The Pursuit of Better

Exit Planning, by definition, has an end-game in mind.  This implies defining the goals, planning the strategy to reach them, and executing the plan.   I am a huge fan of the annual strategic planning and budgeting process – they are foundational.   However, many businesses have great plans on paper and yet fail to finish well.   Why? 

I just finished reading a book entitled “Better” by a surgeon named Atul Gawande.   In a profession where lives literally depend on how well one does one’s job, he has a passion for the pursuit of improvement in every area of medicine.  He shares numerous examples of how doctors in less developed parts of the world have actually developed far more successful processes than wealthier countries.  The major message is – they pursue delivering a “better” service to their clients.

An underlying theme is that improvement comes through a long-term commitment to improvement – in the big and small things.  And there are two sides to this:

1. Don’t settle for “good enough” – always seek to serve your customers better – with a better, cheaper, more effective product or service.

2. Persevere in overcoming obstacles – take the long view to solve the problems that face you.

Obviously, this is a team effort and he makes five simple recommendations that can help build a culture of “better”: (I have listed his recommendations and “translated” them to “business speak”).

1.   Ask unscripted questions -    Ask fresh, unplanned questions - what don’t you know about your customers?  Take the time, not just to do surveys, but think out of the box; explore getting to know your customers better so that you can serve them better.  Have real people connect with real people and ask honest questions. “Listen” to what you hear.”

2. Don’t complain.   Don’t complain about the challenges – every business has challenges that need to be overcome. At times they may seem just “too hard”, however focusing on the problem can be an excuse to not try to overcome it.  Persevere in solving the problem. 

3.  Count something -  Every business has an income statement and balance sheet, however, what really drives your business?  Think outside of the box to measure the performance of the business, so that every area can be measured (often called KPIs).  Quantifying “good” can help you move to “better”.  Then, when your numbers don’t look like they should, ask why to assess and adjust. 

4.   Write something   -  In a book called “Poke the Box” Seth Godin suggests things change when people take the initiative to start something.  Write down ideas, communicate them and act on them - encourage others to do the same.  

5.   Change -   Change hasn’t happened until change happens.  identifying problems, writing about it, and talking about it accomplishes nothing unless things are put into action.  This requires a willingness to change “the way we have always done it”.  Many successes come through failed attempts at change and learning from those mistakes.  

So, start today.  Pick one area where you can improve and pursue making it better.  Then repeat.

 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 Net Proceeds And Not Just Sale Price When Selling Your Business

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

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

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

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

  • Transaction and professional fees.

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

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

  • Capital gains and affordable care act taxes.

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

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

If you need help contact us at 301-859-0860 or email@ennislp.com. Invest 12-15 minutes in the FREE ExitMap® Assessment and get a 12-page report scoring you in four key exit planning areas: Finance, Planning, Revenue/Profit, and Operations.

To ESOP or not to ESOP...

An ESOP, or an Employee Stock Ownership Plan, can be an attractive exit route for business owners.  It can provide a path to “take chips off the table”, sustain the business culture, motivate employees, and ensure that employees have a future with the business.  Selling owners can also have more control over the timing of their departure from the business, with the most enticing aspect often being the favorable tax consequences of a transaction.

These are indeed compelling reasons to move toward an ESOP for an owner who wants to mitigate taxes while at the same attain pronounced values-based goals.  An ESOP can indeed be a rewarding exit strategy for all stakeholders in the right situation. 

There are however drawbacks that Business Owners should understand and plan for with rigor (with an experienced advisor team) prior to implementing an ESOP strategy.  Following are some key planning issues:

Realizing Owner Financial Goals

There are financial risks that an owner needs to understand, mitigate with planning, and be willing to assume as they execute an ESOP:

• The management team will need to run and grow the business successfully.  If they don’t, there may not be adequate cash flow to pay off the debt owed to the selling owner(s).

• It is often necessary for the selling owner(s) to accept a promissory note for part of the purchase price. There is a risk of non-payment if the business does not have adequate cash flow to make loan repayments.

• The owner(s) may also be required to personally guarantee bank financing that is used in purchasing their stock.  If the selling owner(s) has pledged sale proceeds as security for the bank loan or has not received the entire purchase price at closing, the owner risks losing the unpaid portion of the sale proceeds, if they are no longer involved in the business or have control.

• Establishing and operating an ESOP can be expensive.

• An ESOP transaction may not be as financially beneficial as compared to a sale to a strategic buyer.

Next-Level Management Team and Other Business Considerations

• A “next-level” Management Team, that can operate well in an employee-ownership environment capable of taking the business to the next level of growth, is critical for a successful ESOP transaction.

• If employees observe ineffective management, it can impact their perspective on the future growth of the business and their ownership interest in the business.  This could result in employees leaving when a goal for the ESOP was employee retention.

• ESOPs can put a strain on the future cash flow of the business in repaying the loan if the owner’s stock sale was financed.  Also, the obligation to purchase stock from the ESOP accounts of departing employees can result in further cash flow challenges.

• The level of due diligence is like that of a sale to a third party.  This will require time and attention, which can result in a lack of focus on managing current business growth.

• Properly executed ESOPs produce favorable tax consequences, resulting in a high level of scrutiny and regulation by the IRS and Department of Labor.

The ESOP exit route may be the most complex requiring the deepest level of expertise for analysis, feasibility, and implementation.  Make sure to get the right experts on your advisor team early in your process, as it can take years to prepare your business for a successful transaction. 

