Valuable Tips

7/20/18 7/20/18

3 Benefits of Written Exit Plans

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.

Increasing Clarity, Accountability, and Chances for Success

Written communication is often clearer and more specific than verbal communication. Typically, the act of writing causes business owners to think carefully, which decreases chances for misinterpretation. Minimizing misinterpretations—about goals, resources, and desires, specifically—often leads to clarity and consistency, which can cut down the amount of time it takes to implement the Plan by months or even years.

Additionally, written Exit Plans encourage accountability. In a written Exit Plan, all participating advisors have responsibilities and deadlines. This makes the Exit Plan an executable document. It also helps you avoid procrastination. Having a document that tracks deadlines and responsibilities can keep you accountable and help you avoid falling prey to the “rolling five-year plan,” wherein you’re always looking to exit five years from now.

Finally, simply writing your goals down increases the likelihood that you’ll achieve them. According to a 267-participant study on goal setting, written goals are much likelier to be executed. Dr. Gail Matthews, a psychology professor at Dominican University in California, found that individuals are 42% more likely to achieve their goals just by writing them down.

Maintaining Control

A common Exit Planning paradox is that most business owners don’t want to give up control of their companies before they’re ready, but they also don’t want to spend too much time on Exit Planning. Having a written Exit Plan gives owners a chance to maintain control of the Process while also controlling when and how they transition out of ownership.

Owners who write their Plans down—with the help of an Exit Planning Advisor and Advisor Team—can hand their Plans over to their Exit Planning Advisors, who will then take the lead on the Process and execute the Plan. This means that once you’ve confirmed your goals and written them down, your Exit Planning Advisor works to address your goals based on what you’ve requested. With a written Plan, you can keep control of your business until you’re ready to give it up, and you don’t have to make Exit Planning your primary focus. This can increase your planning efficiency and give you the time to continue to build your company’s value.

Minimizing Cost and Time

In general, creating an Exit Plan can take several months, while executing the Plan can take several years. Creating and executing an Exit Plan usually requires input from owners and several advisors, and can also involve an owner’s family or management team. With so many moving parts, it’s easy for owners to take more time and pay more money to exit than necessary. A written Exit Plan helps mitigate costs in terms of time and money.

Written Exit Plans can make the Exit Planning Process more time and cost effective because they allow you to see where everyone is within the Process. Rather than wasting hours of time calling each advisor to ask what they’re doing—time that you could be spending working to generate revenue for your company—a written Exit Plan allows you to track everyone’s progress throughout the Process. Your Exit Planning Advisor is responsible for keeping the written document current and making sure that it reflects your resources, goals, and assets relevant to your business exit. When your advisors are all on the same page, knowing what they must do and by when, it usually minimizes the time and money you’ll need to spend on the Process itself.

Written Exit Plans can benefit you as you begin to plan your business exit, and it’s important to remember that “written down” does not mean “chiseled in stone.” Written Exit Plans can, and often do, change. As your business and goals evolve, a written Exit Plan gives your planning strategies a chance to evolve in lockstep.

If you’d like to determine whether a written Exit Plan can focus your efforts at exiting your business; or if you’d like to begin the process of creating a written document to help guide your business, your family, and yourself through your business exit, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420 or email Dallas@LaunchGrowExit.com

7/5/18 7/5/18

What’s So Important About Planning?

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.

Planning Affects More Than Just Personal Finances

Regardless of the reasons why they choose not to create an Exit Plan, business owners who don’t create Exit Plans tend to open themselves up to more risk than owners who take the time to think through and document their plans for the future. Some of this risk correlates with age, because as you age, you can become less physically and mentally able to adjust to events that can negatively affect your business, such as economic downturns or rapid changes in the competitive environment. This inability to adjust can affect cash flow, which in turn can affect how much money your business is worth and how much money you receive for your ownership.

But an absent Exit Plan can also affect you beyond your personal finances. For instance, without an Exit Plan, your family might find itself in a financial bind if you were to die suddenly. If you were to die and did not have a plan for how the business should be run in your absence, operations may become interrupted or key employees might abandon ship. If your family members rely on your business ownership to fund their lifestyles, it can become difficult, if not impossible, for those family members to fill that hole without a plan.

Planning Can Adjust to Changes of Heart

Experience has shown us that business owners can have changes of heart as they approach their business exits, and even throughout the process of exiting. Owners who at one point said they’d never want to exit may change their minds due to family considerations, an unexpected illness, or burnout. Likewise, owners who first thought they’d like to keep the business in the family may find that their children are incapable of running the business successfully.

In cases like these, you might find yourself with too little time to adjust to a change of heart. This lost time can force you to stay in the business for longer than you wanted, which can cause burnout and affect your performance. This can be especially challenging to your exit if you are at the center of most of your business’ success: If cash flows primarily because of you, hitches in your performance can negatively affect your business’ bottom line. This can have a ripple effect on your personal finances, your family’s financial security, and your business’ value.

Properly crafted Exit Plans help address the issue of lost time by digging deeply into your Exit Planning goals. Then, advisors devise strategies that position you to pursue those goals while remaining nimble enough to adjust to changes of heart you might experience throughout the process.

Planning Can Encourage Stability

Many owners want their business legacies to reflect their values positively, even after they’ve died or exited voluntarily. This kind of stability can be threatened if you can’t clearly articulate your expectations of your business exit. While “producing a good product or service” is a nearly universal value among successful business owners, the nuances of your values can get lost unless they’re clearly stated.

Exit Plans consider your personal values and which aspects of the business are important for your successor to continue or maintain. Using your goals and financial situation as bedrocks, a solid planning process guides advisors toward strategies that respect your values-based goals and find (and if necessary, train) successors that are willing to commit to the values most important to you. This type of stability can too easily fall to the wayside without a plan.

If you don’t yet have an Exit Plan but you’d like to see how Exit Planning can address potential issues concerning your money, time, and successors, contact us today. We have tools and strategies that can help us determine whether the risk of unintended consequences may affect your business exit.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/20/18 6/20/18

Balancing Your Goals With Your Family’s Goals in Family Transfers

If you’re considering transferring your business ownership to family, you might be tempted to put your family’s wants over your own goals. While this altruism may be admirable, it can also cause more problems than it solves. Consider the case of Darnell Orie.

Darnell Orie was unsure how to approach his business exit. His son, Hannibal, was the main reason why his company had tripled its revenues and profits over the last 15 years. And even though he wanted to begin winding down his own involvement in the business, he knew that he had to keep Hannibal motivated to grow the company: His retirement depended on Hannibal’s continued success growing the company.

Darnell had always wanted to transfer ownership to Hannibal, but he knew Hannibal didn’t have the money to pay him full value. He wanted to begin transferring ownership now, but he also felt it would be unfair to expect Hannibal to pay full value, because Hannibal was primarily responsible for the business’ success through his work.

