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

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

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

Succession Planning

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

Exit Planning

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

Plan Ahead for A Successful Exit

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

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

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

Exit Planning and Your Heart's Desires

The Problem

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

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

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

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

Take Action

Grab a pen and do the following:

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

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

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

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

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

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

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

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

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

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

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

Get started today with our Free ExitMap Readiness Assessment.

2024 ExitReadiness Checklist

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

DECIDE WHERE YOU WANT TO GO. 

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

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

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

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

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

ASSESS BUSINESS AND PERSONAL EXITREADINESS. 

Without Accurate Data, All Planning Becomes Meaningless.

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

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

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

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

DESIGN AND IMPLEMENT A PLAN. 

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

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

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

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

• Update a strategic financial plan for business growth.

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

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

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

Below are suggested next steps:

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

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

Adopt A Scientific Approach To Planning Your Business Exit

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

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

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

THE RETHINKING CYCLE: Humility > Doubt > Curiosity > Discovery

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

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

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

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

Year End Action: Sole Owners Should Review Business Continuity Instructions

The end of each year is an ideal time for a sole business owner to review and update their Business Continuity Instructions. An owner’s death or permanent incapacity often leads to the failure of a business, resulting in very difficult consequences for the family, employees, and customers. Written and distributed Business Continuity Instructions will provide those left behind with essential short-term and long-term instructions regarding the continuance of the business.

Very practical short-term information needed on day one, such as…

• Bank account information

• Insurance coverage and location of policies

• Location of spare keys, security codes, and passwords

• Who has the authority to make immediate decisions? Operations? Finance? Administration? Etc.?

• What Key Advisors need to be contacted and engaged?

Long-term information about the continuance of the business, such as…

• Who comprises the Board of Directors (if applicable)?

• How do you want the business transferred? Sale to third-party? Sale to family? Sale to insiders? Liquidated?

• Do you have a current estate plan?

• Is there long-term debt and/or lines of credit that you’ve personally guaranteed?

• What are the sources of working capital during the time of transition?

• What agreements are in place with key employees? Employment Agreements? Stay Bonuses?

Having data like the above current and readily available for those left to continue the business could be the difference between the business continuing for as long as needed and being liquidated at a fire-sale price.

As we approach the end of this year and the start of 2022, we suggest investing time in creating or modifying your written instructions. Contact us today for a free copy of our Business Continuity Instructions fillable PDF.

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How to Identify Your Key Employees: A Key Business Value Driver

Identifying Key Employees is a Crucial Task for Any Organization.

Key employees are the driving force behind a company's success, and recognizing and nurturing their talents is essential for sustained growth and value acceleration. In this blog post, we will explore the importance of key employees, the characteristics that define them, and how you can identify them within your organization.

Why Identifying Key Employees Matters

Key employees are pivotal in achieving your organization's goals and maintaining a positive workplace culture. Identifying them is essential for several reasons:

1. Consistent Performance: Key employees consistently perform at a high level, ensuring your organization achieves its objectives.

2. Leadership Potential: Key employees often exhibit leadership qualities that can be harnessed for future growth.

3. Knowledge Transfer: Key employees possess critical knowledge and skills that are often difficult to replace.

4. Cultural Ambassadors: They embody your organization's values and culture, setting an example for their peers.

5. Employee Retention: Recognizing and rewarding key employees can help retain top talent and reduce turnover.

Characteristics of Key Employees

Key employees exhibit specific characteristics that set them apart from their colleagues. Here are some traits to look for:

1. Consistency: Key employees consistently meet or exceed performance expectations. They deliver results time and time again.

2. Leadership: They demonstrate leadership skills, even in non-managerial roles. They inspire and motivate their colleagues.

3. Problem Solvers: Key employees are adept at finding solutions to complex problems. They tackle challenges with creativity and perseverance.

4. Commitment: They are committed to the organization's goals and values. They go the extra mile to ensure success.

5. Team Player: While they may stand out individually, key employees also work well with others, fostering a positive team dynamic.

6. Adaptability: They can adapt to changing circumstances and are open to learning and growth.

How to Identify Key Employees

Identifying key employees within your organization can be challenging. Here are some strategies to help you pinpoint those who are genuinely indispensable:

1. Performance Metrics: Review performance metrics and appraisals to identify employees consistently achieving and exceeding targets. Look for a track record of excellence.