Following are ExitReadiness® PODCAST episodes focused on ESOPs that will prove helpful:

A Successful ESOP Story Ft. Kris DenBesten

ESOPs As An Exit Route ft. Keith Apton

Contact us today if you need help in determining if an ESOP is your best exit strategy.

The Achilles Heel of Wealth Planning for Business Owners

Small to mid-sized business owners pour themselves into building a valuable business, and if they have a retirement strategy, it likely includes “selling the business”. 

Many business owners have a Wealth Advisor who diligently seeks to ensure the owner has a plan for that “Next Act” – when they sell the business.  And as I speak to Wealth Advisors, a common data point is that for the majority of Business Owners,  the business is often a major portion (80%+) of their portfolio.  So,  the retirement plan is:

1.     Run the business and invest in your 401K and

2.     Sell the business to fund retirement.

Yet – there is an Achille’s Heel to this plan.  

When asked how the value of the business was determined, advisors often say “The Owner told me the number”.   And when we dig a little deeper, that value the owner passes on is often not based on an outside valuation/estimate but on conventional wisdom, hearsay, their friend’s business, or a simple gut feel.  A full 80% of the Wealth Advisor’s planning is not based on objective data, but on a gut feel!  Unfortunately, if that gut feeling is wrong, it can be too late to correct it. 

Basic Exit Planning is a key to protecting against this threat and ensuring that plans are based on reality.  Several key facets of Exit Planning support sound wealth planning, including:

1.     Establishing business value through a 3rd party analysis through a formal valuation or estimate of value.  This gives an objective number for planning.

2.     Assessment of business quality – giving an objective sense of whether the business is sellable.

3.     Plan for value creation – if there is a value deficiency, exit planning focuses on enhancing business value, including correcting weaknesses and planning for growth.

4.     Clarification of Exit Options allowing an owner to understand and choose an optimal exit path that maximizes the ability to meet financial and non-financial goals

5.     Coordination with Wealth Advisor, Tax Advisors, and other professionals to develop tax-efficient strategies for wealth planning, as well as plans to accrue wealth prior to sale.

6.     And perhaps most importantly, clarity of the reality of the situation.  If the news is bad, at least it isn’t a surprise and plans can be made accordingly.

We recommend:

1.     Team up with a wealth advisor who routinely works with business owners and understands your unique challenges.

2.     Establish the value of your business with a 3rd party estimate of value/valuation.

3.     Consult an Exit Planner to understand your exit options.  

4.     Consult your CPA to understand the tax implications of those options.

5.     Work with your advisors to accrue wealth while you own the business. 

Invest 12-15 minutes today 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.

Scary! High Hanging Bridges and Exit Planning

Scary high hanging bridges

If you’ve ever attempted to cross a rickety bridge expanded high above whatever is far below, you know how terrifying it can be even if you’re not afraid of heights! If you fear heights like I do, each step on a high hanging bridge produces huge anxiety as you become keenly aware of what’s at stake…your life! Once as a teenager, I started out across a bridge like that with friends, and realized real quick that there was no way I could make it across and back…I was simply too afraid. In a rare “wisdom moment”, I decided to turn back. Meanwhile my friends had arrived on the other side, and were sitting on the hill loudly mocking their beleaguered friend. So, not only a terrifying but also a humiliating experience.

Potential for disastrous consequences

The source of my anxiety was an intense awareness of the disastrous consequences of a fall from that bridge, that seemed all too probable. It would be a long and hard fall to the river about 100 feet below…and the odds of a skinny teenager surviving were not high! Disaster for sure!

Exit planning can be scary too

An owner’s life may not be at risk when planning an exit, but many other valued aspects of life, including financial security and relationships, are at stake. So, it is certainly understandable when owners experience fear and trepidation during a transition, as the decisions such as the following have huge impact on the owner and all business stakeholders:

• Should I risk having my kids take over the business now….even though they may not be ready? I want to set them up for success…

• I’m going to sell to my key employees….no wait, what would happen if they can’t pay me?

• I’m going to move ahead with a sale to a third-party. But wait, will my employees and customers still be treated in the same way…that’s important to me…

• How will my spouse and family be impacted if I die prematurely? Who will own and run the business?

• I really don’t know what I’d do after leaving that would be as meaningful as building my business…it’s scary to think about!

As owners become highly sensitized to the significance of these issues, it sometimes can be easier to “turn back” and not take any further action in planning their departure. They might experience paralysis with procrastination, or simply decide not to do anything at all.

5 tips for crossing hanging bridges and planning your exit…if you’re scared…

In an interesting article, the author Anna (“would be traveler” and “ethical adventurer and proud member of #TeamHerbivore”) provides very helpful and insightful advice about crossing hanging bridges:

1. Stay with someone you trust and who understands your fear.

2. Cross the bridges with a group of people.

3. Avoid the tendency to look down – Keep your focus on the main reason you’re at the hanging bridges in the first place…

4. Don’t think about how high up you are – At the beginning of each bridge, you’ll see a sign telling you how high and how long the bridge is. If knowing these statistics is a trigger for you, avoid looking at them. Instead, walk straight past them and out onto the bridge.

5. Explain your fear to the front desk – He said that if I couldn’t make it over the first one without feeling terrified, he would refund me the money I paid.

Anna’s advice for crossing scary bridges transfers nicely to business owners planning to exit

In reading Anna’s article, and her recommendations for those facing their fears of hanging bridges, I found it interesting how her advice correlates with exit planning:

• Move forward with a trusted advisor, and possibly another owner who has “gone before you”, who can understand your fear and apprehension.

