and planning your eventual exit. email@ennislp.com | 301-859-0860 | 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.

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 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.

You can 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

Every Owner Has a Plan Until...

Mike Tyson, the heavyweight boxer, was quoted as saying, "Everyone has a plan until they get punched in the mouth."  Regardless of what you may think of him as a boxer or a person, it was a great observation.

It doesn't matter whether we're talking about boxing or business, the truth is that owners all have a plan for a transition until they get hit with a setback.  Some will give up after being derailed, but others will take a step back, correct their course of action, and find a way to succeed. Giving up on a course of action is not the same as giving up on a goal.

Having a strong attachment to the process with which to achieve a goal often undermines our success.

Let’s look at the typical transition options, the potential setbacks, and how to recover from a setback.

Typical Transition Options:

Generally, owners have two practical options - an External Sale (Exit) or an Internal Sale (Succession).  (The other option is to close the doors and sell the assets.)  An Exit is generally a sale to an Individual Buyer or it’s some form of Strategic Acquisition (M&A/Investment Bank/Private Equity).  In contrast, a Succession is a sale to a Family Member, a Key Executive, or via an ESOP (Employee Stock Ownership Plan).  A number of these options can be the right path for an owner, depending on the nature of the business and the needs of the owner.  The problem is that many times, things don’t go as planned. 

Potential derailers for a planned External Sale

Circumstances that can derail an Exit include:

·    Can’t find a buyer or attract capital – This can be due to a surplus of businesses for sale or to the nature of the business.  The greater the surplus of sellers, the more selective buyers can afford to be.  Additionally, the more dependent on the owner and his/her relationships, the less attractive the business.

·    Price too low – This can also be due to a surplus of businesses for sale or it can be due to business valuation issues like customer concentration, weak leadership, market concentration, etc.

·    Unacceptable terms – Sometimes buyers require an owner to stay active in the business for an extended period of time and or defer payment of monies pending performance.

·    Health issues (yours or a family member) – Clearly, this situation is unexpected, and a sale would be undertaken under pressure, which would result in a loss of leverage.

 Potential derailers for a planned Internal Sale

Circumstances that can derail a Succession include:

·    No qualified or interested successor – Either the person you had in mind to take over the business doesn’t want to, or you don’t have confidence in the person who wants to take over.

·    More than one interested family member or executive – You have more than one person who wants to be the successor and it creates conflict – sometimes significant conflict.

·    Too small for an ESOP – You like the idea of creating an employee-owned company, but the cost is too high and/or there aren’t enough savvy leaders to take charge.

·    Health issues (yours or a family member) – Clearly, this situation is unexpected, and a transition would be required before a successor is ready.

How to Reduce the Chance of Your Plans Getting Derailed:

The best approach to planning a transition is to be proactive, well in advance of your anticipated departure.  Start by pulling together a team of professionals sooner than later.  Their expertise can help you choose the best exit strategy for your situation, identify and resolve potential issues, and refer you to people with any additional expertise if needed.

·     Wealth Manager

·     Tax Planning Attorney

·     Successor Recruiting

·     Successor Development

·     Succession Attorney

·     Private Equity Firm

·     M&A Advisor

·     Investment Banker

·     Exit Planner

·     Executive Coach

·     Estate Planning Attorney

·     Commercial Banker

·     Business Broker

If your goal is an external sale, consider having a preliminary Quality of Earnings Report done along with a Quality of Leadership Report.  These two reports will highlight any shortcomings and/or impediments in advance of a sale so they can be addressed before going to market.  Additionally, consider selling sooner than later to avoid the surplus of Boomer-owned businesses coming to market and/or to avoid being forced to retire due to health issues.

If your goal is an internal sale, ensure you’ve identified your successor well in advance and make sure they want the role.  (If there is no one, then start the process of recruiting a potential successor as soon as you can.)  Once that’s done, start working on developing that person.  Develop their business savvy, their leadership effectiveness, their strategic thinking, and their owner mindset.  If more than one successor will be involved, objectively assess them and decide how to split/share responsibilities.

How to Recover from a Setback on an External Sale:

Basically, there are two paths to recovering from a setback on an external sale.  Start by attempting to make the business more attractive.  If possible, address the issues that caused the business to be less attractive, caused it to be worth less than you hoped for, or caused the terms to be undesirable.  If that can’t be accomplished, then switch to an internal sales solution by choosing or finding a suitable successor and grooming them to take over.

