When many business owners first think about their business futures, their first question is, “Whom am I going to sell this business to once it’s my time to leave it?” It makes sense for owners to ask this question first, since the answer to that question can guide how their futures look. But this is a backward way of shaping a plan. Consider the short story of Bob Roberts.
Bob Roberts had had 40 years of success running his hometown disposal company. He was ready to sell to a third-party buyer who had approached him a year earlier. The buyer told Bob that they were willing to pay him $6 million for his business, which Bob thought was more than enough to last him through his retirement. Bob always wanted to sell to a big player and retire in style.
When we talk about planning for the future, we often talk creating a plan. The idea of creating something as big as a plan for the future can imply a ton of from-scratch work (as is often the case), which can cause you to want to put that ton of work off to another day. As a successful (and likely busy) owner, you may not think you have time to create a plan. However, there’s good news, because when it comes to planning for a successful future, it’s more a matter of shaping than creating.
Many business owners believe they have plenty of time to create a successful plan for the future of their businesses. Most commonly, owners think that if they give themselves a few years, they can transform their businesses into whatever they need them to be: whether that means bigger, more valuable, or more easily sold/transferred. And while each business is different and each owner has different goals, one thing is clear: You likely need to start your planning earlier than you think.
Beginning your planning long before you intend to leave your business often lets you choose the conditions of your exit. For example, let’s say that one day, you’d like to sell your business for as much money as possible. To do so, you must know what your current business value is. You must know which factors give your business its value. You must know what the market for a business like yours is and anticipate any flaws potential buyers might find during due diligence.
If you’re like many business owners, your business plays a large role in supporting your family’s lifestyle. As you plan for your business’ future, you may run into questions about how to treat family members fairly in your plans. This is especially crucial if you have children who work in the business and children who do not work in the business.
When planning for your business’ future success, you will likely need to address how you will eventually distribute your assets to children or close family members. As you address this issue, you may realize that what you consider fair is quite different from what your children and family consider fair. Consider the story of owner Bill Budster.
The following is a short list of reasons why you, as a business owner, refuse to plan your business exit.
1. Fear of the unknown. Fear of the unknown, or fear of change, is a key source of Exit Planning aversion. You may have said: “I don’t know what the future will hold, so I will stay here in the present.”
Solution: An Exit Plan is a “living document.” It can be changed, and it probably will be modified over the years. If the marketplace changes, the Exit Plan can and should be changed. Making the Exit Plan a “living document” will allow for a sense of control, which can help overcome this common hurdle.
Planning for your business’ future success is a long-term effort in problem solving. Usually, the problems you’ll try to solve result from the natural evolution of the business. For example, as your business has grown, you may have hired more employees or managers to keep pace. Problems like these are good problems to have.
But as many owners create road maps for future success, they can create problems for themselves. Self-made problems are much more difficult for owners to solve, mostly because they don’t see the problems as problems at all. Like a quietly growing mold, unidentified self-made problems can eat at the foundation of your plans for future success. Let’s look at two of the more common self-made problems and what the consequences of those problems can be.
Many business owners start their companies as lifestyle businesses to support a certain kind of lifestyle that they want. Some found businesses because they have an urge to create and build. Others want to be their own bosses. Still others want to control their own destinies.
Whatever the reason, many businesses start as and evolve into lifestyle businesses. This is great for business owners, their families, and their businesses in general, but it can be a big challenge when you start to plan for the future of your business.
As you start thinking about planning for your business’ future, you might feel that you can plan while continuing to do business as usual. However, planning for the future success of your business rarely means you can continue doing business as usual. For example, many business owners don’t know what their businesses are truly worth. Not knowing what the business is worth might be a part of business as usual, but it makes planning for future success much more difficult.
Do not act as if you had ten thousand years to throw away. Death stands at your elbow. Be good for something while you live and it is in your power. –Marcus Aurelius, Meditations
Building a successful business likely took you years of deliberate planning. From your initial business plan to now, you’ve built something worth protecting and worthy of pride. When many owners reach the peak of their business success, they wonder where they go from there. Whether you’re approaching, at, or getting farther away from the peak of your success, the answer is likely the same: The next step is planning for the future of your business and your ownership.
The tricky part is making time to do the planning. It may seem like you have years and years to begin planning for future success, but that isn’t always true. Though it may seem impossible to think through all the important considerations that are involved in your ultimate and inevitable separation from your business, doing so is also an opportunity to take as much control over the future as possible.
We believe that the most effective way to position yourself for future success is to begin a three-step process. Each of these steps can help you answer questions about your current ownership, how you picture the rest of your life, and how your decisions can affect people and things you care about.
As a business owner, you’re likely the most important person in your business. You’re probably the breadwinner for your family. Your employees rely on your leadership and success for their livelihood. A lot of people depend on you.
What would happen if, without warning, you were to die or become incapable of running the business?
For many small-to-mid-market business owners, there are few things more important than maintaining control of the company, minimizing risks for the company, and rewarding the employees that make the company successful. Ownership transfers to the company’s most valuable employees can do all of these things with proper planning, but there is a caveat.
While it’s admirable for owners to try to reward their key employees with ownership, many owners want to do everything they can to receive maximum value during the process of transferring their ownership interest. In many ownership transfers to employees, the owner’s successors can’t afford to pay the owner for their shares upfront. Instead, they often buy their shares of ownership using a promissory note and then use their subsequent share of the company’s cash flow to pay the owner (paying off the note over time).
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.