• Go through the process with the right group of people — a capable advisor team.

• Keep your focus on the main reason you’re in a planning process to begin with….your personal vision for a successful exit on your own terms and conditions.

• Don’t dwell on what triggers fear and apprehension, but simply create the plan and execute it one step at a time.

• Anna’s #5 doesn’t translate…no refunds!

Get started today “crossing the bridge” to exit. Start with the right trusted advisors, the right process, and adequate time for planning and you will minimize anxiety and maximize your potential for a successful transition.

Invest 12-15 minutes today 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.

Before Moving Forward with a Sale to Key Employees...

If you’re a business owner with a desire and vision for selling to key employees who have helped you build the business, the following is a short list of important issues to seriously consider prior to moving forward. And, the sooner you begin the greater chance of a successful transition.

• Identify and test your assumptions. For example, it’s not uncommon for owners to assume that employees want to buy and own the business. Often this simply isn’t the case due to differing values, life goals, risk tolerance, etc. You and they will be better served if this is established sooner rather than later. It’s not unusual for key employees to prefer a cash-based incentive plan such as Phantom Stock, particularly if they are approaching an age for retirement.

• Employees may be enthusiastically willing to become owners, but perhaps not equipped or even well suited to become owners. Facilitating an objective evaluation of their skills and characteristics, and professional coaching if needed, early on in your process is advisable.

• Avoid making premature and unsubstantiated promises about ownership, either written or verbal, that can result in employee expectations of ownership.

• Be clear on common mistakes to avoid such as selling too much too soon and giving up control prior to realizing goals or including employees in the buyers’ group that will not work well as partners (see the Partnership Charter).

• Be clear on your own risk tolerance. For example, how much $$$$ of a deal would you be willing to self-finance, and for how long? Forecasting business cash flow with a “sanity check” on how the business would financially support the transaction will help you decide how much risk you’re willing to take on.

These are things you could do on your own without assistance, but a safer and risk-averse way to proceed is to engage professionals who can identify and test your assumptions, what you know and don’t know, and then provide advice as to how to proceed wisely.

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.

Cash Flow Projection and a Successful Exit

A small business owner named Simon understands how the cash flow of the business drives his current income, and as well how it would eventually impact the valuation and sale price. However, Simon lacked awareness of elements of potential exit routes that demand cash flow. For example:

• When considering an ESOP, his business met all the basic parameters EXCEPT having the adequate cash flow to service the debt needed to fund the ESOP.

• When running a “sanity check” as to whether key employees could finance an insider purchase with a bank loan, the bank would only finance a small amount…due to projected cash flow.

• In considering a third-party sale, and as a result of Simon’s exit planner’s financial gap analysis, there was a need to invest in updated systems, new hires (next-level management), and incentive plans for key employees in order to increase the value of the business…cash flow was needed to make it happen.

Simon has said that “he’s ready to exit”, but after analyzing his business’ readiness for an exit, and projecting future cash flow, Simon will not be able to exit the way he wants to for at least five years — there’s just too much to get done to realize the value he needs. So, the moral of the story is to have a ten-year cash flow projection and keep it current for planning both growth and your eventual exit. The stronger the cash flow and its management, the greater chance of building a transferable business and having multiple options for exit.

And, begin planning today…it will take longer than you think.

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 Buy-Sell Agreement Solve Problems or Cause Problems?

The most important business planning document that multiple owners of a business can have is a buy-sell agreement.  A buy-sell agreement provides direction to owners and other stakeholders when certain events trigger the transition of an ownership interest in a business. 

These agreements can be very effective in minimizing uncertainty and indecision during challenging and emotional times.  However, it’s not enough to simply have a buy-sell agreement, it needs to be written skillfully to accomplish the desires and goals of the owner(s).

Buy‐sell agreements, in some situations, can create as many questions, problems, and conflicts as they seek to address.  A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time.  Unanswered questions, outdated agreement language that no longer represents the goals of the owner(s), an agreement that is not comprehensive and too simplistic or was poorly implemented can render the buy‐sell agreement ineffective and fail to accomplish the intended purpose.

Opening questions:

• Do you need a buy-sell agreement, and if so, do you have one?

• Is your buy-sell agreement outdated?  When was the last time your agreement was reviewed to ensure that it still well represents your goals? 

• Will your buy-sell agreement cause more problems than it would solve in its current form?

Too often buy-sell agreements have one or more of these planning gaps:

1. Ignores lifetime trigger events such as divorce, bankruptcy, voluntary exit, and involuntary exit.

2. A simple valuation method that does not consider the ever-changing dynamics and growth of the business. 

3. The timing of valuation is not adequately addressed.

4. When buy-sell agreements are not regularly reviewed, they can become outdated and result in unpleasant surprises when they are needed. Owners rely on Buy-Sell Agreements to manage emotional situations, and if those agreements don’t account for changes in their goals as well as the business, they can cause significant problems for everyone involved.

5. Many buy-sell agreements are too simplistic to manage the personal complexities of the individual owners who sign them, and their relationships with each other. For example, companies with multiple owners often don’t want to treat all owners similarly, or one owner subject to the agreement may be uninsurable. In family businesses, non-business considerations may affect the design of buy-sell agreements.

