When imagining the future of their businesses, and possibly a future that involves different ownership at some point, owners may wonder if it’s really possible to consider “insiders” (employees, children, or co-owner) as viable successor owners. Insiders are often a great match for company culture, leadership style, and vision. But they may lack one very important element – money to buy the business. Is this a fatal flaw in planning for the transition of future ownership? Maybe, but maybe not.

First Things First

Before we dig deep into an insider’s ability to pay for ownership, it may be a good idea to take a step back and see whether that line of investigation is even worth pursuing. Start by laying out your goals and objectives for the future of the business in writing. You should be able to clearly define:

  • How much longer do you want to own your business?
  • What do you want your relationship with the business to be before, during, and after an ownership transition?
  • What do you want your business to look like after you no longer own it?
  • What must the business provide, on an after-tax basis, to complete your plan for financial security and independence?

Once you know the answers to these questions, you can start to evaluate possible outcomes for the future of your ownership interest by holding each scenario up against your goals to see how well they fit together.

Insiders Don’t Have Money

It is often the case that an insider, who would otherwise be an excellent successor owner, does not have enough money (or access to money) to support a purchase of the business. But this does not mean that a transfer of ownership to them should be off the table. The secret to success for an insider who is otherwise a strong owner candidate is cash flow. Cash flow can bring everything together.

The Definition of Cash Flow

What is “cash flow?” You’ve probably heard others say that your sale price might be a “multiple of cash flow”. Well, that all depends on the definition of “cash flow.” There are several definitions or measures of cash flow, each with a potentially significant and substantive difference. Typical measures of cash flow include:

  • EBIT: Earnings Before Interest and Taxes.
  • EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization.
  • True Cash Flow: The amount of pre-tax money directed to owners via salary (above the value of their services), bonuses, distributions or dividends, and rental payments in excess of fair market rates for equipment or buildings.

Each of these measures of cash flow can produce a different cash flow amount. Which one makes sense for you may depend on the unique nature of your business.

How Cash Flow Supports the Sale Price to Insiders

Shaila Drexl, owner and manager of three commercial buildings, desired to sell each of her three property management operations to each of the three on-site building managers. She thought she’d retain ownership of the buildings themselves and separated her building ownership from the management businesses. She had heard that “six times cash flow” was a fair way to value her type of business and this method matched nicely with her idea of what she needed to meet her financial objectives.

Let’s assume that Shaila’s employees want to buy her business. Let’s also assume that these employees share a trait common to many employees: They don’t have any money. Since Shaila’s employees don’t have money of their own, and they have limited borrowing potential, the payments they make must come from business operations. Every dollar of cash flow that is created through operations will be taxed at ordinary income tax rates, because it will either get reported as company income or it will be paid or passed through to the employee, who will then report it as income. Each employee will only have an after-tax amount left to pay Shaila, who will then most likely owe capital gains tax because she is being paid for her ownership interest. That’s two bites at the apple for the IRS before each dollar makes its way to Shaila’s savings account.  So, it may take some time for Shaila to reach her after-tax financial goals if her only plan is to sell ownership to employees, because company cash flow is eroding on its way to Shaila’s pocket. Is there a faster way to help Shaila reach her financial targets?

Shaila did the math and decided that it would take too long for each employee to pay for their part of the business if they just used cash flow to pay for Shaila’s ownership using a generous multiple of cash flow as the company value. She called a meeting of her most trusted advisors and began to look at planning strategies that might work better. Her advisors were able to identify a variety of potential improvements to her plan, including revisiting company value, adding different types of payments to Shaila, and transitioning ownership over time rather than all at once. Through analysis and creative thinking, they were able to come up with several ways to use company cash flow more efficiently, all the while keeping an eye on Shaila’s stated goals. In the end, Shaila was pleased with her more comprehensive plan.

The Bottom Line

A sale of ownership to insiders can be fraught with danger if the overall picture, from company performance to individual tax consequences, is not taken into account. Comprehensive planning can take time or may require several perspectives, but the benefits can outweigh the costs for many owners.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notification.

