Planning For Your Exit Despite This Tough Economy - Dec 29, 2009
Posted by: Jane Johnson in Articles
It was recently said that talking to business owners about long-term planning in today’s economic environment is a bit like a doctor telling a critically wounded patient in an emergency room that ‘they need to exercise more and watch their diet to be healthy’. Of course, the emergency room patient is focused on his or her short-term needs, such as fixing whatever put them in the emergency room so that they can go into a recovery mode and, hopefully, restore their lives to a normal status.
We all know what the problems are today with our small businesses – consumer confidence is shaken, purchases are down, accounts receivable are tougher to collect, everything seems more expensive, the banks are hesitant to lend us the money to meet our growing working capital needs, and, because this recession is almost two (2) years old, it all seems like it will never come to an end. These all seem like very good reasons not to be setting aside time for exit planning. But that is faulty thinking which can lead to disastrous results.
If you study the 10-year cycle of business transfers you can see why, despite the terrible economy, today is the optimal time to begin planning an exit. For the last three decades, the cycle of business transfers follows a rather predictable trend. The first two years of each decade have been a buyer's market, the middle five years a seller's market and the last two years have been a near or absolute recession. And, right on schedule, the economy tipped downward in 2008 and has continued this slide in 2009. The difference in this cycle was the severity of the downturn – this was not predictable.
When we project out over the next three (3) to five (5) years, we see that a ‘window’ for a business exit will open again. The question is, ‘will owners be prepared to take advantage of this exit window or will they still be holding onto their business, without an exit plan, into the next recession?’
This recent economic storm has broken the ‘status quo’ psyche for most owners. For the most part, owners now operate under a new thought process, one which says, ‘look, I’ve been through a number of these recessions before, but this one really hurt. I’ll survive it, but I don’t want to go through another one’. It is the inertia of the ‘good enough’ mentality that has been broken. And, the proper way to address this new reality of today’s economy is to begin doing some advanced planning against future contingencies. Beginning the process of developing an exit plan is a great first step in taking inventory of what has occurred and setting a plan to be ready for an exit prior to the next downturn.
Many business owners believe that they will 'exit' their business by 'selling' it. They incorrectly believe this to be the ONLY way to exit a business. This can prove to be an unfortunate misunderstanding, because typically the majority of a business owner's wealth is tied to his or her business, and a firm grasp of the many exit options can literally mean millions of dollars in additional wealth preservation. Sell The Business Develop an Exit Strategy Advisor motives rule As the largest generation in our country's history enters retirement age, many of the nation's private businesses owned and run by these Baby Boomers will need to prepare for a transition. Robert Avery of Cornell University estimates that $10.4 trillion of net worth from private businesses will be transferred within the next 35 years. With so much competition in the transaction markets, it is imperative that owners position their businesses in advance, and learn about this expected wave of exits. According to Avery, "The majority of boomer wealth [in the United States today] is held in 12 million privately owned businesses, of which more than 70% are expected to change hands in the next 10 to 15 years." With such an unprecedented number of exiting owners in all industries, having a comprehensive and customized exit strategy plan will be crucial. It is a fact that not all Baby Boomer businesses or industries will survive the expected wave of exiting owners, with both the weakest businesses and least-prepared owners left unable to successfully sell or transfer their businesses. The majority of an owner's wealth is often tied to the illiquid business, and an owner and his or her family may be dependent upon sale proceeds for the next step in life. In the emerging wave of exiting owners, only the exiting owners with strong business models and well-planned exit strategies will be poised for successful transfers and ultimately, a successful next stage of life. There is urgency to this emerging market, with very few advisors currently trained and prepared to give advice on the traps, and possibilities of planning an exit strategy. If the majority of your wealth is tied up in your illiquid business, a strong team of advisors will be critical to transforming that illiquid asset. Consider working with an advisor trained in exit planning to help you with the largest financial and emotional decision you will ever make! Posted by: Jane Johnson in Testimonials "Jane came highly recommended by a partner from our law firm and she has far exceeded those initial accolades. She's consulted for Clearly Creative on employee compensation planning as well as deal structuring for our firm's largest opportunities including our work for a Fortune 35 company, who has recently become our newest (and biggest) client. In hiring professional consultants, I look for exceptional interpersonal skills, passion for the subject matter, and depth of experience in the industry: Jane brings all this to the table, and much more." Dave Gowel President and CEO Clearly Creative Posted by: Jane Johnson in Articles Surviving is not good enough. Smart companies will make 2009 a "rebuilding" year! Recessions force us to focus our attention internally to be sure our companies can "weather the storm". This is the perfect time to prune dead wood from the business and examine the way we do things...everything! Use this opportunity to work on, not in your business. As a professional services firm, you probably spend most of your time and energy helping your clients build their businesses while often neglecting your own. Having been through the sale of a professional services firm, I can tell you that you never know when you may