How to Recover from a Setback on an Internal Sale:

If your plan to have a particular person take over the business fails, re-evaluate and assess alternative successors and/or start the process to recruit a successor from outside the company.  Once you’ve chosen someone, begin grooming them to take over.

By the way, if you want to accelerate the development of your successor, consider bringing in a professional executive coach.  Having an objective, confidential sounding board can help them gain new perspective and develop the skills they need to succeed.

Michael Beck is an executive coach, business strategist and author.  He is passionate about developing successors and preparing them to successfully run a company.  His company offers leadership assessments and executive coaching, all designed to help successors succeed and owners get paid. Learn more at www.ElicitingExcellence.com

2021 Exit Planning Checklist

All business owners will stop being business owners at some point.  So, there is no better time to begin planning for the inevitable than the present.  The earlier you begin planning, the more options you will have for a successful exit.

However, like any strategic plan, it can be difficult to know how and where to begin.  As we wrap up 2020, it's also an ideal time for us to publish a basic "To-Do List" that will serve you in considering 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 Business Valuation. 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. Co-Owners would 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 2021 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 2021 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 our Free ExitMap Readiness Assessment and get Online Learning and Resources at exitreadiness.com.

Exit Planning and Marathon Runners

“Eat well and exercise!”

Just about everyone over 30 has heard this advice from someone interested in our health, usually a doctor.  We all know that we should begin by doing SOMETHING, yet we wind up not really doing anything.  We know deep inside that if we want to live long and prosper, taking a few painful steps will have long-term pay-offs, but all too often those first few steps never happen.

What has this got to do with Exit planning? 

Business owners know they should be taking steps to plan for the future, but all too often they don’t seem to get around to it.  With each passing year comes the thought, “I’ll get to that.” But, like the good intentions for diet and exercise, the longer one waits, the harder it gets.

How Exit Planners Help Businesses Get In Shape

            Exit planners are a bit like personal trainers.  What personal trainers do for fitness, exit planners do for businesses. They take a look at the shape a business is currently in, and develop plans to improve that business until it is in optimal condition, usually so that the business can be transferred or sold in such a way that the owner remains in control of the sale.  A business in less than optimal condition often means that the owner will lose some of control of the sale to the whims of the buyer.

Dream Big

            A middle-aged person who develops a dream to run a marathon soon finds that just reading about marathons is not enough to get in the race. Still, if they never dream the marathon dream the race has no chance of being run at all.

            Business owners who intend to sell also should not hesitate to dream big, even if they do not plan to sell for five or ten years. Big dreams mean big accomplishments.  Every business owner should dream big about two things:

1. The ultimate objectives (financial, personal, family, and/or philanthropic goals) for leaving the business.

2.  The “transferable value,” of that business, which should ensure that the owner does not have to go with the business when it is sold.

Set Small, Achievable Goals

            Like someday wanting to run a marathon, dreams are easy to write down, but need diligent daily work to achieve.  They will not happen on their own. Whether you a baby boomer nearing retirement, in the middle of your career enjoying the excitement, or just at the very start of a venture, taking these simple steps will prepare you for the future:

1.         Get help to develop a “workout plan.” Just as it can be helpful to get a personal trainer involved when you begin to exercise, the same is true for business planning.  It's a complex process that requires specific knowledge in certain areas (legal, financial, estate planning, human resources, etc.) to ensure your business gets in optimum shape.  

2.         Set simple goals - Simple goals when one begins exercising help to prevent accidental injury, and the same is true for exit planning.  Three simple, easily achievable goals are:

a.     Determine how much money you need, or want, for retirement

b.     Decide when you want to leave your business

c.     Identify the person, or persons, to whom you want to transfer the business

3.         Start slowly – you can't rush getting into great physical conditioning, and you can’t rush the business planning process. Set realistic goals and act on them one by one.

4.         Stay steady and consistent - sticking with the plan and taking small, consistent steps will pay off.  Make time in your busy schedule to do the essential steps.  

5.         Measure progress - in order to ensure you're making progress toward your goal you’ve got to measure it. Setting 90-day goals allows manageable progress and the ability to celebrate the small wins.  

As you work hard in the business day-to-day, take the necessary time to prepare for tomorrow - starting your exit planning program now will maximize your quality of life in the future.