Business owners have a lot of information at their fingertips. There are calculators and assessments available for just about every aspect of your business and personal situation. As a result, many business owners think they have an accurate idea about the value of their business. They may even think they have an idea of where the business value should be at their departure from the business. And retirement needs calculators are abundant, claiming they’ll give business owners a good idea about what they’ll need if or when they step away from their businesses. It can be difficult and somewhat complex to accurately measure the value of a company today, and then what it needs to be worth when the owner is ready to leave. Owners may be surprises to find “the gap” between the current value of their company and where the company value should be when they are ready to move on is much different than what they predict.

Start Your Gap Analysis

A Gap Analysis is the process that you can use to establish a few important benchmarks in your plans for the future, whether you intend to hold your business interest forever, transition ownership over time, or sell out completely in the next few years.

Step One – Quantify the money you will need to reach your personal financial goals.

Step Two – Determine the value your business can contribute toward meeting your financial targets today.

Step Three – Given your expectations for the future of your assets outside the business, try to predict what your business will need to be worth in the future in order for you to reach your financial goals.

Keep in mind that self-assessment and guesswork can only get you so far. You’ll ultimately want to work through this analysis with an experienced professional.

The size of the gap can help you set your priorities and timeline, highlighting your need for building business.

Do You Need to Create a Value Building Plan?

Once you get an understanding of the gap between current business value and where you need to be, you can start developing action steps for the future. Building business value can be an important factor in closing that gap. Many owners know they have to increase business value and want to grow their companies. But owners don’t always know how to do so. You can start by setting the scope of the value-building project.

  1. Reorient yourself from working in the business to working on the business. This means as difficult as it might be, set aside your day to day activity and focus on the bigger picture and how you’ll increase value.
  2. You will need to determine how much the company needs to grow each year to reach your ultimate goals. Create monthly, quarterly, and annual cash flow projections. Focus your energy on reaching short-term goals that build toward longer-term targets.
  3. Repeat your gap analysis. Your gap analysis is the foundation for your value-building decisions: the tools and processes you will use, the support you will need, and the intensity of your efforts. You may need a course correction.

Taking these steps to understand where your company currently stands, where you need to go, and what you need to reach your goals is a great way to effectively include your business in your larger plans for the future. Building business value might be the most important action a business owner can take whether they are ready to leave their business or not.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notification.

In times of great uncertainty or disruption, some business owners will panic and bury their heads in the sand. Some will sit tight and wait for things to settle down. But others will try to create opportunity and future growth. Which will you be? We’re here to help you be the latter.

Minimize Tax Exposure

In your annual tax review with your internal and external teams, try taking a new perspective on tax planning. Ask for help in investigating:

  • Federal and state tax relief programs and government stimulus or support measures.
  • Strategically using losses in a single tax year.
  • Leveraging tax reduction devices, such as qualified retirement plans, healthcare plans for all employees, or programs that encourage investment in disadvantaged areas.

Tighten the Belt

Your peers and competitors are making difficult decisions right now about  where to cut expenses or streamline operations. Sometimes it takes a big event to help business owners see their business models in a new light. You’ve no doubt already made some changes, and your future business value may benefit from making more of these tough decisions now, such as:

  • Combining roles and responsibilities to more efficiently deliver your products or services.
  • Canceling or delaying planned expansions or equipment purchases.
  • Eliminating customers or lines of services that require a high level of human capital or a high degree of customization, which can eat into profits.

Be cautious to not let these decisions affect the remaining employees’ morale. Whatever decisions you make, be sure to keep communication open and frequent to eliminate any fears and concerns within the company.

Consider Growing Rather Than Shrinking

Now may be the time to acquire smaller, less adaptable companies who are struggling to continue. You may have strategic business plans that are more achievable with the help of another company’s assets. Keep in mind that you may not need to acquire an entire business if that approach does not work for you. Consider these options:

  • Purchase the customer list of a competitor who is not going to continue their business.
  • Look at acquiring inventory, equipment, or staff from smaller competitors; these may be options for growing your business that weren’t available just a few months ago.
  • Suggest seller financing and more flexible payment terms; sellers are willing to consider alternate sale structures when bank financing and cash are less likely to be available.