While Hannibal agreed that his sweat equity should lower what he would pay for ownership, Darnell knew that Hannibal’s stepmother and half-sister would probably disagree, even though they were not involved in the business. Darnell is agonizing over three goals: his own financial security, making sure Hannibal’s sweat equity is rewarded, and treating his wife and daughter fairly.

Like many owners, Darnell was equally concerned about his goals, and his family’s wants and expectations. He simply didn’t know how to make them whole.

However, there are three tools he used to help prevent his ownership transfer to family from becoming a zero-sum game.

1. An Exit Planning Process Focused on Financial Security

When he initially approached his exit, Darnell only had one set goal: transfer the business to his son. He didn’t know how much money he wanted and needed to live a post-exit life on his terms, and he wasn’t even exactly sure when he wanted to exit.

In our experience, the most important goal to set when exiting is determining how much money you’ll need to be financially independent after you exit. All other goals should be considered within the context of your financial security. Establishing this foremost goal typically makes your other goals—determining your exit date and successor—clearer, because setting your financial goal first usually lets you consider your exit date and family considerations more accurately.

2. An Incentive Plan for Key Employees

In Darnell’s case, Hannibal was a key employee, someone whose absence from the company would cause its value to drop and operations to suffer. Darnell had to make the offer of ownership appealing to Hannibal while acknowledging Hannibal’s sweat equity and still assuring his own post-exit financial security.

A common tool to address these issues is to implement an incentive plan that hinges on a key employee’s performance. If you’re considering transferring ownership to a business-active child, you might offer your child shares of ownership for meeting certain performance goals. Those performance goals would in turn allow you to exit when you wanted and for the money you needed, while recognizing your child’s contributions.

3. An Equitable Estate Plan

Even though Darnell’s wife and daughter had no interest in ownership, he still wanted to be fair to them when transferring his ownership in his company. Because he couldn’t offer them ownership, he needed a solution outside of the business that wouldn’t require Hannibal to work for them, something Darnell knew his son would refuse to do. He found that solution in estate planning.

Estate planning is an important part of the Exit Planning process, and it can give you flexibility in how you approach family considerations throughout your business exit. By adjusting your will and trusts appropriately, and keeping your Buy-Sell Agreements current, you can more easily do what you consider is right by your non-business-active family members without short changing family members who take on the risk of running an otherwise illiquid business.

You can expose your post-exit financial security and family relationships to unnecessary risk without the tools necessary for proper planning. If you’d like to discuss the tools and strategies you can use to help you transfer ownership to your family members as smoothly and equitably as possible, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/6/18 6/6/18

The Dangers of Transferring to Children Without Planning

After building a successful business, many business owners decide that they want to transfer their ownership to their children. Too often, those owners assume that a transfer to children will go smoothly and simply, requiring little more than informing their kids of the date they’ll be taking the reins. Owners who make this assumption commonly realize that without planning, they can harm their businesses, their business exits, and their long-term relationships with their families.

Without proper Exit Planning, ownership transfers to children can produce negative consequences in three areas of your life.

1. Money

It’s likely that your children don’t have the capital to purchase their shares of ownership outright. This means that when transferring to a child, you’ll likely need to accept a promissory note and rely on your child to maintain or grow the company to receive your business’ full sale value. If something goes wrong, such as your child not having the ability to run the company as successfully as you did, you may receive less than what you expected from the transfer of your ownership interest. Since the goal of an Exit Plan is to position you to exit with financial security, transferring ownership to a child without a thoughtful plan can threaten that goal.

Another common money-related problem concerns how you’ll parse your assets between your business-active children and non-business-active children. Transferring ownership shares to non-business-active children can lead to two problems.

First, it can create resentment among any business-active children, because those children have worked hard to build the business, only to watch a sibling who did nothing to build the business get a share of their hard work. Second, it can make non-business-active children feel forced to do something they have no interest in doing to receive their share. In both cases, your company’s cash flow can be affected, potentially harming your ability to exit your business with financial security.

2. Time

Ownership transfers to children usually require owners to wait longer before receiving full sale value. This means that your finances may be exposed to general business risk for longer. If the company or economy experiences a downturn, you might need to wait longer than you had anticipated to receive the full sale price, which can affect your post-exit plans.

Another time factor that many owners overlook relates to how much time they’ll need to spend training their children or refereeing squabbles between them. If your children aren’t ready to run the business without your help, you may find yourself doing more work for longer, which can prevent you from doing other things you want or need to do to achieve your exit goals. Additionally, if you need to mediate fights between children—whether it’s related to who should do what within the business, or asset allocation between business-active children and non-business-active children—you may end up spending more time cleaning up messes or, worse, end up having to take the reins back to prevent your children from doing permanent damage.

3. Values

Although many owners assume that their children will run the business similarly to how they ran it, this isn’t always the case. If a child decides to run your business differently than you, it can create discord or amplify existing friction among your family members. This can cascade into problems that affect the money you receive and the time you spend in the business.

Differing values can also create hard feelings among in-laws, who might feel that you aren’t treating their interests fairly. In the worst scenarios, in-laws can use access to grandchildren as bargaining chips to get what they think they deserve out of your ownership transfer.

Business owners often fail to identify the consequences of a poorly coordinated ownership transfer to children until it’s too late. If you’re considering transferring your ownership to your children but aren’t sure whether you’ve addressed these potential problems, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

5/16/18 5/16/18

Unforeseen Challenges to Third-Party Sales

For many business owners, a sale to a third party is their assumed Exit Path. Some business owners even start their businesses with the goal of finding a larger, more deeply pocketed buyer; selling the business; and retiring early. The potential to sell the business for cash draws business owners to third-party sales. If you are considering a third-party sale, do you know the full scale of the planning you’ll need to do to get ready? Those who make plans improve their chances for a successful sale.

While it’s true that many business owners initially intend to pursue a third-party sale as their Exit Path, it’s also true that many of those same owners choose a different Path in the end. There are four challenges that you may face in pursuing a third-party sale that may cause to you change your mind, and some of them are unexpected.

Challenge 1: Threats to Financial Security

Third-party sales are a two-sided coin. While they may attract the highest sale price, they also can require you to give up control. If you do not receive the entire purchase price in cash at closing, you risk relying on the company’s new owners to perform well enough to support the earn-out or pay off a promissory note. If the company struggles after the sale, and you are reliant on the continued performance of the business you no longer own for post-exit security, you may find that you have to go back to work.

Challenge 2: Seller’s Remorse

Seller’s remorse occurs when business owners sell their businesses and find that they don’t have anything that they like to do outside of running the business. You may assume that you will figure out what to do after you exit, only to panic as the sale date approaches. Pulling out of a sale can have a ripple effect, since qualified buyers might shy away from businesses that go on the market then come off the market without selling. Additionally, owners who don’t know what to do with their lives without the business can have an unfulfilling post-exit life if they sell the business without a post-exit plan.