6. Fails to address threats to business continuity.  Most buy-sell agreements don’t address the challenges that the business, surviving owners, and deceased owner’s family will face after an owner exits. Too often they only address the transfer of ownership upon an owner’s death or permanent incapacitation. For example, if the surviving owner does not have enough assets to satisfy the personal guarantees previously made by the deceased owner, once that financing is pulled, the business may not be able to continue. Likewise, if the deceased owner was the company’s rainmaker or COO and no one can step into those roles, the business may be unable to survive.

7. Buy-sell agreements are typically deficient in considering the financial security of the decedent’s family. 

Questions your buy-sell agreement should answer include the following:

• Are “lifetime triggering events” addressed as well as death and disability?  Divorce?  Bankruptcy?  Voluntary exit?  Involuntary exit?

• What type of valuation estimate is required?  Book value?  Fair market value?  Fair value?  Investment value?  Agreed upon value?

• What is the desired timing for the value calculation?  Date of the trigger event?  Subsequent event?

• Does the entire business need to be valued, or a partial ownership interest? 

• What method of funding will be used to complete the transaction?

  • Cash – Requires sufficient cash flow or reserves to pay the full sale price in a lump sum.  May not be available when needed.

  • Loan – Future credit availability and cost of borrowing are factors. 

  • Installment Sale – Requires repayment from earnings and is contingent upon the future growth and success of the business.

  • Insurance – Provide liquidity when needed for either death or disability trigger events.

• Should the buy-sell agreement method of funding be taken into consideration in the value?

• What method will be used for valuation?  Fixed price?  Formal valuation?  Formula-based?

• Is there clarity as to what is mandatory and optional regarding the purchase or sale of an ownership interest?

• What goals for your spouse and family do you want to be realized if you die, become incapacitated, or otherwise exit the business unexpectedly? 

Contact us today to learn more about our STRATEGY RENOVATION® Business Continuity Plan if you need help creating or “renovating” your plan for the unexpected.

Keep The End In Mind

Often business owners are exhorted to build their business with "the end", or their eventual exit in mind.  This can be a good idea in that it lends toward building your business to have "transferable value", or value that someone else will want to buy and own when you're ready to leave.  Value apart from you the owner.

It is also wise to build your exit plan with the end in mind.  The end being, not just your eventual exit from the business, but also your exit from this life.  In other words, creating your business exit plan with your "desired legacy" in mind.  Each of us leaves a legacy, but we don't all leave the legacy that we want to leave.  

We find that when thinking of legacy, business owners often focus on the transition of wealth.  And certainly, the effective distribution of wealth to future generations is a most important consideration.  At the same time, there are other significant and unique factors pertaining to the legacy of a business owner:

• Family peace and harmony

• Provision for family and others

• Sustaining the culture of the business

• Effective transfer of personal and business values to future generations

• Reputation and role of the business in the community | Family name in the community and marketplace

• Continued service to employees, customers, vendors, local economy

• Being prepared for the unexpected

• The way(s) in which the business owner wants to be remembered

This is a limited and representative list of issues and categories for reflection and planning pertaining to the legacy of a business owner.  You may have other priorities and desires.  The point is, in order to leave your desired legacy, it will take reflection, planning, and time to execute the plan.  Get started as soon as possible, as we don't know how long we have to create a plan for our desired legacy.

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.

Who Will Take Over The Family Business?

This post originally appeared in Kentlands Psychotherapy’s blog, written, by TODAY’ S GUEST BLOGGER Dr. Elizabeth Carr, for their monthly advice column The Laudable Life which appears in print in the Lakelands Leader.

Q: My two siblings and I all work for our father in our family’s business. Lately, my dad has been talking more about retirement and stepping back. The problem is, that he built this business from the ground up and has always been heavily involved with the day-to-day decisions. He won’t seem to let go of the reins. How are we supposed to ever take over if he micromanages us until the 11th hour? Plus I fear he is going to give the top leadership position to my brother, because he’s older, even though I believe I would do a better job. How do I bring up these concerns to him?

A: In successful small to midsize businesses day will eventually come when the owner must begin the process of handing over the reins to someone else if the business is to survive without them. Often this can be difficult when the habit of making all key decisions is well established by the owner. According to exit planning expert Pat Ennis, ideally, a business owner should begin the transition process years in advance; creating scalable systems and turning over responsibilities to the next generation of leadership. This is particularly true in family businesses where adult children are likely to be taking over those responsibilities. When there’s more than one candidate, the question of who will take that top leadership role can be dicey. Initiating a bottom-up conversation about these sensitive topics requires diplomacy, curiosity, humility, and empathy from everyone involved. Many people in your family likely have strong opinions about these issues, so protecting your family relationships during these negotiations can be challenging. Sometimes having an outside professional to help you can be incredibly helpful. If you feel you’re at an impasse, our compromise coach Cherie Morris, JD suggests you consider asking your father about inviting an experienced neutral person to help you all talk through these issues.

Contributors:

Cherie Morris is the co-owner of Recompose.Us .  Her mission, along with her partner Elizabeth Carr, is to help people resolve conflicts while preserving and repairing their relationships.

Pat Ennis is the founder and president of ENNIS Legacy Partners.  He and his partner Corby Megorden’s mission is to help business owners enjoy life in the business and plan for life after the business.  Kentlands Psychotherapy’s owners have worked with this team and found their assistance to be invaluable.

In the podcast episode below, the four of us have a lively conversation on the issues using the HBO Series Succession as an example of what NOT to do!

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 You Don't Know Won't Hurt You!"