2. Peer and Supervisor Feedback: Seek input from both colleagues and supervisors. Key employees are often praised and admired by their peers and leaders.

3. Leadership Potential: Identify employees with leadership potential by assessing their ability to influence and guide others, regardless of their official title.

4. Problem-Solving Skills: Pay attention to individuals who consistently find creative solutions to challenges, both big and small.

5. Cultural Fit: Evaluate how well employees embody your organization's culture and values. Those who align most closely are likely key contributors.

6. Commitment and Initiative: Recognize those who consistently demonstrate commitment, take initiative, and contribute to the overall success of the organization.

7. Succession Planning: Consider which employees could fill critical roles in the future and invest in their development.

Summary

Identifying key employees is a critical process for any organization. These individuals are instrumental in driving success, maintaining a positive workplace culture, and ensuring continued growth. By recognizing the characteristics that define them and using specific strategies to identify them within your organization, you can invest in their development and ensure long-term success. In the end, the success of your business is closely tied to your ability to recognize and nurture your key employees.

If you need help identifying and equipping your future successor(s) contact us about our STRATEGY RENOVATION® Successor Coaching service.

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

Creating a business exit strategy involves planning and preparation.

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

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

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

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

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

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

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

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

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

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

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

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

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

Do I Need an Investment Banker or a Business Broker?

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

Role and Function:

• Investment Banker:

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

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

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

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

• Business Broker:

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

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

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

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

Clientele:

• Investment Banker:

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

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

• Business Broker:

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

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

Expertise and Services:

• Investment Banker:

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

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

• Business Broker:

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

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

Compensation:

• Investment Banker:

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

• Business Broker:

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

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

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

What are The Critical Elements in Training My Business Successor?

Training your Business Successor is crucial in ensuring a smooth transition of ownership and leadership. The following are critical elements to consider when preparing your Business Successor:

Knowledge Transfer:

1. Identify the knowledge and skills necessary to run the business effectively.

2. Document and share critical information, processes, and best practices with your successor. This includes financial management, sales and marketing strategies, operational procedures, customer relationships, vendor management, and industry-specific knowledge.

Mentoring and Shadowing:

1. Provide your successor with hands-on experience by allowing them to shadow you and observe your day-to-day activities.

2. Encourage them to ask questions, participate in decision-making, and gradually take on more responsibilities.

3. Act as a mentor, providing guidance and sharing insights from your experience.

Delegation and Autonomy:

1. Gradually delegate tasks and responsibilities to your successor, allowing them to practice decision-making and leadership skills.

2. Start with smaller tasks and gradually increase their level of autonomy as their competence and confidence grow. This will help them develop their management style and take ownership of their role.

Communication and Collaboration:

1. Foster open and transparent communication with your successor.

2. Encourage them to share their ideas, concerns, and observations about the business.

3. Establish regular meetings or check-ins to discuss progress, challenges, and future plans.

4. Involve them in important meetings with key stakeholders, such as clients, suppliers, and employees, to develop relationships and gain a broader understanding of the business ecosystem.

Strategic Thinking:

1. Provide exposure to strategic decision-making by involving your successor in developing business plans, goal setting, and long-term strategies.

2. Discuss market trends, competitive analysis, and growth opportunities.

3. Encourage them to think critically and creatively about the future of the business and how to adapt to changing circumstances.

Building Relationships:

1. Introduce your successor to essential stakeholders in the business, such as key clients, suppliers, and industry contacts.

2. Help them establish and maintain relationships, as these connections can be valuable for the business's future success.

3. Encourage networking and participation in industry events and associations to expand their professional network.

Emotional Intelligence and Leadership Development:

1. Focus on developing your successor's emotional intelligence and leadership skills.

2. Help them understand the importance of effective communication, empathy, conflict resolution, and team management.

3. Provide opportunities for leadership development through training programs, workshops, or executive coaching.

Continual Learning and Adaptability: Encourage your successor to embrace continuous learning and adaptability. The business landscape is ever-changing, and staying updated on industry trends, technological advancements, and best practices is essential. Encourage them to attend relevant seminars, conferences, and workshops and engage in professional development activities.

Remember that the training process should be tailored to your successor's specific needs and capabilities. It's essential to be patient and supportive and allow for a gradual transition of responsibilities. By investing time and effort in training your successor, you increase the likelihood of a successful handover and the long-term sustainability of your business.