Challenge 3: Tax Consequences

Will you be one of the unfortunate owners who finds yourself owing a significant percentage of your sale price to the government in taxes? Without a pre-sale analysis of the business and personal tax consequences of a sale, you may go too far down the path with an attractive buyer before you realize you can’t afford to sell the business for the price they offer.

Challenge 4: Culture Shock

Buyers commonly want to make changes to their acquisition post-closing. After all, buyers rarely buy businesses unless they think they can make changes to improve them. You may regret selling to a buyer who radically changes your company, which can dampen your post-exit satisfaction. Perhaps more harmful are owners who decide that they cannot stomach a radical change to their businesses’ culture and take them off the market, thereby causing the value of their businesses to drop dramatically (i.e., tainting the marketplace).

There are many assumptions for business owners to make if they decide to pursue a third-party sale. Those assumptions can have negative effects for owners and their businesses if not properly addressed. If you’d like to discuss the plausibility and challenges of a third-party sale for your business, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

5/2/18 5/2/18

Building Business Value Through Exit Planning

Business owners seldom seek to exit their businesses without attaining financial security. They understand that one requirement of financial security is to grow business value, but many struggle to achieve this goal. Fortunately for these owners, Exit Planning can directly address their need to build business value and serve as an unexpected solution for owners who want to increase their businesses’ value, but don’t know how.

One of the pillars of Exit Planning is a timeline that plots the value-building actions that owners should consider in order to position themselves to exit their businesses on their chosen exit date. This timeline incorporates how much the business needs to grow in value to meet the owner’s financial target by the owner’s departure or exit date. The timeline is created after the business owner’s professional advisors assess the owner’s current resources (especially business value and cash flow) relative to the owner’s financial needs post-departure.

For example, a business owner may want to exit in five years with $250,000 of post-exit annual income. Her Advisor Team may determine that the value of her business must grow from $3 million to $4.5 million for her combined ownership and other assets to provide what she needs to achieve her goals. They may also determine that growing cash flow (or EBITDA) by $100,000 per year would likely create that value. Action items and anticipated benchmarks are added to the overall Exit Planning timeline to keep everyone focused on what needs to be achieved and when.

Following the creation of the timeline, the next Exit Planning step is to assess the strength of the company’s Value Drivers. Value Drivers are activities that create value in a company. Third-party buyers, private-equity firms, and even key employees often require businesses to have strong Value Drivers before they consider purchasing the business. That’s because Value Drivers often create sustainable, recurring, scalable, and ever-increasing cash flow.

Some of the Value Drivers that you may install in your business include:

1. A stable, motivated management team that stays after you leave the business.

2. Operating systems that improve the sustainability of cash flows.

3. A solid, diversified customer base.

4. Recurring and sustainable revenue resistant to commoditization.

5. Good and improving cash flow.

Because installing strong Value Drivers is a foundational element of proper Exit Planning, and strong Value Drivers typically increase a company’s value and curb appeal to buyers, using Exit Planning to build company value can help business owners begin to solve the value-building question while positioning themselves for their future business exits.

A common mistake that business owners make when thinking about Exit Planning is that they focus more on the term “Exit” than “Planning.” They worry that if they commit to Exit Planning, then they will have to aim all of their energy at leaving their businesses, whether they want to or not. However, Exit Planning goes far beyond the concept of leaving the business in that the Exit Planning process addresses various issues that can positively affect the business’ value, cash flow, and overall operational performance.

If you’d like to learn more about installing Value Drivers in your company or simply want to talk about whether using Exit Planning to build business value is a viable option for you, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

4/18/18 4/18/18

The Two-Pronged Approach to Exit Planning

When business owners begin to think about their business exits, they tend to focus on one specific goal that they want to achieve. Some owners focus on when they want to exit, some focus on how much money they want when they exit, and others focus on the person or group that will take over once they exit. But what’s the process that takes owners from thinking about what they want, to acting on what they want?

In the context of Exit Planning, it’s important for business owners to understand the two-pronged approach that Exit Planning Advisors take to Exit Planning. The first prong is the general prong, which focuses on a successful business exit for a business owner. The second prong is the specific prong, which focuses on the business owner’s goals and in turn defines what makes the business exit successful.

Generally, owners can expect an Exit Planning Advisor to focus first on one overarching goal. This goal is the goal that drives the business owner’s desire to exit, so each general goal will be different, based on the owner’s goals. A common general goal is to exit the business with financial security. In fact, Exit Planning Advisors do not consider an exit successful unless this criterion is met by the time the owner exits the business.

Specifically, owners should expect an Exit Planning Advisor to focus on additional goals in order to help owners plan for their exits on their terms rather than their advisors’ terms. Those goals can include positioning owners to leave when they want and to transfer ownership to the person they want, among others.

The process behind planning to achieve these goals begins when Exit Planning Advisors gather information about the business owners they’re serving. Only after an Exit Planning Advisor has a clear idea about what a business owner hopes and wants to achieve will that advisor begin to quantify and qualify the resources necessary to achieve those goals.

When approaching a business exit, business owners should expect that their advisors can describe and compare different Exit Paths. After describing and comparing those Exit Paths, business owners should also expect an Exit Planning Advisor to weigh the context of each business owner’s unique situation before suggesting an Exit Path. Advisors do owners a disservice when they assume that they know which Exit Path owners want to take, or assume that the owner’s interest in one Path is a final decision.

Once business owners and their Exit Planning Advisors agree on the feasibility of the owner’s goals, Exit Planning Advisors begin to implement strategies to work toward those goals. They do so with the help of their Advisor Teams, which are comprised of different advisors from various advisory fields. These advisors focus on aspects of the Exit Plan specific to their fields of expertise and report to the Exit Planning Advisor. By the end of the process, which typically takes 5–10 years, many business owners find themselves better positioned to exit their businesses on their terms, as decided at both the outset and throughout the Exit Planning process.

If you’d like to discuss how you can begin the process of Exit Planning, or would like to know more about the process our firm uses to help owners exit their businesses, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

4/4/18 4/4/18

How Emotion Affects Your Business Exit

Generally, business owners feel comfortable being owners. They enjoy what they do, but rationally, they know they need to change their roles in their businesses eventually. But most owners don’t resist planning their exits on a rational basis. Instead, they resist Exit Planning at an emotional level.

Consider Clancy, a 50-year-old business owner. He loves working at and owning his 25-person manufacturing company, but he knows that he’ll eventually need to start preparing for retirement. He assumes that if he can sell his business for about $5 million, he and his wife can live comfortably and still help send their grandson, Ralph, to the finest colleges. He gets his business professionally appraised and learns that it’s currently worth $3.5 million.