Have you ever heard the old saying, “What you don’t know won’t hurt you”?  Not sure why, or who it was in my life at the time would say it, but I remember hearing it a lot when I was a kid.  Through the years I’ve found this saying, through personal experience and observation, severely misleading at best.  I wonder if the person who originated the phrase had only “current hurt” in mind.  For example, I might be unaware that my car has no engine oil and that the engine is going to die exactly a week from today – but today, because I don’t know it, it doesn’t hurt.  However, in a week when the car blows up and catches on fire, there is a lot that’s going to hurt.  So, what you don’t know, can absolutely hurt you, and often does…it simply may not be immediate.

If you’re a successful business owner, your business may be your biggest asset, and play a key role in whatever represents success for you in the future (i.e., financial, values-based, or legacy goals).  You may understand there are things you need to know about how ready you are, and how ready your business is for you to leave on your own terms and conditions. But you’ve chosen not to know, as it will surely result in additional work, time, and/or financial investment…and because “what you don’t know, currently isn’t hurting you.”  It may not hurt now, but the hurt that comes later could be devastating when you eventually leave your business if you then learn that your financial, values-based, and legacy goals are not going to be realized. 

Take steps now to expose reality and get the knowledge you need then act on it.  And get help…because you don't know what you don't know.  

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.

Are You Selling Pet Rocks or Pain Killers?

In 1975, Gary Dahl created the perfect pet - the Pet Rock.  In six short months, he sold 1 million Pet Rocks, then the fad died.  You see, the Pet Rock did not really solve a customer’s problem – it was just a cute idea.  On the other hand, the over-the-counter pain killer market exceeds $ 50 billion annually.  The point is people will pay to remove or alleviate pain from their lives, while “Pet Rock” sales fade away. 

As business owners, we want to serve clients well, generate incomes for ourselves and our employees and hopefully build a company that has real value when we decide to leave.

In the first chapter of his book, The Boutique, author Greg Alexander encourages owners seeking to grow their business, that the very first thing they need to do is define the problem they solve for clients – and how do you address their pain?  If you can deliver the right “painkiller” to the right “patient” you will be on the right path.  Here are a few simple steps to help you focus on Greg’s advice and ensure you can continue to provide meaningful services in an ever-changing market:

1.     Define What You Sell – You started your business with a service or product that someone was willing to pay you for.  Most growing businesses’ initial service offering evolves into a few (or perhaps many) services.  This mixed bag of services gets categorized on company financial statements as a single line of Revenue – “sales” or “services”.  You need to clearly define what you sell.  Examine the “types” of services you offer and define what is different about each – ie – what types of pain killers do you offer?

 2.     Does The Product Solve The Problem? Every product or service should solve a client’s problem.  Do your clients and potential clients agree that they actually have the problem you are seeking to solve, and do they feel that problem is big enough to take action?  Get clear on who has the problem your services solve.

 3.     What You Do Best – Now identify what you do best (or could do best).  Identify the service offering that will be most sellable, easiest to scale, and most profitable.  This requires examining your current/past work and answering the following questions:

a.     Is my service delivery efficient?  Can I make it more so?

b.     Does my market have significant growth potential?

c.     What is my most profitable product?  What is in greatest demand?

d.     Am I selling to the right clients?

e.     Do I have the right marketing and sales force to make it happen?

 4.     Commit to Action – After answering the above questions, you should identify specific steps to move in the direction needed.  You will need to invest time and funds to make the changes needed.  This may include:

a.     Adding staff – particularly sales and marketing

b.     Narrowing or re-focusing  your target clients

c.     Investment in systems to optimize your product delivery

d.     Delegating the least important parts of your role so you can focus on the most important things.

e.     Re-aligning your accounting to track sales and profit by product

f.      Get the professional support you need to make the change.

Change is hard, and any change like this will take time.  But, make a plan, define where you think you need change and then act.  Do “90-day sprints”, assess your progress and your assumptions and adjust course as needed.  At a minimum, annually repeat the above exercise.  Over time, you’ll experience the satisfaction of helping your clients alleviate some of the “pain” in their lives while building a company more scalable and valuable.

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.

Contact us for an exploratory conversation if you need help in designing or implementing your plan for a successful exit.

"Five Years...That's When I'm Planning to Leave..."

We refer to it in the exit planning trade as the "perpetual five-year exit plan".  When asking a business owner when they plan to exit their business, the following is a fairly common response:  "Not sure but probably about five years from now..."  And it’s not unusual to get the same response year after year from the same owner.  There can be numerous and varied reasons for the response, but a lack of planning is often primary. 

The problem is that if you don't begin planning now, you and your business may not be ready for you to exit in five years, and it could end up being necessary for you to plan and wait for another five years in order to attain your goals.

In our effort to help you avoid the perpetual five-year plan, the following is our "2021 Exit Planning To-Do List" we posted at the end of last year to help you get started. 

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 current goals of all owners.

• Review 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.

• Update strategic financial plan for the business.

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

• Who will Manage the Exit Planning Project?

Following are some easy next steps:

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.

Contact us for an exploratory conversation if you need help in designing or implementing your plan for a successful exit.

How Will Selling (Or Not Selling) Your Business Impact Your Lifestyle In The Future?

Our fictional business owner, Baby Boomer Jane Doe, is like most owners in that her business is her largest asset and will play a central role in achieving future financial security, goals, and dreams.  Jane has been in business approximately 25 years and, as a result of the steady stream of business revenue, she has experienced a very comfortable lifestyle that includes two homes, private education for the children, annual vacations, and plenty of discretionary income.  

