Exit Planning

Exit Planning Requires Strategic Planning

Every aspect of our lives and businesses are driven by cycles. What’s old will become new again…what’s worked in the past, will work in the future (with some adjustments and updates). The bottom line is that business cycles will show growth and then enter recessions on a fairly regular cycle. That much you can count on. But, will your business survive the storm? Do you have a transition or exit strategy in place? Do you know the true value of your assets? Do you have a great team in place?

There are many technical details this document will not cover. Our intent is simply to get you to start your preparation NOW. The farther in advance that we talk, the higher your probability of success becomes.

Big Questions:

  1. Do I want to retire and or am I ready to retire?
  2. What is going to happen if I do nothing?
  3. Or is now the right time to buy a business?
  4. If I have never sold or transitioned a business, why would I attempt to do it myself?

What is a business cycle? Wikipedia defines it as the downward and upward movement of gross domestic product (GDP) around its long-term growth trend. And like all cycles, the economy will rotate between growth and recession at a fairly regular pace – every 8 to 10 years. And the last recession was in 2008 – eight years ago.

According to the National Bureau of Economic Research #, the United States historically averaged a recession (called “panics” at the time) every 2.1 years from 1836-1928 culminating in the Great Depression in 1929.

The time to plan and prepare for your future is NOW! Experts predict the next economic downturn is on the horizon, expected within the next two-three years some forecast. How will this affect you as a business owner? Think about it; 25 million entrepreneurs are 55 to 65 years old and are survivors of the last recession. Do they want to go through it again? Most likely your answer is a resounding “no”. And, if you’re 65 or older, you definitely won’t want to have to weather another recession.

Transition Planning

Our team educates entrepreneurs about “The Process” of transitioning a business. By working with us you should be acutely aware of your options. There is always a window of opportunity coming and you do not want to miss your best window.

Many great transition or exit plans include a well design succession plan, the challenge is that most entrepreneurs do not have a succession plan, and there is a strong chance many of the options for transition planning will simply not be viable, due to no succession plan.

Putting off a succession or exit planning will hurt your company in many ways. Developing a workable succession plan means that you have had to examine all of the risks your company may face from competition to ensuring top talent remains on your team.

NOTE: Remember, every strategy we discuss has the potential to add significantly to your profitability and value of your business NOW, while planning for the future.

The fact is that a large number of the boomer generation will be putting their companies on the market soon. The number of baby boomer companies expected to appear through 2029 on the market is in the hundreds of thousands. This number is huge, especially when you compare it to the historical annual sales of privately held companies of 24,000. Without a plan in place, some of the companies will be purchased, and some will have to liquidate which will have a direct impact on the lives of the employees, let alone squashing the dream of the boomer entrepreneur.

The American Management Association surveyed 1,098 senior managers and      executives, asking which of the following best describes the management
succession planning at your organization. The responses were:

  • 8% – We have a comprehensive development program integrated with our strategic business objectives
  • 17% – We have a formal management training program based on development of specific competencies
  • 18% – We have a succession plan intended for a sudden loss of key senior executives # http://amanet.org/training/articles/few-companies-integrate-management-succession-with-strategy.aspx

It can’t be stressed enough – NOW is the time to start planning. Whether it’s your internal succession plan, your exit strategy or the steps you need to take to come out the other end on the winning side after a recession.

Succession Planning in the Family Business

Family businesses are considered to be the backbone of not only their community, but of the economy in general. When the words “family owned” are inserted into the discussion, a whole new level of possible issues arise. Out of 5.5 million private companies within the U.S., approximately 2.7 million of the 5.5 million have annual sales revenues of $10 million to $50 million; and 1 million have sales revenues of $50 to $500 million a year. They’re critically important to the health of our nation, yet they are often the most endangered during a recession. Why? Lots of reasons that all begin with the phrase “lack of”. Often there is no transition plan or internal leadership succession plan or professional business advisor in the picture. It is estimated that 60-70% of all small to mid-size companies in America are family owned.

Caution: It’s important to have a transition plan in place. Be forewarned, you may have to prepare for possible conflicts as family owned businesses are often wrought with emotion and it’s impossible to make everyone involved happy. Potential conflicts may arise with:

  • Family Members
  • Inactive Shareholders
  • Active Shareholders
  • Employees
  • Management

Emotions, Warning Warning – The Emotional Side of a Business Transition

Selling or transitioning a business can be as emotional as sending your youngest child off to college. Hundreds of thousands of baby boomers are about to be forced to make a transition decision for the legacy of their business…and they are not prepared. Your business has been an important part of your life for quite some time. And if you built your business from the ground up, you’ll immediately notice the similarity to raising a child. Think about it. You’ve nurtured your company through countless sleepless nights and you’ve protected it from danger or threats. Now you’ve decided to sell the business and are second-guessing your decision throughout the entire process. Sounds like a parent, doesn’t it?