Clancy talks to his friend, a fellow business owner, about his exit. His friend refers him to an Exit Planning Advisor, who lays out several strategies to get his Exit Plan started, including urging him to train a management team to assure that his business has transferable value. Clancy agrees, but doesn’t act. After leaving his Exit Planner’s office, he begins working on a proposal for what could be the company’s largest contract ever.

Three months later, Clancy’s business wins the contract. This win rekindles Clancy’s love for the business, and so he puts off Exit Planning for when he gets tired of working. Rationally, he knows he should address his retirement, but he’s riding the high of success. He stops taking his Exit Planner’s calls, figuring he would worry about his Exit Plan when he was ready.

Ten years later, Clancy decides that he’s ready to exit. He considers calling his Exit Planning Advisor, but decides that he doesn’t want to pay for her services, and that he can do it alone. After all, he managed to close the biggest deal of his company’s history on his own.

Though he’s confident that he can sell his business for at least $5 million, he has his business professionally appraised once more. He finds out that it’s worth $6.5 million, and decides to sell. After putting it on the market, he meets with a serious buyer.

During the meeting, the buyer’s representative asks Clancy, “Can you tell me about your management team?”

“You’re looking at it,” Clancy says proudly.

“So, who takes over when you leave?” the representative asks.

Clancy pauses, then says, “I figured that was your responsibility.”

The representative asks a few more operational questions and tells Clancy she’ll be in touch with him. A week later, the buyer offers Clancy two options: $3 million pre-tax if he leaves now, or $5 million pre-tax if he stays on to help train a management team over five years.

Clancy is furious, and points to his professional valuation. The buyer’s representative tells him that his valuation assumes he stays with the business. She also explains that since winning the big contract, cash flow has remained stagnant, meaning the buyer would have to invest to build cash flow.

Clancy declines the offer and approaches several other buyers. But those buyers heard that Clancy pulled out of a deal earlier. Coupled with the fact that he had no management team outside of himself, each buyer offers even less than the original buyer.

In desperation, Clancy calls his Exit Planning Advisor and tells her what happened. She suggests that he set a meeting with her.

At the meeting, Clancy’s Exit Planner explained how Exit Planning could help him create transferable value that would allow him to reach his personal financial goals and ensure that the business would continue to flourish without him. She explained that Exit Planning and value building would take years. Fortunately, during those years, Clancy could change his role and focus his efforts on areas of the business that would most benefit him and his company.

From fear to overconfidence, emotion plays a huge role in business owners’ Exit Planning decisions. Clancy lost millions of dollars and years of retirement because he had no one to act as a check on his emotions. Leaving the business is one of the most emotional events business owners can face, which means business owners should take care when making decisions that can affect their business exits.

If you’d like to discuss how to address both the emotional and rational aspects of your business exit, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

3/21/18 3/21/18

The Importance of Setting an Exit Date

According to surveys, up to 79% of business owners plan to exit their businesses within the next 10 years, with more than half saying they want to exit within the next five years. However, many business owners fall into the trap of the “rolling five-year Exit Plan,” in which owners constantly reset their exit dates for five years later. This often prevents them from taking tangible steps to accomplish their exit goals.

To highlight the consequences of setting an exit date, let’s look at a case study involving a business owner, Charles Franklin, and his Exit Planning Advisor, Mathilda Traubert.

Charles met with Mathilda to discuss the first steps he needed to take to exit his business on his terms. After learning that Charles wanted fewer responsibilities and more free time as he exited his business, Mathilda asked, “Have you decided precisely when you want to exit your business?”

To highlight the consequences of setting an exit date, let’s look at a case study involving a business owner, Charles Franklin, and his Exit Planning Advisor, Mathilda Traubert.

“I don’t have an exact date, but within the next five years,” Charles said. “Setting a date isn’t that important to me.”

“Why don’t you think it’s important?” Mathilda asked.

“Well, I love my business, and I want to make sure it’s successful. I’m worried that if I set a date and the business isn’t ready by then, then I’ve wasted a lot of time. Besides, if I’m not running my business, what will happen to it? Without my business, what will happen to me?”

Mathilda knew that once Charles set a deadline, she could help him create an Exit Planning timeline to start tackling the tasks he needed to complete to achieve his exit goals. But she also knew that the only way to get Charles to act was to focus on what he wanted, not what she knew.

“What if I told you that by setting an exit date, we can take steps to get your business ready for your exit?” Mathilda asked. “It gives us time to do the things we need to do to help your business thrive as you get ready to leave. As we move closer to your target date, you’d be transitioning into fewer responsibilities and more free time.”

“But what if it’s not ready by then?” Charles asked.

“We’ll use that date as our goal and start implementing strategies that will give us the best chance to get your business ready by that date,” Mathilda responded. “The goal is to prepare the business so that it can continue with minimal disruption to its cash flow without you at the helm. In other words, we will set a date by which your business will be successful whether you’re running it or retired from it.”

“So then I can choose whether to stay or go, and the business should run fine with or without me?” Charles asked.

“That’s right,” Mathilda said.

In short, setting a departure date allows you and your advisors to undertake the planning and action items needed to prepare the business for your exit. Properly done, this gives you the flexibility to leave when you want, on your terms.

If you’re ready to talk about how setting an exit date might affect your Exit Planning process, or you’d like to discuss how your exit goals align with when you want to exit, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

3/7/18 3/7/18

Handling the Early Stages of Exit Planning

For business owners, the idea of exiting their businesses, which for many owners define their professional lives, can seem like a gigantic undertaking. They ask themselves, “How can I possibly do all of this? Where can I go for help, and what do I need to know?”

These questions are perfectly normal to ask as you consider your business exit. Further, business owners are absolutely correct in thinking that Exit Planning is a gigantic undertaking. No single business owner or advisor can create and implement an Exit Plan alone. In our experience, most successful Exit Plans occur through a process of collaboration among several different professions.

It can be stressful to go someplace new without any guideposts. How can you best navigate the early stages of Exit Planning? Consider the four following suggestions.

1. Be Prepared for a Collaborative Process

As you consider planning your exit, you’ll gather advice and strategies from several different business advisors. That’s because you’ll likely have several goals that you’ll want to achieve, and the experts who can help you approach those goals tend to span several professions. Your Exit Planning Advisor Team should work together to address your wants and needs throughout the process.

2. Remember That You Are in the Driver’s Seat

While the advisors on your Advisor Team will use their expertise to address your wants and needs, they will not tell you what your wants and needs are. When it comes to your business and goals, you are the expert. A properly crafted Exit Plan addresses your concerns, establishes your priorities, and achieves your objectives and aspirations. You should feel comfortable saying what you want to achieve, and let your advisors determine whether and how it’s achievable.

3. Don’t Get Ahead of Yourself

Exit options and their inherent issues do not matter until you’ve defined your wants and needs. It’s easy to get caught up with how many exit strategies are available to you at the outset. Before you choose an Exit Path or settle on a planning technique to achieve a particular goal, your Advisor Team will evaluate your priorities and the resources available to you. Only after that review should they start to identify solutions. This will help prevent you from addressing problems that don’t exist. It can also help you identify unrecognized problems and needs.

