There are many things for you to consider as you think about the future of your business ownership: When is the right time to move on? How much money will I need? How do I even sell this business? These questions dovetail into an important decision you’ll try to make early in the process of planning your future: Whom you’ll sell or transfer your ownership to.
At the end of the day, business owners can sell to two different types of buyers: insiders or outsiders (also referred to as “third parties”). There are different flavors of insiders (e.g., children, key employees, co-owners, and even ESOPs) and third parties (e.g., competitors, venture capitalists, private equity groups, strategic buyers), and owners sometimes get bogged down in what seems like an endless supply of options and strategies to plan for the future of their businesses. However, whether your goal is to sell to an insider or a third party, it’s important to understand that, no matter what, third parties set the standards by which we judge just about all ownership transfers.
Building business value is a core reason you wake up and run your business every day. As your business grows in value, it can position you to find new clients; keep current clients happy; support your employees financially and intellectually; and provide a nest egg for yourself, your family, and any charitable organizations you work with.
Many business owners find that there’s a certain point at which they don’t know how to grow the business any larger. They’ve done everything they can think of, but the business plateaus. These plateaus can create big challenges for owners who will one day rely on selling or transferring their ownership to fund their post-exit lives. What can you do to help yourself overcome these plateaus?
Businesses that rely on their owners as the primary source of success are common. They’re also the most dangerous kind of business to own when you want to plan for the future of your ownership interest. Unless your goal for the future of your ownership is to liquidate the business and shut it down, you’ll likely need to build your business’ transferable value.
One way to define transferable value is that it is what a business is worth to a qualified buyer without the owner present. Essentially, a business that relies on its owner for success is worth less to a buyer than a business that can run smoothly without its owner. For some businesses, overreliance on the owner can make the business not only worth less but also worthless to buyers, despite all other indicators of success.
As a successful business owner, you know that your business has value. It likely supports the lifestyle you and your family live. It provides a paycheck and perhaps benefits to the people you employ. The products or services you provide are meaningful to your clients. But if someone asked you, “How much is your business worth?” could you confidently provide a dollar amount?
Many business owners aren’t exactly sure what their businesses are worth. More commonly, many business owners overestimate the value of their businesses, based on rules of thumb, comparing what outwardly similar businesses have sold for, or simple gut feeling. Less commonly, owners undervalue their businesses for the same reasons. But one thing is clear: Failing to know what your business is worth right now can have negative consequences for how you plan for the future of your business. Why is knowing the value of your business today so important?
Do you remember trying to solve a complex maze as a child? You’d start at the beginning, trace a line toward what you thought was the correct path to the end, only to run headlong into a wall. So, you’d start again, only to run into a different wall. But then, someone who had experience solving complex mazes may have suggested, “Start at the end: It’ll take you through the correct path to the beginning.”
When planning for your business’ future, starting at the end is a valid strategy. “The end,” in this case, may be a well-formed plan to fulfill your unique personal wishes: what happens to the business, your target successor, and your family if you die. Few people like to plan for their deaths, but there is power in planning. Rather than death having the final say in how you and your business are remembered, you can position yourself to have the last word with proper planning.
If you choose to work backward in your planning, it’s still wise to consider setting goals and determining any monetary gaps you may have between what you have and what you need to fulfill those goals. Once you’ve established those facts, you should ask yourself three questions as you work backward to impact your future.
When thinking about business planning, one aspect you may be tempted to overlook is the contributions of your key employees. Key employees are the lifeblood of well-run businesses, and they play an important role when owners begin to plan for their businesses’ futures, especially when owners begin to plan for their inevitable business exits. Many owners find that unless they have ways to incentivize key employees to stay with the business—rather than taking their talents elsewhere for more money or recognition—they cannot properly plan for their business’ futures. Consider the story of Jacqui Dickson, a key employee with Balthazar’s Ink Emporium.