But now Jane wants to plan for "what's next" as she now has grandchildren in different states she wants to visit regularly and has lost the passion once enjoyed in owning and running the business.  In conversation, Jane says with a level of exasperation, "I'm just ready to leave the business...I'm done".  Jane doesn't have management or children interested in purchasing the business, no longer wants to be an owner and thinks the best exit route would be a third-party sale.  

After engaging an exit planner to lead the design and implementation of her plan to leave, Jane is alarmed and disappointed to learn that her business is worth quite a bit less than what she had estimated and that a significant increase in her investable assets will be required to do all she wants to do post-exit.  Her financial planner assessed that her "plan for life after the business" would have a price tag of at least $4 million, while her business is really worth $1 million (Note: Jane had estimated a $2 million value), she has current investable assets of $1 million, representing an "asset gap" of $2 million.  And again, Jane wants to leave now!

As Jane's exit planner continued to "expose reality" regarding her business readiness for a successful third-party sale, Jane also had to come to grips with the reality of her business not being as sellable as she had assumed.  The planner pointed to a number of "value drivers" that needed strengthening (i.e., EBITDA, capable management team, plan for growth, etc.) to make her business more attractive to either a strategic or financial buyer. 

So, if Jane chooses to sell now and is able to, all indications are that she would not receive a sufficient amount of net proceeds to facilitate her post-exit life plan.  She will either need to begin now to execute a plan to accelerate the value of her business and sell at a later date or significantly reduce her post-exit goals and lifestyle...neither of which are attractive options.  Jane is not feeling at all good about her limitations and lack of control over her current options.  

It is now clear to Jane that it would have been wise years ago to assess both her personal and business readiness and put a plan in place to accelerate the value of the business.  If the business was more sellable and highly valued she would have more options for when and how she exits.

Have you conducted an accurate financial gap analysis including an objective estimate of business value and personal financial plan?  Do you have a plan in place to systematically maximize the value of your largest asset?  Will selling (or not selling) your business affect your future lifestyle goals?  Will it be sellable as more and more baby boomer business owners put their business on the market in the next decade?

Take control of your plan now so that you exit on your own terms and conditions.  Contact us for assistance with any of these critical planning issues.

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.

Be Happy And In Control Like George

It wasn’t until the 4th hole that Fred and John started talking about their businesses today during their morning round of 18 holes. Through 20 years of Saturday morning golf, by the first tee they typically would have analyzed and forecasted the economy, reported on sales and profitability, or ranted about the most urgent “fire that needs to be put out”. But this Saturday was different because Fred had an entirely different mess on his hands that he really didn’t want to think or talk about until John made the mistake of asking, “What’s going on?” Over the next 14 holes, John was forced to endure Fred’s scary (but sometimes humorous) tale about his “transition plan” out of the business. John thought more than a few times, “Man, sorry I asked.”

By the 7th hole, Fred was grumbling how he “had no idea” about all that was involved in planning his departure from the business — “I figured it would just mean sitting across a table from a buyer, we agree to a price, sign some legal papers with a couple of attorneys, they give me a check, I give them the keys, and it’s a done deal! Well, I had that all wrong my friend!”.

As they made the turn John now felt his anxiety level steadily rising with each passing tee box — and it was due to more than the missed putts. He was learning much more than he wanted to about the countless planning issues that have come up for Fred personally and for the business in this process — tax planning, estate planning, business valuation, a plan for future business growth and grooming successor, planning for life after the business, business continuity, and on and on and on!

Fred also painted a gloomy picture of how he was the one in the middle of everything working around the clock to coordinate the needed advisors and work. As Fred walked to the 14th tee (John really wasn’t listening at this point) he said, “Most of the time I have no idea what they’re even talking about! I don’t know if they ‘re collaborating the way they should and if the right questions are being asked or answered — I just don’t know if it’s all getting done right…while in the meantime professional fees are piling up! I’m having a hard time sleeping at night! And it’s absolutely affecting my golf game!”

After slicing his tee shot into the water hazard on the right side of the fairway, Fred started up again on his way back to the golf cart…”And if that’s not enough, the business is struggling because I’ve taken my eye off the ball to manage this project! Both sales and profitability have suffered so much I wonder if I will now get the $$$$ I need when I sell!” John asked, “Why don’t you have your CPA Sarah or your Attorney Bob coordinate everything — be like a project manager?” Fred responded that he had asked them both but neither had any desire to manage the project and simply wanted to “stay in their lane” of expertise.

Exhausted and a bit defeated after tallying the scores, Fred and John bellied up to the bar at the 19th hole. A few minutes later George walked in and joined a table across the room. Fred remembered that George had successfully sold his business a year ago and that George never seemed stressed, either during the process, that took a couple of years, or since selling. “George never seemed freaked out …never…he always seemed to have everything under control…what’s his secret John you know George well???” Fred said in a deflated tone. John was quick to respond, “Well…I know he had one of those Exit Planners or Advisors or whatever they’re called doing everything you’ve been complaining about …and you can bet your bottom dollar on this…that’s exactly what I’m going to do after listening to you all day!!!”

Be happy and in control like George and engage us to lead your Exit Planning project. There is much at stake, including your sanity and peace of mind.

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.

email@ennislp.com | 301-859-0860

Preparing a Successor...How Long Does It Take?

It’s an important question to answer. The company’s future, the successor’s success, and the ability to make buyout payments depends on it.