Questions like “Have I made the right decision?” and “What will I do without it?” may torment you, create a high level of stress and worse yet, cause abrupt behavioral changes. It’s a known fact that calm people can become volatile; confident people become defensive and meek people become awkwardly bold. It’s a roller coaster ride of separation anxiety. You’re not alone. Both sellers and buyers are experiencing the same or similar emotions and uncertainties.

Deciding to sell or transition your company is a huge decision that will affect your employees and your family. In essence, you’re selling a dream that your employees helped you build and that your family supported from the beginning.

Pre-Transition

This is the planning stage. The plans put in place in this stage will have a direct impact on the final transition or sale. This is known as the questioning phase. Questions like:

  • Do I need a structured or formal business transition plan?
  • Is this the right time to sell or transition?
  • No one knows my business like I do… Do I really need an advisor?

PHASE-1

Preparation – “What Rocks Will Potential Buyers Look Under?

Some of you may be thinking I am simply not sure yet, I know I should have an exit plan, but I am just not sure yet. What if the phone rings tomorrow and someone offers you two million dollars, would you say yes? What if we could help you get $3 million dollars- would you say yes quicker? The preparation our all-star team approach takes is to help you assemble all the data and information you need to launch the preparation phase, by design is better than by luck.

The people/talent section of transitions is often lacking in quality and systems. In Chapter 5 of my latest book “The Answer is LEADERSHIP…What Is The Question”, I dedicated one entire chapter to the nine talent systems that will add or subtract value to any potential buy. They are your:

  1. Recruiting system
  2. Hiring & selection system
  3. Onboarding system
  4. Accountability system
  5. Promoting talent system
  6. Training & development system
  7. Leadership development system
  8. Compensation/bonus system
  9. Measuring culture system

Additional rocks a potential buyer will peak under

In addition to the nine talent systems mentioned above, ask yourself these additional important questions to make sure you have “Staged Your Business To Be as Valuable As Possible”?

  1. How well has your business performed financially over the past three years?
  2. Will the business run well for months without the owner?
  3. How strong is the management team?
  4. Are your systems and processes effective?
  5. What is the growth potential of you company and of the industry?
  6. What are your customer retention trends & how diversified is your customer base?
  7. How strategic is your lead generation/marketing plan?
  8. How effective has your sales team and sales process been?
  9. How effective is your strategic plan?
  10. What is your cost and margin structure?
  11. Customer distribution- do you only have a few customers that represent a large portion of company revenues?
  12. What is the condition and value of your building and or equipment?
  13. Are there any issues with working capital (eg. Accounts receivable and or inventory)?

Selecting Your All-Star Team

In the spirit of candor, IF you want to successfully transition out of your company, and unless you have already done this successfully quite a few times, PLEASE assemble a team of experts to help coach and advise you. For example, you team should include experts at:

  • Lawyer * Tax expert
  • CPA * Investment banker/broker
  • Business Advisor * Financial planner/advisor

This team should meet with you in advance to help you with each phase of the transition process, starting in a perfect world 3-5 years before you are planning to transition out. Find experts that have facilitated hundreds of family owned and privately owned business transitions will help you design a plan that supports your families future. Entrepreneurs live for the struggle of launching their businesses. But one thing they often forget is that decisions made on day one can have huge implications down the road.

PHASE-2

So You Decided to Sell Your Business or Exit

You feel that the time is right to sell your business. But, deciding to sell is only “one third” of the process. There are Three Phases to consider

  1. Preparation – you should do everything in your power to stage your business to sell, just like you would prepare your house to sell
  2. During – the actual process of finding a buyer, and all the steps and work required to sell the business for a price/value that you and the buyer consider fair market value
  3. Post sale – it is common to experience sellers remorse, and or now what does dad do all day?

For each $1 that you increase for EBITDA during the valuation year, you should arguably receive an additional $4 to $6 in sale price.    Frederick H. Lipman,

Phase-3

Post Sale – Are Your Retirement Plans In Place or Lacking?

If you sell your business, is the cash a small part or a large part of your total retirement financial plan? I’ve found that a major problem is that the majority of business owners do not have a retirement plan or even a financial advisor they trust. Let’s face it, you want something from your future buyer – THE LARGEST CHECK POSSIBLE!! And in order to get that, you need solid advice!

Studies from the CFP Board in 2012 and 2013 show that in 2013, the number of American households with a comprehensive financial plan was only 19%, while those with a basic financial plan (only 1 or so goals and nothing looking at the whole picture) was 33%.# Source: 2013 Household Financial Planning Survey and Index from CFP Board.

A study conducted by John Hancock and Greenwald & Associates (data compiled 7/7/2015) surveyed more than 2,000 workers and found that only 20% know how much they’ll need in retirement, only 25% work with a financial advisor, and that only 34% of participants who work with a financial advisor have a written financial plan for retirement while only 6% of participants who don’t work with a financial advisor have a written financial plan.

OUR GOAL: Hopefully this overview has prompted you to simply pick up the phone and contact John Lankford at (888) 730-1950 and begin planning and talking with experts now.

One thing is for certain… the storm is coming, not if – but when.

Prepare to succeed, lots of families are counting on you.