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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 mostly focused on their 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 will not 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 planning you exit.  But that is a faulty assumption which can lead to disastrous results.

Ironically, this recessionary economy is one of the best times to be planning your exit because it is when you are focused on rebuilding your business

Here’s the thing about long-term planning . . . most of us don’t do it.  The fact of the matter is that the American psyche is built around positive thinking and immediate action.  Coupled with this issue is the psyche of the average business owner.  The prevailing attitude of the average business owner is one of ‘invincibility’.  And why not?  After all, it is the small business owner who has defied the odds of success, defied this economy and remained positive despite all of the troubles of the last few years.

Most owners who believe strongly in a positive future and continued prosperity in their businesses do not take the time to consider long-term planning – after all, the future seems so distant and largely inapplicable to the issues facing them today.  And because the economy is used as an excuse for their lack of planning, most owners leave their entire wealth and financial well being exposed to loss.

Let’s take a look at the 10-year cycle of business transfers to see why, despite the terrible economy, today is the optimal time to begin planning your exit. 

The cycle of business transfers follows a rather predictable trend.  And, right on schedule, the economy tipped downward in 2008 and continued this slide in 2009.  The difference in this cycle was the severity of the downturn – this was not predictable.  Few, if any, people recognized the amount that the major pools of wealth in this country were over-exposed to risk and were set for the dramatic correction that occurred.

Despite what has happened over the past few years, we need a context within which we can deal with this problem.  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 you be prepared to take advantage of this exit window or will you still be holding onto your 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.

So, one may ask, ‘why start today when the next downturn is years off?’.

The answer is that it can take many months to develop an exit plan and many more years to execute that plan.  For example, it can take nine (9) to eighteen (18) months – or more – to sell a business.  This, of course, assumes that the business is ready to be sold and that an outside buyer is willing to purchase it.  Further, in the absence of any succession planning, a time period for grooming the next level of management is approximately five (5) years – again, if all goes well. 

The problem here is that the owner who uses this economy as an excuse not to plan their exit will miss the opportunities that are available today.  Not the least of which is the long stretch of time that it takes to properly prepare for and execute an exit.

In conclusion, most owners have always realized that, despite their best efforts, they are vulnerable to economic swings.  This recession, however, carries with it the additional reminder for baby boomer owners that there may be only one (1) more exit window before they are 70 years of age, or older. 

Since the majority of the average owner’s total wealth is tied to their business, it is more important now than ever to plan for your exit while still in the midst of this recession.

Don’t use this recession as an excuse for not planning.  See through the difficulties of today and realize that this tough economy is the ideal time to begin planning your future exit. 

Transfer Options: Beyond the Outright Sale

It’s nice to have options.  Haven’t we all heard that before?  It’s something many business owners would probably say and sigh with relief when they realize that ‘selling’ a business isn’t the only way to exit that business. In this article, we’ll dispel this myth and talk about the many options available to exiting business owners.

Today, a large number of Baby Boomer business owners face the challenge of meeting their retirement needs with illiquid wealth tied to their privately-held businesses.  According to an NFO WorldGroup study performed in 2002, the number of business owners planning to retire was expected to increase from 50,000 per year in 2001 to 750,000 per year by 2009.  Now, more than ever, it is crucial for owners to become educated about their options.

There are primarily seven (7) different options by which a business owner can transfer the interests in a privately-held business:

·       Employees

·       Charity

·       Family

·       Co-Owners

·       Outsiders (owner retires)

·       Outsiders (owner stays)

·       Initial Public Offering

Employees & Family

Liquidity is the primary concern when considering a transfer of a business to employees or family.  One might naturally believe that these individuals don’t have the financial wherewithal to buy out the owner.  Whether or not this is the case, it doesn’t have to limit the succession planning process. Take a look at the following options:

ESOPs Provide Tax Benefits

An owner may transfer shares to employees, through an Employee Stock Ownership Plan (ESOP) without the employees ever contributing any money to the owner’s exit strategy.  Their liquidity simply isn’t a factor.  Furthermore, since 1974, Congress has supported ESOPs by way of tax incentives.  These incentives make an ESOP an attractive Exit Vehicle for an owner–even if the owner has no true desire to help their employees.