have the opportunity to entertain an offer from a potential buyer. Once the recession winds down, it will be a buyers' market and you may be approached. This may not be the optimal time to sell but you will learn a lot by entertaining the offer. Are you ready to have your company examined under a microscope? Is your "house" in order? Do you know what makes your company more valuable than others in the same industry?? According to a recent survey of acquirers and valuation experts called "Top Dollar - How to Achieve a Premium Valuation for your Professional Services Firm" (http://www.pivotalbrands.com/resources/surveys/topdollar.html), there are seven primary factors that drive premium instead of average valuations of professional services firms. Most of the factors won't surprise you, although their ranking may! Here they are in order of importance: Strengh of existing client relationships Technology Quality of management team Marketing strategy Financials Employees Profile/Image So it is not just about the numbers! Prior to selling our firm, my former partners and I were able to implement several important initiatives at our company that boosted our value significantly before we were approached by our buyer. I would challenge you to think beyond survival and focus on these factors for the remainder of 2009. Determine how to improve your business practices in each of these areas and then measure the results by developing monthly key performance indicators (KPIs) that include both financial as well as non-financial data. You may be a somewhat smaller organization at the end of this recession but you will have a high quality foundation on which to grow and build your value even if you are not preparing for an exit! Posted by: Jane Johnson in Articles Do you know what your margins are? If you search long enough, you will find several different definitions for "margin" - but they should all have roughly the same meaning. Margin is the ratio of gross profit to gross revenue for the products and services you sell. Said another way: gross profit is the amount of money you have left after production to cover operating expenses and net profit. Thus, gross profit is a measure of a company's efficiency in turning raw materials into income. Those raw materials may be people and/or physical materials. For retailers, gross profit measures their markup over wholesale. Gross Revenue - Direct Costs = Gross Profit Margin = Gross Profit/Gross Revenue All companies need to be concerned with their margins. It may sound simple, yet many companies do not know how to calculate margin and don't track it on a regular basis. Why is it important? If your margins aren't high enough to cover operating expenses, you are losing money and you will need to raise your selling prices or cut your direct costs to increase your margins sufficiently to achieve a net profit. You may say that raising your prices is not possible because you are in a competitive situation. Are you sure? You need to review your pricing strategy often and determine if you want to be the low-cost provider, the most-expensive provider or somewhere in the middle of the pack. You need to try to predict your customers' behavior with each scenario. Will your existing customers switch providers if you raise your prices or is it too much trouble for them to do so? What new customers might you attract if your raise your prices? Are they better and more valuable customers? Will they spend more with you? All companies should strive to cut their direct costs and improve their margins on a continuous basis. Here are just a few ideas: And don't forget to: If you don't know what your margins should be, do a little research on your industry, see what your competitors are reporting and set a goal that beats the competition! It will make a big difference to your bottom line! Posted by: Jane Johnson in Testimonials "Jane was initially requested to help Photovac resolve several problems with our inventory and Cost of Goods Sold. She quickly mastered our MRP system and has been able to efficiently determine the causes for most of our problems and recommend solutions both for the short term and long term as well. Jane has been an excellent resource and, once our problems are resolved, we plan to engage her on a 2-day per month basis to periodically review our financial and materials operations."  Thomas A. Smith, CEO Photovac, Inc.
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For business owners who understand that an 'exit' from their business could occur in many different ways, a world of possibilities opens up. It therefore stands to reason that the initial step in forming an exit strategy includes learning the difference between an 'exit' from the business and a 'sale' of the business.
An exit strategy considers aspects of a business transition that go well beyond the sale. The process entails answering questions not only about your business and how much money you need to get from it, but also about what you are personally trying to achieve.
When business owners 'sell' their business, they generally forfeit strategic and financial control to the buyer. Control is generally a large issue for many owners, and keeping control of one's business (and destiny) is a driving factor in the day-to-day decision-making process. The business owner who perceives 'selling' his or her business as the only option, will often do very little to prepare for the departure because of the fear of loss of control. This is unfortunate because 'exit' options exist that allow an owner to maintain control AND begin to draw down the equity locked inside the business.
The following table illustrates the numerous differences between simply selling the business and developing an exit strategy:
Even if owners are not planning to sell their business, but instead transfer stock and control to family members or a management team, it is essential for tax and managerial reasons to begin these processes years prior to the anticipated date of departure. Whether selling, transferring, or gifting a business, owners will be competing in the flood of near-term business exits, and should begin boosting company value in preparation.
Clearly Creative - Jun 7, 2009
Boost The Value Of Your Professional Services Firm - Mar 29, 2009
Know Your Margins - Sep 15, 2008
Testimonial - Photovac Inc - Sep 15, 2008
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