Personal Planning Considerations

Be sure to revisit your personal planning in light of any recent changes in your business value, investments outside of your business, or other areas of personal financial stability. Think through issues such as:

  • Business Continuity – how will your business continue if something happens to you?
  • Exit Timeline – how has your personal plan to continue working or owning your business changed recently, and what adjustments are necessary to get you back on track or support your new timeline?
  • Family Support – Do you have family members who need additional support, financial or otherwise? If so, are there creative ways you can help them?

We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notification.

Whether it’s because you want to keep the business “in the family” or because you suspect you will not be able to find a good buyer for your business, you may be thinking of selling your business to an employee. The first thing to think about is the kind of employee who can and should take over leadership and ownership. You’re entrusting your business and its future to this person or group of people. We suggest that a “key employee” may be a good candidate to purchase the business.

What is a Key Employee?

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.

Why would you sell to you key employees?

One reason you may want to sell to a key employee is that you believe you have already achieved financial security. You may feel that your employees have earned ownership or that you owe them ownership of the company for their many years of loyalty.

Another reason is you may not have an alternative option. Maybe you have no other third-party offers and no children to pass along the business to, so you look to your rock star employees to continue building your legacy.

Selling to Employees can be Both Fast and Slow

If you have some time to complete a transfer, a key employee might be a good option. Often, an owner must stay active in (or at least in control of) the company for five or ten years after the sale process begins in order to complete a successful transfer and attain financial security. In these years, owners hire and groom employees who not only want to be owners but also have the ability to assume ownership.

If your business has a business value today that you think is too low, you may also be considering a sale to a key employee. Taking more time to transition ownership to one or more key employees may also give you more time to grow business value and capture profits.

On the other hand, selling your business to key employees might be faster or less risky. Typically, key employees are very involved already in the day-to-day activity of the business. They will know how you want your company to be ran because you have groomed them to run it a certain way. They may share your vision for the future and see opportunities for growth and success that outsiders might miss. As a result, your key employees may be excited to get going on transitioning ownership sooner rather than later.

If you’ve been thinking about selling to employees for many years, or if the thought is just now occurring to you, you’ve reached the starting line for the next phase of your business owning journey.

We can help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact Peter Skelton at (585) 271-6400 x 108 or peter@kafl.com at your convenience.

Copyright © 2020 Business Enterprise Institute, Inc. All rights reserved.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notification.

Planning for a successful future isn’t homogenous. It simply can’t be. The needs that you and your business have are likely to be different from every other owner and business out there. So, the question you might ask about planning for future success isn’t, “How should I do this?” Instead, it should be, “Which process is the best for me?” Today, we’ll look at three different ways you can begin the process of planning for future success.

Urgency Planning

Many owners like to approach their planning through the lens of urgency. Urgency planning means identifying goals or problems that are of the highest risk, ranking them by risk, and then tackling each element in order. This may seem straightforward, but there are some considerations.

  1. How do you define risk?
  2. Why do you think a certain aspect about your business is subject to risk?
  3. Why do you think you must address this risk before or after others?

Determining why things are urgent guides the planning process. If tackling projects based on their criticality is what’s most comfortable for you, it’s important for you to know why those things are critical and how they affect the other critical things down the list. Pausing to understand your reasoning may also give you some insight into your more fundamental priorities.

From-the-Ground-Up Planning

When business owners first start thinking about planning for a successful future, from-the-ground-up planning is what they initially envision. (This might be a reason why owners sometimes find the concept overwhelming.) The process for from-the-ground-up planning often looks like this:

  1. Getting internal affairs in order. This could be hiring the right and appropriate number of people, conducting quality control, or creating yearly goals for each team.
  2. Develop management. Once the house is in order, the next step is to find or train managers who can run the company themselves. Developing a strong management team is critical to the success of from-the-ground-up planning because it’s the managers—rather than you—who will keep internal affairs in order and exceed expectations. This will give you time to move to the next step.
  3. Designing your ownership transfer. Whether you stay in your business forever, transfer to insiders, or cashing out with an outside third party buyer, you’ll need to determine the appropriate amount of money you must have to achieve financial independence and how the business can support that need. Planning your future may include anything from installing programs to incentivize, retain, and/or reward key employees to creating a set of business continuity instructions in case you die or become incapacitated.