As a business owner, you’re likely used to having as much control over how the business functions as possible. You’re the go-to person for big decisions and you own the consequences of those decisions, whether they’re good or bad. This attitude is often good and sometimes necessary for the business’ success. But when you begin to consider how you will plan for your business’ future, you might be positioning your business poorly, especially if you have any intentions to one day sell your business to a third party.
In this article, we’ll outline three facts about third-party sales and present a few consequences you might face if you aren’t aware of these facts.
As a business owner, you know that planning is crucial, and that the new year is typically when you implement new strategies. As the new year begins, many business owners have begun to examine what they’ll do, if anything, about the long-term future of their businesses.
Winston Churchill once said, “Failing to plan is planning to fail.” Today, we’ll look at what we’re hearing from business owners regarding their long-term business planning to help you gauge what other business owners are thinking and doing and see where you stand.
When preparing for a large-scale event—such as an extended trip to a foreign country, sending the kids to college, or preparing your business for the future—the planning required can sometimes look too big and unwieldy to pursue. Planning for the future of your business might be one of the largest-scale financial events of your life, which implies that planning is paramount. How can you plan for a business exit when you have so many other things to do?
As a business owner, you likely have three skills you can leverage in your business exit.
1. Your drive.
2. Your ability to identify talented people to work with and for you.
3. Your ability to implement processes that position you to achieve your goals.
Let’s look at how you can leverage these skills in your planning.
One of the toughest things you’ll confront in your planning is focusing on the goals that matter most. You might find that the things you want to do conflict with the things you must do. For instance, you may want to use your analytical skills to increase production—something you can do at any time—during the only time that candidates for a next-level management team are available for recruiting or development. The first project is more enjoyable, but the second is more important to your future. What can you do to overcome overwhelming decisions between doing what you want and doing what you must? Consider the situation of Sybil Marino and Ronda Rowe, co-owners of a manufacturing company.
Many business owners believe that they want to sell their businesses to a third party when they first start considering their business exits. Owners who want to start planning for a third-party sale sometimes fear that tight-fisted buyers will be the primary enemy in the way of a successful business exit. However, experience shows that it is business owners who are their own worst enemy when pursuing third-party sales, because they succumb to two common Deal Killers.
Briefly, a Deal Killer is a negative aspect of the business or its owner that can kill a deal with a third party if it isn’t resolved before the buyer learns about it. There are several Deal Killers, but two common ones are:
Building a successful business and minimizing risk may seem like opposite strategies, but typically, they go hand in hand. Once a business matures past the early, sometimes chaotic stages of development, business owners often turn toward actions that can protect them from the unexpected. Common examples of risk mitigation include purchasing life insurance on owners’ lives and insuring any assets crucial to business success. These are valid ways to minimize risk, but rarely are they enough to protect owners and their businesses as they approach their business exits.
As you consider how to best protect yourself and your business from risks to your business exit, consider three often overlooked methods of risk minimization.
One of the most important goals of Exit Planning is to position business owners for post-exit financial security. To do that, business owners and their advisors must have several pieces of information: how much the business is currently worth, how much money the owner will need to live the post-exit lifestyle they choose, and which non-business assets the owner has.
In our experience, business owners tend to overestimate how much their businesses are worth, overestimate how much their investment portfolios will grow, and underestimate the amount of money they need after they exit. Unless a financial planning expert tells them otherwise, many business owners often try to exit their businesses using faulty information. Consider the example of Lynn Setum, a business owner who nearly courted disaster by making incorrect assumptions about her financial planning.
Imagine building your business over several decades, beginning to plan your business exit, then dying unexpectedly before you can implement your plans. Business owners rarely think about how an unexpected death or permanent incapacitation can derail even the most carefully created plans. And it makes sense: If you were always worried about what could go wrong, chances are you’d have never started your business in the first place.
But as you approach your business exit, you’ll likely want to take steps that minimize the kinds of outside effects that can cause your planning to fail. One way to do that is to install Business Continuity Instructions. Business Continuity Instructions are a formalized process that gives your family, business partners, and employees guidance regarding how to address any number of unexpected events. Whether those events are extreme—such as death, incapacitation, or blackmail—or more common, such as divorce or a co-owner or key employee leaving the company, Business Continuity Instructions can position you to implement your Exit Plan despite the unexpected.