Get started today with our FREE Exit Readiness Assessment.

Wealth Management for Small Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business into your overall plan for managing your wealth.

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

• Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?

• Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.

• A financial needs and gap analysis with an accurate valuation (not back of the envelope - meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?

• Personal risk management including asset protection, insurance planning, tax planning.

• A current estate plan — a business owner cannot do exit planning without doing estate planning.

• A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.

• An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

Contact us at email@ennislp.com for assistance in building sellable business value or planning your eventual exit. Please also consider investing 15 minutes in completing our FREE Exit Readiness Assessment. We do not ask for confidential information.

Test Your Assumptions About Exit Options

Five years ago we met with the owner of a successful business who told us he wanted to exit in the next few years. When asked if he knew who he wanted to sell the business to, he responded: “I guess I will sell to a third-party buyer”. He didn’t at all seem excited about that, so with further questioning, we learned that he was moving ahead under the assumption that a sale to a third-party was his only option. We also discovered that his real desire was to sell to a key employee who had been instrumental in building the business, and a son working in the business. Also, he had already spoken to a strategic buyer who was interested in buying his business and expanding into the area.

In 2019 with our help he successfully sold his business to the key employee and his son. The moral of this story is to test your assumptions pertaining to how you will eventually exit your business. And, it’s best to have an expert test those assumptions…because you don’t know what you don’t know, and you may not even recognize where you’re making assumptions. Our client assumed he would not be able to sell his business to whom he wanted to, and had actually started down a path that he really didn’t want to travel down. With the right help, his assumptions were identified and tested, and in the end, he was able to do what he really wanted to do.

Identifying and then testing assumptions is essential for a successful exit. Our client realized what he really wanted to happen because he took the first step in seeking expert assistance. You can get started today with our FREE Exit Readiness Assessment.

email@ennislp.com | 301-859-0860

Aligning Employee Incentive Plans with Owner Goals

Sarah wanted to exit in 5 years and had learned through planning and analysis led by her exit planner what “her number” was, as well as an objective estimate of the value for her business. She was pleasantly surprised to find that the financial gap for making her post-business dreams happen is not insurmountable. At the same time, she is aware that growing the value of the business (Sarah’s largest asset) will be necessary to close the existing gap.

With her newly designed comprehensive exit plan, and a decision to exit with a future sale to an unidentified strategic buyer, Sarah now has a crystal clear picture of what is needed to maximize and preserve the value of the business and attain her post-exit goals. Following are a few of the key value-driver action items identified during the analysis of Sarah’s situation:

• Strengthen Management Team

• Improve Financial Performance

• Establish and document a Growth Plan

• Increase Recurring Revenue

Now that Sarah knows how much she needs to grow the value of the business within her planned time frame for an exit, and what needs to happen to facilitate the required growth, she needs to take action in aligning employee incentive compensation with her strategic goals. For example, there is a need to increase EBITDA so she will implement an added incentive for the Chief Operating Officer that is tied to profitability. Currently, all that’s in place is a year-end bonus simply based on Sarah’s generous nature and whether or not they “had a good year.” She will do likewise for other employees who help drive the performance needed to accomplish her goals.

Sarah also now knows that it will be essential for these key employees to stick around during, and after, a sale transaction if the transaction is to be successful. Key employees who are not incentivized to remain through the owner's exit can seriously impact the owner proceeds at the sale and even destroy the deal.  

So, what does Sarah do? Stock Option Plan?  Phantom Stock Plan? Restricted Stock? Cash-Based plan? Stay Bonus? What plan or plans will be the most effective, easiest to implement, and cost-efficient?  Incentive planning can be complicated requiring deep expertise in statutory and technical requirements, tax planning, and other areas.   The Certified Exit Planner has made sure that the right experts have been involved and coordinated in designing and implementing Sarah’s new incentive plan, and so she is quite confident in the final plan.

In summary, be intentional in aligning your employee incentive compensation plans with your strategic owner-based goals for growth and exit, and get the needed expertise on your advisor team to help design and implement the plan. Effective incentive planning can play a key role in helping you attain exit goals within your desired exit time frame.

Contact us today for an exploratory conversation if you want to exit within the next 10 years. Don’t wait until you feel pressure to leave your business to begin planning. Plan 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.