Learn more about our ExitReadiness® Successor Coaching service HERE.

When Should I Consider an Acquisition in Growing the Value of My Business?

Considering an acquisition as a growth and value acceleration strategy for your business can be beneficial in various circumstances. Following are situations in which you should consider acquisitions:

• Market Expansion: Acquiring another business can provide a faster and more efficient route to expand into new markets. If you have identified potential growth opportunities in a different geographic region or target market, acquiring a business with an established presence in that area can give you immediate access to customers, distribution networks, and market knowledge.

• Diversification: Acquisitions can be a strategy for diversifying your business's offerings. By acquiring a complementary company that offers products or services related to your existing offerings, you can broaden your product portfolio and reach a broader customer base. This diversification can reduce your reliance on a single product or market and provide opportunities for cross-selling and upselling.

• Competitive Advantage: Acquiring a competitor or a business with a unique technology, intellectual property, or market position can help you gain a competitive advantage. It can allow you to eliminate competition, increase market share, consolidate industry resources, or access innovative technologies that give you a distinctive edge in the market.

• Talent and Expertise: Acquisitions can be a means to acquire skilled employees, specialized expertise, or talented management teams. If you want to strengthen your team or enhance your capabilities in a specific area, acquiring a business with the desired talent and expertise can provide a quick and effective solution. This can help accelerate growth, improve operational efficiencies, and drive innovation.

• Cost Savings and Synergies: Acquisitions can result in cost savings and operational synergies. By integrating the operations of the acquired business with your own, you can eliminate duplicate functions, consolidate supply chains, and leverage economies of scale. This can lead to improved efficiency, reduced costs, and increased profitability.

• Access to Resources and Assets: Acquiring a business can grant you access to valuable resources, assets, or distribution channels that would be challenging or time-consuming to develop internally. These resources may include manufacturing facilities, intellectual property, customer relationships, supplier contracts, or proprietary technology. Acquiring such assets can enhance your competitive position and accelerate your growth trajectory.

• Strategic Opportunities: Assessing market dynamics, industry trends, and competitive landscapes can reveal strategic acquisition opportunities. Identify a business that aligns well with your long-term strategic goals or fills a gap in your capabilities. An acquisition can be a strategic move to capitalize on the opportunity and strengthen your overall position in the market.

Conducting thorough due diligence and analysis before pursuing an acquisition is essential. Assess the financial viability, cultural fit, legal and regulatory compliance, and compatibility with your existing operations. Engage professionals, such as Business Brokers, Investment Bankers, and M&A Advisors, to assist you in identifying potential targets and navigating the acquisition process.

Remember, acquisitions can be complex and involve risks, so careful planning and strategic alignment are crucial to ensuring a successful integration and achieving the intended growth objectives.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is a Certified Business Valuation and When Do I Need One?

A Certified Business Valuation is a comprehensive assessment conducted by a qualified professional to determine the fair market value of a business. It involves a systematic analysis of various factors such as financial statements, industry trends, market conditions, company assets, intellectual property, customer base, and other relevant aspects to estimate the worth of a business.

You may need a Certified Business Valuation in several situations, including:

• Selling or Buying a Business: When you're involved in a business sale or acquisition, a valuation helps determine a fair asking price or offer, ensuring both parties understand the business's value.

• Obtaining Financing: When seeking a loan or financing for your business, lenders often require a valuation to assess the value of the company and its ability to generate cash flow to repay the loan.

• Partnership Dissolution: If you're part of a dissolving business partnership, a valuation is essential to determine the fair value of each partner's share and facilitate a smooth division of assets.

• Estate Planning: Business valuations are necessary when planning for estate taxes or distributing business assets as part of an inheritance. A valuation helps establish the value of the business for tax purposes and ensures a fair distribution among beneficiaries.

• Shareholder Disputes: In case of disagreements among shareholders, a valuation can be conducted to determine the value of shares or ownership interests, aiding in resolving disputes or facilitating a buyout.

• Financial Reporting: Valuations may be required for financial reporting purposes, such as complying with accounting standards or fulfilling regulatory requirements.

• Litigation or Dispute Resolution: During legal proceedings like divorce settlements, bankruptcy, or insurance claims, a certified valuation can provide an objective assessment of the business's value, serving as evidence in court.