Estate Planning Within an Exit Strategy

Regardless of their liquidity, family members can in fact play a key role in an owner’s business exit.  If an owner has provided for his financial needs independent of the business, he can gift shares of the Company to family members.  Over a long enough period of time, these gifting programs can coordinate with an estate plan to manage estate taxation.  In addition, transfers to family members can occur in a fast growing business through a Grantor Retained Annuity Trust.  These powerful estate planning tools can provide significant tax savings to the exiting owner.

A Leveraged Buyout Option

Employees and Family Members can also utilize the existing assets of the Company to construct a Leveraged Buyout of the owner’s interest.  In this scenario, the Company takes on more debt and therefore more risk to accomplish the transfer.  If the employees and family members are willing to assume this risk, the owner can make out quite nicely.

Co-Owner Transfers

The existence of more than one owner creates yet another option.  This ownership structure often comes with a Shareholders agreement.  The Agreement dictates the terms by which one owner may purchase the interest(s) of the other owner(s).  These interests often have a pre-determined Value.  A co-owner transfer makes for a clear-cut transaction, as long as the pre-determined Value meets the exiting owner’s Goals. 

Outsiders

Outside Buyers will generally pay the highest price to an exiting business owner.  The higher up front Value takes into account all possible synergies of the deal (i.e. economies of scale provided by the Buyer, back office savings, cross-selling opportunities, etc.).  Most often in this scenario, the owner will sell to a competitor and leave the business entirely.

What about the owner who wants to sell to an outsider without completely leaving the business?  Good news—this owner has yet another option.  With the intention of using Capital and Management to improve the operation, a Private Equity Group can buy or invest in the Company. This is an attractive option for the owner who wants to keep a hand in the business since The Private Equity Group often asks the owner to ‘stay on’ and run the business.  Both cash and shares are offered to motivate the owner, thereby meeting his financial goals and allowing him to keep his ‘job’.  This option can present the best of all worlds.

IPO

Larger companies, those worth $100mm or more, can offer their shares in an Initial Public Offering.  This type of transaction allows the ‘general public’ to purchase ownership in the Company.  In turn, the Company accesses ‘public capital’ and its shares trade on a public exchange.  When considering this option, an owner must assess the public company costs.  The business will need to spend the time and money to report to its shareholders, which can sometimes lead to a short-term mindset.  Nonetheless, this option can provide the owner with a high level of liquidity.

Conclusion

Isn’t it nice to have options?  It isn’t necessary for a business owner to simply ‘sell’ the business and walk away cold turkey, unless of course, that’s what he wants.  After examining our brief discussion of transfer options, an owner can begin to ask questions that will lead to an Exit Strategy that meets his or her personal Goals.

Exiting Your Business Successfully:
What You Need To Know

If you are like most business owners, you have devoted an immeasurable amount of work and resources into growing your company. With all that you have invested, doesn’t it make sense to plan an exit from that business that protects the wealth you have accumulated in it? After all, exiting your business will certainly be one of the most important financial events of your life. The first step is to understand that an exit is not simply the sale of your business. Rather, it is a process that may occur over many years and selling your business is just one of many options available to you. Designing your exit strategy will take time, planning, and forethought but will allow you to reap the greatest reward for your years of hard work.

EXIT PLANNING EXPERTS

What is an Exit Plan?

An exit plan outlines your options as a business owner for transition of your business in the most wealth-protective way. This plan takes into account all factors related to your personal life, your business, the timing you would like for the exit, as well as potential successors or buyers.

The most obvious exit option to most business owners is the sale of the business to another buyer, perhaps someone in the same industry. It is important to know that less than 20% of businesses successfully sell to an outside buyer. What if you are one of the majority, and selling your business is not an option, do you know what exit choices are?