Hybrid Planning

Hybrid planning takes the two planning methods from above and mixes them together. Doing so lets you maintain a balanced momentum toward the things you’re excited about pursuing while still addressing the most daunting aspects of your planning process.

For example, you might be excited about building your company’s value but dread the idea of finding a next-level management team because you’ve never had one before. A hybrid method lets you combine your urgency planning (building value) with your from-the-ground-up method (installing next-level management) so that you aren’t disregarding the things you’d rather not do. Similarly, you might combine your urgent desire to install your kids as the next generation of owners and leaders, but you’ll also need to support the company documenting its internal systems and processes (a fundamental factor for business stability), which can help your children be more successful.

We can help business owners identify and prioritize their objectives with respect to their business, their employees, and their family. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact Peter Skelton at peter@kafl.com or 585-271-6400 x108.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notificaiton.

As a business owner, you make decisions constantly that you believe will reduce your risk and/or improve your business outcomes. There are countless ways to do this. In this article, we’ll present ways to leverage your internal strengths to reduce risk and improve business outcomes. We’ll also show you how these strategies can affect your longer-term, post-business planning.

An effective strategy for reducing risk and improving outcomes is having a management team that can run the business in your stead. There are numerous benefits of having such a management team. First, it reduces your company’s reliance on you. This can give you more time to focus on the biggest goals you have for yourself, your family, and your business.

Second, it can act as a source of new ideas to improve the business in general. This is especially true if your management team has a diversity of experience. Different experiences can lead to different, sometimes unconsidered, strategies to improve business outcomes.

Third, it often increases the value of your business. Whether you hope to sell to a third party or an insider, or even work until you die, having people other than yourself who can keep the business humming makes it more attractive to potential buyers.

Having a strong management team also ties into your long-term, post-business planning. If you hope to eventually sell your business to insiders, the management team may end up being a qualified buyer, or they may be critical to supporting your children as they take over leadership. This can give you a head-start on bolstering future performance for a strong and healthy company, leading to a more successful transfer.

For example, incentive plans for your management team give them more responsibility, which lets you determine whether they’re fitting successors or high-level executives. Incentive plans also motivate the team to continuously improve the business because any rewards are contingent on achieving goals that contribute to your future success. This can allow you to wind down your responsibilities without giving up control while increasing your income, reducing your risk, and improving your outcomes.

To take it one step further, a common misinterpretation is that owners must transfer all of their ownership to insiders at once. This isn’t necessarily true. There are many ways to transfer portions of ownership over time, which are often tied to good incentive planning. This can keep you in control while you delegate more responsibilities to other people. It also gives you an out if your management team proves incapable of meeting or exceeding expectations, which protects you against risk.

If you intend to sell to a third party or work until you die, you can set up different kinds of incentive plans to make your desired path and tenure easier. You might consider a “Stay Bonus” structure in your incentive plan. It rewards managers who stay with the business through and after you transition out of it. This reduces the risk that important players will abandon ship and negatively affect your company’s value.

How can you know whether you have a management team that can reduce risks and improve outcomes? A good indicator is how the business operates in your absence. If you’ve ever taken extended time off only to find yourself addressing business issues on your time off, it’s likely you don’t have a strong management team (the same applies if you feel like you can’t ever take extended time off). If you aren’t confident that your management team can run the business well without you, you may want to consider finding managers that can.

To reduce risk and improve outcomes, you’ll likely need to look outside of yourself. But this can be extremely beneficial to yourself, your family, and your business. However, leveraging your internal strengths (or finding strong external managers to join your company) can take time. This means that it’s likely in your best interest to start this planning now, before you absolutely need it, rather than when you need it.

If you’d like help in working through the ways you might reduce risk and improve outcomes in your business, please contact Peter Skelton today at peter@kafl.com.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

Information provided by Business Enterprise Institute, Inc.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notification.

What’s your New Year’s Resolution?

Communicating better and more effectively is in the top three of my resolution list, along with exercising more and losing weight.  One of the challenges I find with communicating with clients is a reason to reach out in a way that’s meaningful and with relevant information.