It's important to note that the specific circumstances and requirements for a Certified Business Valuation may vary based on jurisdiction and the purpose for which it is being conducted. Consulting with a qualified business valuator or professional accountant can help you determine when and how to obtain a valuation tailored to your needs.

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 Should I Know About a Letter of Intent (LOI) When Selling My Business?

A Letter of Intent (LOI) is a document used when selling a business to outline the preliminary terms and conditions of the proposed transaction. While the specific content of an LOI can vary, here are some key points to consider:

• Purpose: The LOI serves as a non-binding agreement between the buyer and seller, expressing their intention to proceed with negotiations and due diligence toward a potential sale. It sets the stage for further discussions and acts as a starting point for the formal agreement.

• Non-Binding Nature: Typically, an LOI is non-binding, meaning it does not legally obligate either party to proceed with the sale. It serves as a negotiation roadmap and establishes the basic terms and conditions to guide the transaction.

• Key Elements: An LOI generally includes essential information such as the purchase price or valuation methodology, proposed deal structure (e.g., stock purchase or asset purchase), payment terms, conditions precedent (e.g., due diligence and satisfactory financing), exclusivity period, and confidentiality provisions.

• Confidentiality: It is common for an LOI to include a confidentiality clause to protect sensitive business information disclosed during the negotiation process. This ensures that both parties maintain confidentiality and do not disclose or misuse proprietary or confidential information.

• Due Diligence: The LOI may outline the timeframe and scope of the due diligence process, allowing the buyer to conduct a thorough examination of the business's financial, operational, and legal aspects. It may specify the buyer's access to records, the need for independent audits or other investigations to validate the information provided by the seller.

• Exclusivity and Good Faith: The LOI may include a provision granting the buyer exclusivity for a specified period, during which the seller agrees not to negotiate with other potential buyers actively. Additionally, both parties typically agree to negotiate in good faith and proceed diligently with the transaction.

• Conditions and Termination: The LOI may specify certain conditions precedent that must be met for the transaction to proceed. These conditions may include regulatory approvals, third-party consents, or the successful completion of due diligence. The LOI should also clarify the circumstances under which either party can terminate the agreement.

• Legal Counsel: Both parties should seek legal counsel before signing an LOI. While an LOI is usually non-binding, it is still a significant document that can impact the negotiation process and subsequent sale agreement. Consulting with an attorney experienced in business transactions can help protect your interests.

Remember that an LOI is a preliminary document and should be followed by the negotiation and drafting of a formal Purchase Agreement, which will provide the binding terms and conditions for the sale.

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

What Should I Expect in a Due Diligence Process When Selling My Business?

When selling a business, the buyer typically conducts a due diligence process to gather and evaluate relevant information about the business. Due diligence aims to assess the business's risks, opportunities, and value before finalizing the transaction. While the specific scope and depth of due diligence can vary, here are some common areas that may be examined:

• Financial Due Diligence: This involves thoroughly reviewing the business's financial statements, tax returns, and accounting records. It includes analyzing revenue and expense trends, assessing the quality of earnings, identifying any potential financial risks or liabilities, and verifying the accuracy of financial information.

• Legal: Legal due diligence aims to identify any legal issues or risks associated with the business. It involves reviewing contracts, leases, licenses, permits, litigation history, intellectual property rights, employee agreements, and other legal documents relevant to the business. The goal is to ensure the business complies with applicable laws and regulations and assess potential legal liabilities.

• Operational: This focuses on evaluating the operational aspects of the business. It may involve assessing the efficiency of business processes, analyzing supply chain management, reviewing inventory and production systems, evaluating customer contracts and relationships, and examining the overall operational infrastructure of the business.

• Human Resources: Human resources due diligence involves reviewing employee-related matters, such as employment contracts, organizational structure, key employee roles and responsibilities, compensation and benefits, labor agreements, and any potential legal issues related to employees. The buyer may also assess the culture and employee morale to ensure a smooth transition.

• Customer and Market: This entails analyzing the business's customer base, sales pipeline, market trends, competitive landscape, and marketing strategies. The buyer may seek to understand the business's market positioning, growth potential, customer satisfaction levels, and any risks associated with customer concentration or changing market dynamics.