4. Keep in Mind that Exit Planning Is a Process

Some business owners get intimidated by how involved Exit Planning seems from a big-picture standpoint. It’s important to remember that Exit Planning is a process that typically spans years between the first identification of your goals and the results from all implemented solutions. Rather than trying to eat the apple in one bite, your Advisor Team will break the process down into smaller, more manageable chunks. This can help you narrow your focus and take specific actions to address the things that need to be addressed, in the order that makes the most sense.

The early stages of Exit Planning can seem overwhelming. But the collaborative nature of Exit Planning can help take some of the pressure off of what you can expect throughout the process. If you’d like more information about how you can begin to get a handle on the early stages of your Exit Planning process, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/23/18 2/23/18

How Does Exit Planning Protect Business Value?

When you set about starting your business, you likely had big goals and expansive dreams about its success. Whether success meant having an impact on your community, making as much money as possible, or something else, you probably wanted your business to become the ideal firm in your market.

As you build your business toward the ideal, you concurrently build your business’ value, which is a key aspect of a successful Exit Plan.

Does this mean that hiccups, stalls, or unforeseen failures in the growth of your business’ value will directly affect your business exit? While that can be true, proper planning helps mitigate those kinds of fluctuations. Consider the situations of two owners, Wendell Heath and Aspen Taylor.

As you build your business toward the ideal, you concurrently build your business’ value, which is a key aspect of a successful Exit Plan.

Wendell Heath and Aspen Taylor each founded construction companies as C corporations in the late 1980s, in similar but non-competing markets. In the early 2000s, Wendell and Aspen each decided that they wanted to leave their businesses by 2010. They each had their businesses appraised for $5 million. Both wanted to increase their businesses’ value to $8 million.

Wendell began by investing heavily in equipment and hired a slew of employees to keep up with the high housing demand. He typically found himself working 60-hour weeks. The only advisor he spoke to was his CPA, and he only spoke to her during tax season. Despite his CPA’s suggestions, he did not consider converting his corporation to an S corporation, saying that he’d do it later after he built his business’ value. He figured hard work and dirt under his nails got him this far, so it would also bring him to a successful retirement.

Aspen began by speaking to her CPA, alerting him of her desire to exit within 8–10 years. Her CPA directed her to an Exit Planning Advisor, who suggested that she begin installing a strong management team, complete with incentive programs and covenants not to compete.

Over five years, Aspen went from working 60-hour weeks to 30-hour weeks. Her Exit Planning Advisor also connected her with a tax specialist—who helped minimize her taxes on income and convert her C corporation to an S corporation—and a business broker, who helped her buy two smaller competitors to broaden her market share. She hired a management coach to identify and train four key employees who could either buy or run the company when she was ready to exit.

In 2008, both companies were hit by the Great Recession.

Wendell’s cash flow fell dramatically. He was forced to lay off most of the people he had hired several years earlier. The equipment he’d invested in often sat unused. Although his business was valued at just $6 million, he took it to market because he was tired of working 60-hour weeks. The best offer he got was for $5.5 million, which resulted in a $2.25 million payout.

Aspen’s company felt pain during the recession, but her layoffs were minimal, thanks to the cash she had saved through strategic tax planning. The two companies she bought years earlier increased her business’ value to $15 million, and her strong management team made her company attractive to buyers despite the Great Recession. Her conversion to an S corporation lowered the taxes on her company’s sale. In 2010, she exited her business with $10 million post-tax.

Past success rarely predicts future performance. Much can happen between when you decide to exit your business and when you actually exit. If planning for and minimizing the hiccups, stalls, and unforeseen failures in the growth of your business’ value is important to you, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/13/18 2/13/18

When Key Employees Stall Your Exit

An important part of a successful ownership transfer, regardless of Exit Path, is the presence of key employees. Key employees are those who have a direct and significant impact on business value, meaningfully participate in the business’ strategic future, and whose combination of skills and experience would be exceedingly difficult to replace.

Because of their role in the business, key employees can just as easily stall your business exit as facilitate it. Consider the story of Maria Villalobos, who had her Exit Plan stalled by one of her key employees.

Maria Villalobos was nearing her retirement. Over 30 years, she built her one-woman plumbing company into a 55-employee regional powerhouse. Her ambition had led her to plan for her business exit on her own, based on information she had gleaned and absorbed over the years. She hired a business valuation specialist, who valued her company at $11 million, enough for her and her family to live comfortably. She recruited a business broker to assemble a deal team and find the right buyer. And over 15 years, she had invested in training three key employees—Armand, Petra, and Donald—to run specific portions of the business after she retired.

As her business broker fielded offers, Maria gathered her key employees to tell them her intentions.

“I know I’ve been talking about retiring for a couple years now, but I’m finally ready to pull the trigger,” she told them. “My broker’s gathered some offers, and we’re going to be considering them this month.”

“It’s about time,” Donald said cheerily. “You’ve earned this.”

“Congratulations, Maria!” Petra added.

“That’s great,” Armand said.

“I couldn’t have gotten here without you all,” Maria said, smiling.

“So, what are the offers?” Armand asked.

Maria had built trust with her key employees over their 15 years together, and felt comfortable giving them an idea.

“A good amount. North of $10 million. And once we finalize the deal, you three will basically be in charge.”

Maria told them that she would update them as she finalized the deal and adjourned the meeting. She ended up signing a letter of intent that would get her the $11 million purchase price, contingent on her key employees’ continued work with the company after the transfer. Maria shared this information with her key employees.

One week before she was set to sign off on the deal, Armand requested a meeting.

“I want part of the deal,” he told Maria.

Maria was stunned. “You’re going to have more responsibilities, more pay,” she said.

“That’s not enough,” Armand responded. “You said you couldn’t have gotten here without me. I know what you’re selling for, and I want $3 million, or I’ll walk. I’ve got a couple of job offers on the table right now that pay better anyway.”

“I can’t do that.” Maria said. “I won’t.”

“Well, good luck then,” Armand said.

Armand tendered his immediate resignation and began working for a direct competitor. Maria was forced to inform her buyer, who pulled the deal. She tried putting her business back on the market, but every offer she received was less than $5 million, based on the hole left by Armand’s absence and her first failed attempt to sell. One buyer offered her $7 million, but only if she stayed to fulfill Armand’s duties for at least five years. It took Maria an additional five years to sell her business for the money she needed.

For as diligent as Maria was, there were several pieces of her plan that she neglected. She failed to handcuff Armand to the business. She failed to have her key employees sign a covenant not to compete. She failed to incentivize all of her key employees properly. In the end, by trying to plan her exit by herself and without a full range of expertise, she overlooked several key aspects to a successful exit. It ended up costing her millions of dollars and half a decade of her time.