Generally, Business Continuity Instructions are useful for answering three key questions.
As a business owner, you likely have plenty on your plate. You have a business to run, perhaps a family to care for, and many other responsibilities that require your time. So, why should you consider pursuing Exit Planning? Can it help address issues relevant to you without eating into what little time you have?
Whether you’re thinking about exiting your business soon or expect to stay in your business for decades, Exit Planning can have positive consequences for you, your business, and your family. Exit Planning uses an owner-centric mind-set. This means that Exit Planning focuses on your goals and desires. More specifically, Exit Planning works to position you to leave the business when you want, with the money you decide you need, and to whomever you choose. Rather than adjusting your goals to fit into a strategy, Exit Planning adjusts the strategies around your goals, giving you more control and freedom over how you approach your business exit, no matter which Exit Path you choose.
Many business owners take pride in the businesses they’ve built. Some of those owners are so proud and dedicated to their businesses that they’d be happy dying at their desks, doing what they love. They believe that they can wait until they’re ready to begin thinking about what happens when they exit the business, either by choice or otherwise. A few believe that they don’t have to plan for their exits at all. They figure that since they are willing to die in the business, there’s no point in planning for their exits.
This might be a flawed mind-set.
Exit Planning can be complex. Between setting your exit goals and transferring your business, you’ll attempt to build business value, find an appropriate successor or buyer, navigate perplexing tax implications, and keep your key employees onboard. And that’s just a few of the things you’ll do! With so many considerations surrounding your business exit, you may want to consider creating an Advisor Team.
Simply put, no single advisor has sufficient expertise to create and implement all of the activities required in a typical Exit Plan. To give yourself the best chance to exit your business on your terms, you’ll likely require the services of several advisors from different fields. These may include a CPA, a financial advisor, a business lawyer, an estate planning lawyer, an insurance professional, a business valuation specialist, an Exit Planning Advisor, and others. Depending on the size and complexity of your business, and the requirements you set to consider your exit successful, you may need anywhere from two to seven different advisors on your Advisor Team. That’s perfectly normal. The diversity of expertise will work to your benefit.
As you consider your business exit, you may find that approaching it alone is prohibitively challenging. You may also find that some of the advisors with whom you’ve worked don’t have all of the skills, tools, and strategies necessary to help you exit on your terms. While planning for your future is the key, you know that results are how you’ll judge your business exit. But a business exit can have several facets, such as personal, financial, and professional considerations. Is it possible to address all facets at once?
We recommend that you follow a comprehensive Exit Planning process that responds to the unique qualities you and your business possess. You’ll first want to establish your goals for yourself, your family, your business, and your employees. Next, evaluate what you’ve done so far, where you’ve made progress, and where you’ve fallen short. Then, identify and compare action items that may move you closer to your goals. You’re likely to need more than one qualified advisor to help you uncover opportunities and strategies that move you forward and address specific aspects of your business exit. Last, you’ll set a schedule and assign responsibility for getting things done.
Let’s look at how these activities can affect your business exit.
Planning a business exit can seem like a lot of work at first. From building business value to developing capable successors to figuring out exactly what you want to do with your life after you leave, Exit Planning might look like too much work for one person to do. In our experience, Exit Planning isn’t something that business owners can tackle alone if they want to exit on their terms. But with so much to do, where can you start?
One way to begin the Exit Planning Process is by writing your Exit Plan down. Writing your Exit Plan down can provide three potential benefits when done properly.
When business owners start their businesses, they often create a written business plan to guide them toward success. However, many successful owners don’t mimic that process when they begin to approach the end of their business ownership.
There are three areas in which forgoing planning for the future can create unintended consequences for business owners: money, time, and successors. Consider how a thoughtful planning process (or lack of one) can affect each area.