One of the groups that many advisors find challenging are business owners.  Few things are bigger and more important to business owners than planning for their future success, both inside and outside the business. It’s a huge planning process, and owners need help from advisors to plan effectively. Shockingly, business owners are reporting that when they need their advisors most, they’re nowhere to be found.

According to a Ycharts survey, as reported by Caleb Smith and Irene Huhulea of Investopedia, “[T]he majority of advisory services clients are under-engaged when it comes to their relationships with advisors. In fact, 63% of survey respondents said that they were contacted by their advisors ‘infrequently’ or ‘very infrequently,’ including nearly half of clients with $500,000 or more in AUM.” Additionally, “The survey also found that 62% of respondents said more frequent or more personalized contact would give them more confidence in their financial plan and 85% would consider the frequency and style of communication when deciding to retain services.”

So, advisory services clients, including business owners, want more communication from their advisors, would feel better about their planning with more personalized contact, decide whether to retain an advisor’s services based on how well they communicate, and still feel like their advisors aren’t in contact with them enough. What can and should advisors do to address these communication breakdowns?

As an outside advisor, it’s easy to view a business primarily as an asset. To business owners, the business is often so much more. Yes, it’s important to business owners for the business to be worth as much as possible. But there’s more to business ownership than just maximizing value.  Unless advisors understand what, other than money, owners care about, it’s impossible for them to work in their clients’ best interest.

Understanding what drives business owners outside of money is much more challenging than it seems. The advent of analytical technology has made it much easier for advisors to be more indirect with their clients. They can more easily crunch numbers and create projections, sometimes without ever contacting their clients directly. This isn’t to say that this technology is inherently bad: It certainly makes planning processes more efficient. But none of these technologies can replicate the human element of planning for a successful future.

Bluntly speaking, unless advisors know how to appeal to the emotional side of planning, they cannot truly provide the advice business owners seek. The planning process is far too emotional to rely solely on cold logic, algorithms, and projections. This isn’t something that advisors can simply discount. Recall that 85% of advisory services clients consider whether to retain an advisor’s services based on how and how often that advisor communicates with them. Proper communication is what owners want, yet many advisors aren’t delivering it.

We are investing in being a leader in helping you communicate with your business owners about planning for their successful futures.

So what are some of the takeaways?

  • Advisory services clients, including business owners, feel that their advisors don’t contact them frequently enough, and will make decisions regarding whether to retain their services based on the frequency and quality of their communication.
  • Advisors to business owners must know how to communicate with their clients and prospects in ways that reveal what matters to them. Once they find out what matters most, they must do everything they can to address those matters.

If you would like to discuss how we can help you open up some conversations with your business owner clients, contact me and let’s talk!

Peter Skelton
CEO
KAFL Insurance Resources
www.kafl.com
585-955-6224 Direct
800-272-6488
585-271-5050 Fax

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

For professional use only. All information can be subject to change without notificaiton.

“For years, my Exit Planning goal was to get out of my business on my terms. But I didn’t act until I saw the consequences of inaction staring me in the face.”  –A Former Business Owner

“I believe that my exit from my business will most likely occur as a result of planning and action items that I implement.” —80% of respondents to The BEI 2016 Business Owner Survey

Most business owners know that they need to plan for their business exits. Once they begin the Exit Planning Process, they often find relief in the actions they can take to assure a financially independent exit. Why then do fewer than 20% of owners have a written Exit Plan?

Actions owners have taken toward their exits graphic

BEI’s experience with Exit Planners and statements from business owners themselves suggest that it is unrealistic to expect owners to act on their own initiative or even at the suggestion of an advisor. For any number of reasons, most business owners push Exit Planning to an unset, later date. But some owners do act. Why? For insight, let’s look at the situation of Miles Smith (a pseudonym for a representative owner).

Inaction: A Common Reaction to Solid Advice

Miles Smith owned a successful environmental remediation company. At age 62, he knew he needed to do something to prepare for his business exit. He first met with his financial planner, who referred him to Sally Campos, an Exit Planning Advisor.

During their first meeting, Sally did two things: First, she summarized the Exit Planning Process using examples from prior Exit Planning engagements. Second, she described the relationship between transferable value and Miles’s role in the business. Sally then asked Miles which role he played in his company’s major decision-making actions.