If you’re unsure about which aspects of your business exit you might be missing, or you want to maximize and protect your company’s value as you approach your business exit, contact us today. You don’t have to expose yourself to unforeseen risks and unfamiliar territories by planning your exit alone.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

1/18/18 1/18/18

Knowing What You Have to Get What You Need

For many business owners, building their successful businesses began by accurately determining what they had. Whether their businesses provide products, services, or ideas, the success they experienced didn’t come to them blindly. It likely took years of refinement, study, and analysis to figure out the best way to establish and deliver the thing that makes the business successful. The same is true when discussing business exits.

As owners set their business exit goals, they may find that the resources that they currently have do not allow a financially independent business exit. That is, if those owners were to exit their businesses with their current resources, they would likely need to go back to work at some point to stay personally solvent. For those owners, a business exit is less a retirement and more of a headfirst dive into a pool of new challenges and opportunities. When they dive headfirst into that new phase, they want to make sure there’s enough water in the pool to keep them afloat after they’ve jumped.

Owners who exit their businesses on their terms and who can dictate how they spend their post-exit lives tend to show similar patterns of action. After they establish what their business exit goals are, they evaluate the resources they currently have versus the resources they believe they will need to achieve a financially independent future beyond the current business. The difference between what you have now and what you need for financial freedom is called the Asset Gap.

Sometimes, the Asset Gap is small or non-existent. Many owners believe that they fall into this bucket. They believe that they have more than they will need or that their businesses are worth more than they are. However, it’s much more common for owners to discover—sometimes too late in the process of exiting their businesses—that they’ve overestimated what their businesses are worth to a potential buyer while underestimating what they need to live the post-exit life they desire. How does this happen?

Overestimation of the business’ value occurs when owners take a biased view of their companies and assume that their companies are worth as much or more than similar companies, possibly based on an assumed rule of thumb that doesn’t really exist. It makes sense that owners fall into this mind-set: They’ve often built their businesses from the ground up and have reaped the benefits of their success. Because they’ve put so much work and money into the business, they tend to put an overly subjective value on the business. When they look to find buyers, they can be surprised—and sometimes offended—when the value of the business to them doesn’t reflect the value of the business to the potential buyer.

Underestimation of post-exit needs occurs when owners assume that they can live on less than what they currently spend. However, the opposite is usually true. Do you plan to downsize your house, get rid of your nicest car, travel less, and avoid new hobbies or business ventures? In short, living on less after exiting is often an unachievable and unbelievable myth.

Do you know what your business is worth objectively? Do you know how much money you’ll really need to exit your business on your terms? Do you have an accurate estimate of how long you’ll likely live after you exit? Do you feel comfortable predicting how the markets will do far into the future? If not, contact us today. We work to help business owners find out what they have so that they can take steps to turn it into what they need.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

1/4/18 1/4/18

Setting Exit Goals for the New Year

With the new year upon us, many people have begun their journeys to fulfill their New Year’s resolutions. For business owners, it’s no different. Between creating goals for the business to achieve and assuring that the business keeps growing, owners will have much to consider this year. One of the goals most commonly shared by owners is to successfully exit their businesses over the next 10 years. Most business owners have a sense of how much longer they want to remain as owners of their businesses, and the new year is a perfect time to take control of the planning that can make the future successful.

In our experience, it usually takes a typical owner of a small to medium-sized business 5–10 years to implement an Exit Plan. That means that for many owners looking to exit their businesses within the next 5–10 years, their best chance at a successful business exit begins today.

As owners set out to begin creating a written Exit Plan, they may want to know that the most successful owners tend to establish their goals before they begin implementing a process. There are usually three types of goals that we see owners set as they begin the process behind their business exits:

Foundational Goal: When planning a business exit, the foundational goal is financial independence. This means transferring ownership and receiving enough money to not have to work again, unless you choose.
Universal Goals: Universal goals are goals that nearly all owners aim to achieve. They include leaving the business when they want, for the money they need, and to the person or people they choose.
Values-Based Goals: Perhaps the most influential type of goals, values-based goals are goals that revolve around your personal values and ethics. Examples include making sure the business isn’t shut down locally or maintaining a company culture after you leave. Often, owners don’t even realize they have values-based goals until late in their Exit Planning process, at which point it may be too late to address them.

Identifying the goals that are most important to you gives you the best opportunity to create a plan that addresses those goals. It also gives you a chance to see whether you have conflicting exit goals. Because a business exit usually affects more people than just the business owner, you may find, as you plan, that some of your initial goals stand at odds with other goals. By setting your goals before implementing a process to achieve them, you can determine which goals are most important and decide how to manage any conflicts in what you think will help you exit your business on your terms.

If you’d like to discuss your goals for your business exit and the steps that follow to create a thoughtful plan for the future of your ownership, please contact us today. We can help you map the things that you believe will be most conducive to the success of your business, your family, and yourself as you approach your business exit.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

12/20/17 12/20/17

Estate Planning: A Small Slice of a Bigger Pie

Business owners commonly associate Exit Planning with estate planning, and they aren’t too far off. Good Exit Plans and estate plans both aim to assure that the owner’s family is provided for after the owner is gone. Both an Exit Plan and an estate plan might address a transfer of ownership to an intended recipient following the death of the business owner.

But one thing that owners may overlook when committing to estate planning is the notion of transferable value. While transferring ownership can be relatively straightforward, creating transferable value so that an ownership interest carries the benefits the owner hopes for can be a greater challenge. Transferable value is the value a company has without its owner, and it’s incredibly important to consider when we are looking at what ownership is expected to provide once it’s transferred through an Exit Plan or estate plan.

It’s this aspect that makes estate planning a small but significant slice of a larger planning pie.

Estate plans focus on transferring assets upon an owner’s death. They typically assume that the owner will live past his or her expected exit date and thus have the opportunity to transfer all assets as planned. But what happens when an owner dies prematurely? What happens when the business—which is most likely the most valuable asset to be transferred—relies so heavily on the owner’s presence that its value plummets when the owner dies? How can you help your family receive real value rather than just ownership rights?

That’s where Exit Planning picks up the slack, because Exit Planning focuses on three key elements that estate plans often overlook.

1. Transferable Value: Exit Plans include action items to help ensure that the business runs smoothly whether the owner lives, dies, or becomes incapacitated.

2. Financial Security: Exit Plans implement strategies to give owners the best shot at financial security regardless of the unexpected.

3. Choice of Successor: The Exit Planning process encourages owners to choose a successor long before the business needs that successor.