When it comes to learning the business and the industry, an owner probably knows best as to how long that will take. Generally, this will take anywhere from 3-15 years. However, learning the mechanics of a business does not necessarily make someone a good leader nor a good owner. (After all, most successors have only been an employee.)

Clearly, some people are more natural at leading than others, but one thing is sure. We're not very good at self-assessment (especially when it comes to leadership). Assuming a successor understands the business, their effectiveness as a leader and as an owner needs to be objectively assessed and their weaknesses improved.

A leadership assessment followed by a program of executive coaching will accomplish this. After 20 years of developing leaders, I can say that the process generally takes about 6-12 months.

But a major challenge can arise. What if that successor turns out not to be competent as a leader and an owner? By way of example, years ago I had a client who kept bringing on potential successors (without my help, by the way...), only to have each of them fail. One after another (three in total), each failed and either left the company or had to be fired. Before they found a suitable successor, almost 4 years had transpired.

The bottom line is that it's better to start the leadership development process sooner than later. Don't hand over the keys to your business before your successor's competence is assessed, their weaknesses addressed, and their leadership and judgment demonstrated.

————————————————-

Michael Beck is an executive coach, business strategist, author, and president of Eliciting Excellence.  His 20 years as a professional executive coach has helped leaders improve interpersonal skills, sharpen strategic thinking, and enhance judgment.  He has worked domestically and internationally with a wide range of clients from diverse industries including technology, manufacturing, professional services, healthcare, financial services, and not-for-profit.  Michael has held executive positions ranging from CEO to  VP of Business Development and has a background in engineering (BS, MS – University of Pennsylvania) and finance (MBA – Wharton School of Business). Michael is the author of the book “Eliciting Excellence”, has a Black Belt in self-defense,  and is a competitive dart player.

Is Your Business a Passion Project or a Growth Machine?

In their Harvard Business Review article, “Every Business Owner Should Define What Success Should Look Like”, authors Josh Baron and Vlad Barbieri highlight and effectively describe the need for a well-defined “Owner Strategy” for an owner and their business.  The authors provide a short account of Elisa and Mark’s watch business and how they needed to decide whether the business was a “passion project or growth machine” that paints a clear picture of the importance of a thoughtful and well-defined owner strategy.

The article is concise and effective in addressing an essential but often overlooked aspect of business owner planning. Also provided is a simple yet impactful framework for creating an owner strategy for the business that is based on the personal goals of the owner for the business.  A strategy that “generates alignment among owners, board members, executives, and employees, which in turn, improves both performance and satisfaction.” And we would only accentuate their recommendation of clarifying the owner’s personal goals not directly related to the business (i.e., family, estate planning, travel, legacy, etc.). As well, add that determining how the owner eventually would prefer to leave or exit should influence an owner’s decision regarding a strategy of “Growth - Control, Growth - Liquidity, or Liquidity – Control.”

An investment of a few minutes reading the Baron & Barbieri article could have a huge impact on your future business growth and 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.

Fidelity Investments, Kaizen, and Business Value Acceleration

Fidelity Investments is an international brand and one of the most valuable privately held businesses in the world. 

Founded in 1946, Fidelity Investments celebrated 75 years of business in 2021.  Through their 52,000-plus associates and global presence, they serve 40 million individual investors, manage employee benefit programs for nearly 23,000 businesses, and support more than 3,600 advisory firms with investment and technology solutions.  Since its inception, Fidelity has experienced consistent and impressive growth.

I was privileged to work at Fidelity in the 90s and early 2000s, and it was there where I first became familiar with the term “Kaizen”.  Kaizen is a Japanese concept of incremental and continual improvement in the management of an organization and was a Fidelity core value consistently communicated by then Chairman Edward C. Johnson III.

“Throughout Fidelity’s long history of growth, our dual commitments to our customers and to innovation have served us well,” Johnson III said in the memo. “By investing in technology and using the Kaizen method of continuous improvement, we have built a strong brand, industry-leading positions, and multiple profitable businesses.”  - Quote from CNBC publication*.

Innovation and continual improvement historically have been well anchored throughout the ever-growing Fidelity complex by senior and middle management, guiding business initiatives, operations, training, etc. In his book, Rethinking Competitive Advantage, author and consultant Ram Charan provides an example. During a Sunday afternoon conversation with Mr. Charan in 2014, Kathy Murphy, then President of Fidelity’s Personal Investment unit, was “spurred with a sense of urgency to make the kind of radical changes very few legacy companies attempt, let alone succeed at.” Charan goes on to describe how (after she “mustered the courage”) Murphy proceeded in digitally transforming the organizational structure and culture so that Fidelity PI now runs as if it were always a digital company. This is the kind of continual and incremental improvement that has characterized Fidelity throughout its history resulting in huge value for all stakeholders (family/owners, shareholders, customers, employees, etc., etc., etc.).

Do you want to accelerate the value of your small business?  Adopt Kaizen.

In our work with small business owners, we have observed that those who have a core value of incremental and continual improvement (Kaizen), are the most successful in growing and exiting their businesses.  They have better financial performance, management, systems, and prospects for growth and hence more valuable businesses. And, those owners who have a valuable sellable business, also enjoy more options for their eventual exit. So, if you want to enjoy life in the business, and exit on your own terms and conditions, be like Fidelity Investments and adopt Kaizen.

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.

* PUBLISHED MON, NOV 21 20164:35 PM ESTUPDATED MON, NOV 21 20167:23 PM EST

A Hazy Crystal Ball is Better than a Rear View Mirror

Several years ago, I did a cross-country trip with my family.  We laid out a rough plan of what we wanted to see, how long it’d take to get from Point A to B to C, and most importantly, what we wanted to eat!