“Just about everything that matters goes through me,” Miles said proudly.

Sally knew that Miles’s role in his business would need to change if it were to have transferable value, and she shared her thoughts with Miles. Miles knew that he needed to do something to make sure that his company would still be valuable without him, and he even told Sally that he agreed with her. But after he left Sally’s office, he did nothing, despite Sally’s comprehensive description of the importance of transferable value, despite how Exit Planning could increase transferable value, and despite all of Exit Planning’s benefits.

This passive refusal to act by savvy, decisive business owners seems paradoxical. Why don’t these smart people do what is in their best interests?

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

This emotional resistance manifests not as outright rejection of the Exit Planner’s suggestions, but rather as passive inaction. Business owners know that Exit Planning is necessary, but emotionally, they are not prepared to take that plunge. So, they ignore the problem until they’re ready emotionally, and by then, it’s often too late to create a plan that helps them exit their businesses on their terms.

How can business owners and advisors confront and overcome emotional roadblocks, especially when most owners and advisors would consider themselves experts in rationality?

Understand That Rationality Only Goes So Far

As professionals, business owners and advisors are trained to be logical, accurate, and rational. When Sally met with Miles, she used logic to explain what Miles needed to do if he wanted to exit his business on his terms. Miles agreed, because he understood her argument and what he needed to do, but he did nothing. Miles knew he had to do something, but he didn’t feel he had to do it now.

Whether you’re a business owner or advisor, you might read that last sentence and think, “That sounds like laziness or irresponsibility to me.” I can assure you—based on my own experience and countless stories from other owners and advisors—that rarely are such situations the result of laziness or irresponsibility. Instead, they’re the result of neglecting the important but sometimes hard-to-wrangle concept that exiting a business is an emotional event that requires an emotional response from both business owners and advisors. BEI has found a way to address these issues without requiring a doctorate in psychology.

Understand That Speaking to Emotion Is Necessary and Valid

In their 2010 book, Switch: How to Change Things When Change Is Hard, Chip and Dan Heath noted, “. . .the core of the matter is always about changing the behavior of people, and behavior change happens in highly successful situations mostly by speaking to people’s feelings.”

It’s common for business owners and advisors to disregard emotion when making business-exit decisions, because most of us are either uncomfortable or unversed in handling the emotional aspects of a business decision. Yet, in talking with owners about their business exits, it is important for advisors to realize that, for owners, this is not a simple, logical business decision. It is one of the most emotional decisions business owners will make in their lives, on top of being one of the most important financial decisions that they will make. That’s why speaking to emotion is not only valid but also necessary for a successful business exit. But how can we do that?

Speaking to Emotion in a Business Context

Let’s give Sally a second chance and assume she understood the need to focus first on emotions over rational explanations. How would that meeting go?

First, rather than try to convince Miles of the need to change, Sally let Miles convince himself that he needed to change his role. She asked Miles to complete a short assessment provided by BEI that identified his exit goals and objectives, and pinpointed the specific areas of his business that he felt needed improvement.

For example, Miles answered “No” to the following prompt about his management team:

  • Statement: Buyers look for and pay well for companies with motivated and long-standing key employees. Unless key employees are able to run the business without the owner, the company is neither sustainable nor salable to a buyer, employees, or the owner’s children.
  • Question: Can your management team run your company in your absence?

Asking owners to assess their businesses appeals directly to both their rational mind and their emotions. In completing this short assessment, Miles concluded that his business would collapse without him at the helm.

“This business would not exist without me,” Miles said. “I can never leave.”

“And is that OK with you?” Sally asked.

The consequences of his continued inaction stared Miles in the face, and he felt it in his bones.

“No,” he replied. “But what can I do?”

Sally then described Exit Planning as both a process to exit his business and a means of moving his business forward. She explained to Miles how Exit Planning could help him create transferable value that would allow him to reach his personal financial goals and ensure the business would continue to flourish without him. The idea of progress appealed to Miles.

With Miles on board, Sally then explained that Exit Planning and value building would take years. Fortunately, during those years, Miles could change his role and focus his efforts on areas of the business that would most benefit him and his company. Sally showed Miles that Exit Planning did not mean exiting before he was ready, either financially or emotionally. Working toward an exit on his terms also appealed to Miles.