Estate plans may presume survival and integrity of business value, whereas Exit Plans anticipate the unexpected. When the unexpected occurs, businesses with strong transferable value (i.e., those businesses that don’t rely entirely on the owner’s presence) usually position themselves to deliver greater value to the owner’s family. Businesses without transferable value tend to die along with their owners, which can cause much-needed financial security for the owner’s family to evaporate. For owners who derive most of their wealth from their businesses, the Exit Plan’s emphasis on transferable value can be a critical component of a successful estate plan.

If you’d like help incorporating your estate plan into the larger pie of Exit Planning, contact us today. We have experience in helping owners establish the processes they need to give themselves and their families an opportunity at financial security, regardless of the circumstances.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

12/6/17 12/6/17

Business Continuity Instructions: Guiding Your Family, Even After Death

As owners approach their business exits, one topic that’s often overlooked is unexpected death or permanent incapacitation. One reason owners gloss over this topic is because it injects an uncontrollable element into a controlled process. Many successful business owners take pride in the control they have over guiding their businesses toward success, so the idea that all of that hard work can be dashed by death without warning is unsettling. But consider the following case study:

Bud Brown, an Exit Planning Advisor, woke up early on a Monday morning with great anticipation. He and one of his clients, Bruce Delany—a successful business owner and longtime friend—were preparing to receive an offer from a third-party buyer. As Bud finished tying his tie, his phone rang: It was Bruce’s wife, Dolores. He answered with a warm, “Good morning, Dolores. Excited about today?”

“Bud, Bruce is dead,” Dolores said vacantly.

“What do you mean Bruce is dead? I just talked to him yesterday.”

“He was exercising.” Dolores said quietly. “Doctors said he had a heart attack. He fell and hit his head.” She took a deep breath and sighed.

Bud stood silently in in shock, searching for words. He and Bruce had had lunch to talk about the sale fewer than 24 hours ago.

“Bud,” Dolores said, her voice cracking, “I don’t know what I’m supposed to do now. Bruce always said to call you if something happened to him. I need help.”

When an owner dies or faces permanent incapacitation, all control over life and business disappears. Even worse, that owner’s family is often thrust into taking responsibility for the business, regardless of ability or desire. Family members may find themselves wishing they could ask the owner some important questions and get some much-needed advice, but that is just not possible.

Fortunately, there is a way to prepare your family if you were to face unexpected death or incapacity, and the key is establishing Business Continuity Instructions (BCI).

BCI constitute a non-binding guide that your family and loved ones can use to address business concerns and personal finances upon your unexpected death or incapacitation. The BCI include information about whom your family should contact and for what information, who should fill which roles in the company, and how the company’s ownership should be handled upon your death or incapacitation. It also guides your family toward your vision as to how the respective financial resources of the family and company might interact if you are not available to keep things going. The BCI should be your way of telling your family things they want to know at a time when you are otherwise not able to do so.

BCI are easy to complete and can provide direction and comfort to your family during an unbearably difficult time. They should be written in easy-to-understand language and put all important information in one accessible format. Additionally, you don’t need to be actively considering a business exit to benefit from BCI. BCI are compatible with owners who want to exit in three months and owners who never want to exit at all.

BCI can help you control the trajectory of your business even after you’re unable to control it yourself. Start your list of critical information today. If you think it would be helpful, our firm has specific tools and resources to help you create and keep current any BCI you provide to your family. If you need help giving your business and family a chance at continuity in the face of your unexpected death or incapacitation, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

11/22/17 11/22/17

What Could Go Wrong When Transferring Ownership to Employees?

We often hear owners say they want to transfer their businesses to third-party buyers when they first encounter the concept of Exit Planning. However, we’ve observed that in many completed Exit Plans, owners actually choose to transfer their businesses to employees. Some reasons for this decision include employees knowing the culture and values of the business, a desire to keep the business with people the owner knows and trusts, and employees’ inherent desire and commitment to grow the business.

As owners start to consider options that include transferring to employees, they can forget to ask two important questions:

1. Do the employees I want to succeed me even want my ownership?

2. If so, how can I motivate each employee to stay and make the financial commitment?

Your love and enthusiasm for your company can cause you to skip these critical first questions. What may seem like a good fit to you can lead to chaos if the most important employees (often referred to as “key employees”) cannot, will not, or just don’t want to accept ownership. Fortunately, there are three things you can do to address this issue.

As owners start to consider options that include transferring to employees, they can forget to ask two important questions:

1. Do the employees I want to succeed me even want my ownership?

2. If so, how can I motivate each employee to stay and make the financial commitment?

Talk to Your Key Employees

Knowing whether a key employee would consider and be capable of ownership is the most important step in transferring to a key employee, and it’s often the step that’s most overlooked. Many owners take pains to convince themselves that a certain key employee (or key employees) would be a perfect fit, but fail to ask the employee whether he or she is even interested in ownership. For some key employees, being a key employee is more than enough for them. Others simply don’t have the skills to transfer into ownership. The best way to address these issues is to talk frankly with them about their aspirations and what they’d do if they were owners.

Incentivize Your Key Employees

Key employees who are interested in ownership can be scared away when they learn that ownership transfers aren’t a gift. While this may be unreasonable, it’s remarkably common. The idea of having to spend their own money to own the company can be overwhelming, especially when key employees don’t have the funds to pay for a share of ownership upfront. Fortunately, you can quell this concern by creating and implementing an incentive plan that focuses their attention on growth and rewards them by turning performance into ownership opportunity.

“Handcuff” Your Key Employees

A key aspect of successful incentive plans is assuring that they handcuff employees to the business. Handcuffing key employees means providing lucrative payouts (based on performance) that take some time to fully mature. Key employees who leave the company too soon walk away from their benefits. This is an important element in an incentive plan that is intended to lead to an ownership transfer to key employees.

Talking, incentivizing, and handcuffing are the three basic aspects of most successful insider transfers, but they’re also critical functions of successful business planning in general. We encourage you to learn more about each element before you begin the insider transfer process. If you’d like more information and assistance on how to best talk to, incentivize, and handcuff your key employees—whether you’re looking to exit your business soon or not at all—contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

11/8/17 11/8/17

Avoiding Unwanted Surprises

For some business owners, a third-party sale is their best option for a successful business exit. Third-party sales are popular because owners often believe they can get the most money from their businesses in as little time as possible from a third-party buyer. They might be right. But what they may not consider is how little control they have over their businesses, their schedules, and even their futures once the third-party sale process begins. Consider the following case study:

After 35 years of building a successful manufacturing company, which employed about 100 people, Lemont Lemieux was ready to retire. Always a do-it-yourselfer, Lemont had hired a business valuation specialist; found an interested buyer; assembled a deal team consisting of a business broker, deal attorney, and his company’s CPA; and, most importantly, told his wife, Trinity, about his intentions to sell to an outside buyer long before he began the process. Neither of their children had any interest in the business, and Lemont and Trinity were ready to travel.