When we hit the road, I did not drive looking primarily in the rear-view mirror, with an occasional glance at the gas gauge and the road signs, but looked ahead and tweaked the plan.   Yet, that is often how business owners run their businesses;   this year’s plan can often be “let’s do what we did last year – just more of it.”  We look at whether we have cash in the bank and check our financial statements from last month and compare how we are doing against last year.

But we need to run our businesses with an eye on the future.  No one has a crystal ball that provides perfect clarity on the future.  A million factors and forces affect our business and most of them are not within our control.  Forecasting and planning, by definition, require looking ahead a taking our best (hopefully educated) guess on what the future holds.  I want to convince you that a rough, hazy plan is better than no plan!

You may not know where to start, so, here are some practical pointers:

MAKE THE PLAN – every forecast needs to answer the following questions:

1.     Where am I?  Assess your revenue, profitability, operations, market position and see how you are doing.  What is working well and what isn’t?

2.     Where do I want to be in the future?  Lookout 3 to 5 years and write down goals.  How much revenue growth, how much Net income Growth, what improvements are necessary for the business? 

3.     HOW do I get there?  This is most critical.  Identify actions/investments you could take/make to attain your goals.  These might include:

a.     Establishing new markets

b.     Creating new products

c.     Adding key staff

d.     Improving processes

4.     What is most important?  Prioritize your “improvements” and plan them over 3 to 5 years.  Tackle 2 or 3 goals per year.

5.     The end result should be:

a.     How much will my revenue grow in the next few years?

b.     How much will my bottom line growth in the next few years?

c.     Who do I need to hire/ get on the bus?

d.     What improvement do I need to make?

e.     How much will this cost?

WORK THE PLAN – once the plan is created, establish a consistent, routine review and adjust as needed.  This includes:

1.     Monthly review of financial performance against the plan – including, Revenue, Cost of Goods, Overhead, Net income, and other key metrics as appropriate.  This obviously implies a monthly budget.

2.     Monthly (or more frequent) review of strategic projects.  Routinely assess whether you are making progress on your major goals; are you Ahead, Ontrack, Behind, Dead-in-the-Water.

3.     Adjust course – if you are not “on Plan”, why?  What are the causes of the “variance” and what do you need to do to get back on track? 

4.     Modify the plan as needed – the “crystal ball” is hazy and there is no perfect plan.  As you adjust you will learn your capacity for change, as well as identify ways to improve that capacity.

Start Now and Keep It Simple – In planning our road trip, we identified key sights to see along the way, and saw most of them. We paced ourselves and enjoyed the trip.   You may not know how to forecast, but you DO know your business!  Trust your experience and make a “road trip” plan to identify the following, at a minimum:

·       Revenue goals for next 5 years

·       Net Income goals for the next 5 years

·       New Critical Hires & the cost

·       Major projects & the cost

When you shift your gaze out, you are more able to see the business as an asset, rather than a job.  The team knows where you are going and will often get on board to help stay on track.  Looking ahead allows you to see the potholes in the road before you hit them.   Hopefully, you will start to enjoy the business more.  Proven ability to grow is a key value driver when selling a company – but, it may actually help you build the company you want to KEEP!

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 Deciding on Exit Strategy be Easy or Difficult?

For most small business owners, deciding as to how they exit will be easy, because they will have few options.

The majority of small business owners, based on research, will choose between selling assets to a third-party buyer or simply shutting down when they’re done being a business owner. To realize the maximum number of options for exit, an owner needs to invest both time and money, and few do this systematically and strategically over time with the end in view. The result is fewer options for exit and a forced “easy exit decision”.

Those of you who do plan, build a business that is transferable, and hence have more exit options, might be (in a good way!) further challenged when making the final decision as to what exit path to execute.

Betty founded her business over twenty years ago, and was strategic in her approach to building a transferable business and planning for her eventual exit — she continually had the end in view when planning for business growth today. From the beginning, Betty’s plan was to eventually sell to a third-party buyer and that is absolutely a current possibility as she’s recently been approached by a few potential buyers. Betty would now like to leave completely in the next 2-3 years, so a sale with an earnout could be the answer.

However, Betty now has other interests and goals, in addition to her financial goals — she has two children in the business that have shown interest and promise in being future owners — Betty would very much like to see the values and culture of the business sustained in the future — and finally, she’d like to ensure the future of key employees who have helped her grow the business through the years. These “values-based” goals more align with either an ESOP (Employee Stock Ownership Plan), sale to a key employee group, or transfer to the children.

The good news for Betty has many options for exit, so she can give legitimate and serious consideration to all of her values-based and legacy goals.

More challenging for sure, but good challenges as Betty has the flexibility to accomplish all of her goals in choosing the best-aligned exit strategy. She is not limited as to her options — Betty is positioned to do a third-party sale, sale to insiders, an ESOP, a transfer to children, or a combination.

Betty is again enjoying the benefit of having an experienced and trained Exit Planner assist in thinking through all the pertinent issues.

In Betty’s case, there is an understanding that having a “tough exit decision”, is actually a good thing because it’s due to her various exit options and goals. Betty’s Exit Planner helped to get her to this point and is again adding value in designing and implementing the final decision. She is grateful for the exit options available to her and the flexibility for personal goal attainment which are the good fruits of wisely investing in a strategic exit plan from the inception of her business.

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.