Once Miles understood that every Exit Planning action would be based on his goals, aspirations, and concerns—both financial and personal—he was willing to trust the process and Sally.

In explaining the benefits of Exit Planning to business owners, appealing to both their minds and hearts is essential. That idea is at the core of The BEI Seven Step Exit Planning Process.

Whether you’re a business owner looking for an advisor who can speak to both the rational and emotional concerns you have about your business exit, or you’re an advisor who wants to become the kind of advisor who can help owners navigate the rational and emotional roadblocks inherent to a business exit, we encourage you to contact us or call 303-321-2242.

Future Reading

In the next several articles, we’ll look at how some of BEI’s other assessment questions help pinpoint areas of concern for owners. These questions can help owners and advisors assure that they’re speaking on the same terms, both logically and emotionally, when discussing business exits.

Source: Submitted by John Brown on Wed, 12/06/2017 – 5:00pm on https://www.exitplanning.com/blog/unaddressed-role-emotion-business-exits

In our last three articles, we’ve discussed the importance of exit goals and two of the three types of exit goals: foundational (financial independence) and universal (the amount of income owners want after they exit, their ideal exit date, and the party they’d like to take over the business). In this article, we tackle the third type: aspirational or value-based goals.

Values-based goals are “softer” but more emotionally compelling. These are goals owners have for themselves; their businesses; and their families, employees, communities, and others during and after they exit. Owners generally have many aspirational goals, and advisors must uncover all of them if they are to craft successful owner-centric Exit Plans.

Aspirational goals influence and often drive an owner’s decision to use a particular Exit Path. In fact, if we are certain of one thing about Exit Planning and owners it’s this: For most owners, a successful exit is not just about the money.

As an example, consider the many owners who have strong and deep emotional attachments to their companies. These owners can be reluctant to exit unless they know that their companies will retain their current culture of integrity and fairness to employees and customers. This aspirational goal of maintaining company culture may well exclude a transfer to an outside party and favor a transfer to an Employee Stock Ownership Plan or to management.

In addition to maintaining culture, aspirational goals can include:

  • Acknowledging employees
  • Family harmony
  • Owner legacy
  • Taking a business to the next level
  • Minimizing taxes
  • Community involvement
  • Retiring to pursue personal goals: travel, time with family, hobbies, etc.
  • Charitable intentions

In this article, we make the case that unless advisors recognize the importance of aspirational goals and are prepared to discuss them with their owner-clients, they are unlikely to see owners move forward with planning.

Digging for Gold

Advisors must probe their client/owners’ responses to be certain that they (and their clients) fully understand these softer, or aspirational, goals. Generally, Exit Planning Advisors kick off this discussion by asking owners to:

  • Describe their vision for their companies without them.
  • Describe their vision for themselves without their companies.

Visions can be difficult for owners to clarify and quantify, so Exit Planning Advisors ask them a series of follow-up questions. For example:

  • Why do you wish to maintain the company’s culture after you exit the business?
  • What aspects of the culture do you want a buyer to maintain?
  • Do you have ideas on how to accomplish that?

Only upon fully understanding an owner’s aspirational goals can advisors begin to recommend the appropriate actions to achieve them.

In addition to clarifying the owner’s vision, asking questions establishes the advisor’s interest in achieving their clients’ deepest wishes. When owners are confident that their advisors understand and take a personal interest in working with them to reach their aspirational goals, they are far likelier to engage them and move forward with a process that achieves all of their goals.

We hope that these articles about the importance of various types of goals have been helpful but caution that we’ve only touched the surface. It’s not uncommon to spend more time on discovering and clarifying an owner’s goals than on any other part of the planning process.

The next series of articles will describe how to understand and objectively determine an owner’s current resources (business value and cash flow, personal investments, etc.). With an understanding of owners’ goals and an assessment of their resources, advisors can begin the planning necessary to achieve their clients’ goals and aspirations.

Source: Article submitted by John Brown on Mon, 06/22/2015 – 9:38am on https://www.exitplanning.com/blog/owners-vision-future-values-based-goals

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