One day, Lemont’s business broker called him and said, “We worked out a final deal that will get you the $7 million [after taxes and fees] that you said you wanted. The buyer said they want to have this deal finalized as soon as possible so they can start integrating your systems into theirs and begin the management reorganization process.”

“Management reorganization process?” Lemont asked.

“Right. The buyer plans to shut down your local operations. They’ll move your equipment and maybe a few employees to their nearest facility, where there’s excess capacity. After their site visit at your plant, they identified three employees from your company they want to interview to oversee operations in that line, so one of them will most likely get the job.”

“Why wasn’t I involved in this discussion?” Lemont asked. “I never wanted to have operations here shut down. I’ve got a lot of longtime employees. I’ve got managers that built their careers working their way up in the company.”

“You never told me about wanting to protect your employees. You’ve only talked about wanting to get out this year, so that’s what we aimed to do,” replied the business broker.

Lemont’s situation is only one example of how third-party sales can be trickier and more complex then owners expect because there are factors that owners simply don’t consider. The deal team handles most of the process and does everything it can to get as much money on the best terms possible. But the deal team may not be focused on an owner’s broader objectives for the sale. With this in mind, there are three things you can do to stay in control of the process throughout.

1. Have your Exit Objectives in mind.

A thorough assessment of your complete goals and objectives uncovers issues and interests you may not realize are important.

2. Build and preserve your management team.

A strong, well-trained management team will affect business value, transaction terms, your leverage in the deal, and maybe even your community.

3. Create a comprehensive Exit Plan before putting the company on the market.

Planning in advance of a third-party sale shines light on the connections between your exit and the future for your business, your employees, your family, and possibly your neighbors.

If a third-party sale is the Exit Path you’re considering, contact us today to make sure that your interests are represented throughout the process of exiting your business.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

10/18/17 10/18/17

For Business Exits, Being Inconsequential Is of Great Consequence

It’s likely that few people, if any, have ever told you, “You need to make yourself less important,” regarding your business. But sophisticated buyers look for businesses that can operate without their owners. Unless your goal is to sell or transfer your business, and then stay with the business as a subordinate to assure a smooth transition, you’ll need to train a management staff that can run the business without you. This is the most important Value Driver you’ll install, and for many owners, it’s the hardest, because they aren’t prepared to expend the emotional and mental energy required to remove themselves from their businesses.

There are countless technical strategies to making yourself inconsequential to your business, many of which we’ve discussed in previous newsletters. But just as important as the technical aspects are the mental and emotional aspects, so let’s look at some of the common mental and emotional roadblocks you might face as you make yourself inconsequential.

1. Inconsequential does not mean useless.

We usually think about the word inconsequential as identical to useless. While inconsequential and useless are similar in meaning in a dictionary, they are not even close in a business exit context. When you become inconsequential to your business, you’re giving the business the chance to survive without you, rather than leaving its existence solely in your hands. Like a parent giving a child away in marriage, you are passing your most important creation into the steady hands of a well-qualified successor. Becoming inconsequential is a good thing for you and your business because it allows both of you to grow into new roles that extend your success.

2. Inconsequential does not mean forgotten.

Many owners take well-earned pride in building successful businesses, so the idea of being inconsequential—and vicariously, forgotten—is deeply troubling to them. (History rarely remembers the inconsequential.) But in terms of business exits, memory favors the inconsequential. The inconsequential owner knows he or she will not live forever, knows that the best companies outlast their founders, and confronts that reality by handing the baton to qualified successors. The inconsequential owner positions the business to continue when he or she leaves the helm, framing the owner as a forward-thinking founder worthy of remembrance; the consequential owner often goes down with the ship, leaving the deckhands stranded and asking, “What if?”

3. Inconsequential does mean more valuable.

It may seem like a paradox, but inconsequential owners are more valuable to their companies, their families, and themselves. Companies with inconsequential owners are worth more to buyers because they implicitly have strong management teams. This lets those owners sell their companies for top dollar, to the financial benefit of their families (or charitable organizations) post-exit. Finally, with top-dollar payment often comes the freedom to pursue other interests, increasing the likelihood of a happy, comfortable post-exit life.

Don’t be misguided by the term inconsequential. In terms of your business exit, becoming inconsequential is supremely consequential to your company’s continued success, your legacy’s positive memory, and your post-exit comfort. If you’d like help making yourself inconsequential, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

10/4/17 10/4/17

Minimizing Threats to Business Value

Many owners and advisors talk about the importance of growing business value, and there are nearly unlimited options to help business owners do just that. But wouldn’t you agree that growing business value is pointless if you don’t know how to reduce the threats to that growth? As you prepare for an eventual exit from your business, there are several threats to business value that you need to be aware of:

· Key employees leaving the company and competing by taking customers, employees, and/or trade secrets.

· Key employees dying or otherwise leaving without a replacement.

· Data security breaches.

· Uninsured casualty loss.

· Fraud and embezzlement.

· Losses from high-risk operations.

· Any number of other economic, industry, or internal threats.

· Key employees leaving the company and competing by taking customers, employees, and/or trade secrets.

· Key employees dying or otherwise leaving without a replacement.

· Data security breaches.

· Uninsured casualty loss.

· Fraud and embezzlement.

· Losses from high-risk operations.

· Any number of other economic, industry, or internal threats.

Let’s look at three of the most common problems that minimizing business risk can position you to solve.

How Minimizing Business Risk Solves Problems

Minimizing business risk can position you to solve three problems.

1. Harm to Transferable Value

Business risk increases as you grow your business’ transferable value because a vital part of increasing transferable value is making yourself inconsequential. As key employees take the reins to grow the company, they begin to manage and develop their own relationships with key customers, employees, and vendors. This increased contact can turn ambitious key employees into risks. Unless you proactively change your role in the business, those key employees can suddenly leave the company, taking critical relationships with them. Proper planning can reduce this risk.

2. Data Security Breaches

Data security breaches can destroy customer trust, especially when sensitive information is stolen. Without customer trust, business value may plummet, making an ownership transfer unbearably difficult. Minimizing this risk maintains the trust customers have in the company, thereby protecting the business’ value from outside threats.

3. The Cost of Protecting Your Business

The third problem is one that owners often create themselves: Because they aren’t willing to pay the upfront costs to protect their businesses, they end up paying much more later to resolve problems that they could have prevented at the outset. Properly protecting against business risk costs money, and these upfront costs might tempt you to ignore risks in hopes that nothing bad happens. However, ignoring business risks can be devastatingly expensive compared to addressing them early on. An ounce of prevention is worth a pound of cure, so hiring experienced advisors to help identify and address business risks preserves and protects hard-earned business value, making a successful exit much more achievable than simply hoping nothing bad happens.

If minimizing business risk is an area in which you haven’t yet focused your attention, contact us today. We can help identify and begin to address threats to your business’ value.

Contact us today to begin identifying, prioritizing, and installing the Value Drivers your company needs for you to leave your business on your terms.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.