• IT and Technology: With increasing reliance on technology, due diligence may involve evaluating the IT infrastructure, software systems, cybersecurity measures, data privacy compliance, and intellectual property related to technology. This assessment ensures that the business's IT assets are secure, reliable, and capable of supporting future growth.

• Environmental and Regulatory: Depending on the nature of the business, environmental and regulatory factors may be assessed to identify any compliance issues or potential liabilities. This may include reviewing permits, environmental impact assessments, hazardous material handling, and compliance with relevant regulations.

• Other Areas: Depending on the specific industry or nature of the business, additional areas of due diligence may be conducted. For example, a property appraisal or environmental assessment may be conducted if the business has significant real estate holdings. Intellectual property due diligence may be necessary for businesses heavily reliant on patents, trademarks, or copyrights.

The due diligence process can be time-consuming and may require the involvement of various professionals, such as accountants, lawyers, industry experts, and consultants. It's essential to be prepared and organized, providing the necessary documentation and access to the information requested by the buyer. Engaging experienced advisors can help you navigate the due diligence process effectively and ensure a smoother transaction.

Contact us at email@ennislp.com for a free Due Diligence Checklist.

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.

Understanding the Taxation of Key Person Insurance

Key person insurance plays a vital role in protecting businesses from the financial impact of losing key individuals within the organization. It provides a safety net by compensating the company for the loss incurred due to the death or disability of a key employee. While key person insurance is a valuable risk management tool, business owners must understand the taxation aspects associated with these policies.

Tax Treatment of Premiums

Generally, the premiums paid for key person insurance policies are not tax-deductible as a business expense. The Internal Revenue Service (IRS) considers key person insurance premiums as a capital expense rather than an ordinary and necessary business expense. As a result, the premiums are typically not deductible from the company's taxable income.

Tax Treatment of Proceeds

When a key person insurance policy pays out due to the death or disability of the insured employee, the tax treatment of the proceeds depends on various factors. Generally, the insurance proceeds the business receives are not considered taxable income. Therefore, the payout is not subject to income tax.

However, there are situations where tax implications may arise. For instance, if the business has previously deducted the premiums paid as a business expense, any insurance proceeds exceeding the total premiums paid would be subject to income tax. Additionally, if the business has transferred ownership of the policy to the key employee, the proceeds may be taxable to the employee.

Tax Treatment of Cash Value

Some key person insurance policies, such as whole life or universal life insurance, accumulate cash value over time. The growth of this cash value is tax-deferred, meaning that the business does not have to pay taxes on the growth of the policy's cash value until it is withdrawn.

However, suppose the company surrenders the policy and receives the cash value. In that case, any amount received above the total premiums paid is subject to income taxes. It is important to note that withdrawing cash value from the policy can have tax implications, and consulting with a tax professional is recommended.

Tax Treatment of Premium Financing

Premium financing is a strategy where a third party provides a loan to the business to cover the premiums of a key person insurance policy. The company repays the loan with interest over time. From a tax perspective, the interest paid on the premium financing loan may be tax-deductible as a business expense, subject to certain limitations and restrictions.

Conclusion

Key person insurance is essential for businesses to mitigate the financial risks of losing key individuals. While the premiums paid for key person insurance are generally not tax-deductible, the death benefit received by the company upon the insured individual's death is typically tax-free. Businesses need to be aware of the potential tax implications of key person insurance, especially regarding cash value growth, policy transfers, and premium financing. Consulting with a qualified tax professional can help ensure compliance with tax regulations and maximize key person insurance benefits while minimizing tax burdens.

Contact us at email@ennislp.com or 301-859-0860 if we can be of service in reviewing your key person insurance program.

INVEST 12-15 MINUTES IN THE FREE EXITMAP® ASSESSMENT AND GET A 12-PAGE REPORT SCORING YOU IN FOUR KEY EXIT PLANNING AREAS: FINANCE, PLANNING, REVENUE/PROFIT, AND OPERATIONS.

A Growth Plan Helps To Maximize Your Business Sale Price

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

What’s in a Growth Plan?

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

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

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

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

• What is the profitability of those products?

• What resources are required to accomplish our goals?

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

The Effect of a Proven Growth Plan…

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

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

• The projected cash flows are credible.

• Enables a higher starting point for negotiation.

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

Now consider two companies…

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

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

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

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

The Emotional Aspects of Your Eventual Business Exit

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

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

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

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

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

Planning Ahead for Exit has Many Benefits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.