Ten Things a CEO Should Remember About Succession Planning

by Kevin Kennedy
 

You can read several books or my white paper about “succession.” The purpose of this article simply is to differentiate “exit planning” and “succession” and outline the    main points for a CEO to think about with succession planning.

In the simplest terms:

• Exit Plan focuses on monetizing the trapped illiquid wealth in a private business.
• Succession Plan focuses on a company successfully performing without its present owner/CEO.

An exit plan is a customized written plan that monetizes a business, meets the owner’s personal and financial goals, protects his or her wealth, and moves the owner into his or her next stage of life. 

A succession plan provides a customized written plan that focuses on the human side of a business. Succession replaces the owner by moving the chosen performers to a professional level of management and into leadership. This requires time, training and stretching the team.

A succession plan may take several months to write and several years to execute. Depending on the readiness of a company’s management and the type of exit and current payout, a succession plan may last from three to 10 years. On the other hand, if the business is systematized and has clean financials and mature management is in place, the company could be “sale ready” in less than a year.

Ten Things a CEO Should Remember About Succession Planning:

1.     The Owner’s Mindset:

The succession process does not begin until the CEO can begin to see him/herself outside the business, has a flexible date and a written plan. This stewardship will lay the groundwork for a successful transfer, the CEO’s legacy and the company’s future. Francis Hesselbein said: “Successful transition is the last act of a great leader.”

2.     Complete Your Exit Plan—Update Legal Agreements:

A large part of the exit plan is income replacement for the owner. The owner’s exit plan should be a process so the owner can see him/herself as financially independent or the owner will never be able to separate from the business. Legal agreements should be updated to protect the business and the owner’s estate during this process.

3.     Establish a Clear Direction and Focus:

The beginning of the succession process is a time to revisit the strategic plan, vision and mission. This process will be an exercise for the management team to establish their roles, work as a team and have a stake in the plan for the company’s future. It will be the management team’s responsibility to engage the company in this plan, communicate the plan and be held responsible for the plan’s implementation.

4.     The Odds are Against Your Success:

A Family Firm Institute study reveals how difficult it is for small businesses to succeed over generations and business cycles.

·       Seventy percent of companies fail to transfer into the second generation.

·       Ninety percent of companies fail to transfer into the third generation.

The CEO cannot take this lightly. If you fail to plan, you plan to fail.

5.     Develop Management Succession:

Management succession is more that the replacement of talent; it is the development of talent. This is a time for the new team to re-examine and improve performance of the company’s systems in a process of continuous improvement for the company’s profitability. The new management team should lead this process and education effort for the entire company.

6.     Develop Leadership Succession:

Traditionally, you have strong managers who drive the company and meet deadlines and corporate goals. They must now rise to a higher level of leadership, set a corporate direction and build consensus. How do you change their behavior, build self-awareness and still maintain their spirit?

This change is accomplished through the light of self-awareness, acceptance of the      truth, peer evaluation, experience and personal coaching. There are many processes and proven exercise to move them to the next level.

7.     Understand Emotional Intelligence:

Most of us recognize IQ (Intelligence Quotient) from an educational system that weights this measurement. Now researchers use EQ (Emotional Quotient) or Emotional Intelligence as a measurement, and studies have found it is the key ingredient for leaders and millionaires.

The book Emotional Intelligence considers non-cognitive skills more important than IQ in the workplace. The author, Mr. Daniel Goleman, states that emotional intelligence is reflected in behavior from self-awareness, [how one?] uses gut feeling, self-control of emotions, empathy, and the ability to inspire and influence others.

8.     Time is Your Best Friend With Education:

Succession and behavioral change take time, and the sooner you start training, the better your results will be. There are three parts to this training: education, coaching and stretching. You will spend about 30 percent of your time with education and coaching. The key is to leave 70 percent of your time for the stretching process. This is where managers are field-tested, apply their learning, make mistakes, adapt and mature.

9.     Coaching the New CEO:

Every CEO must realize his or her role with the new successor is to make sure the next CEO is prepared to lead the company. Meet and decide collectively the process, time line and curriculum. Remember, this process is all about the new CEO, not you. Your role is to teach, coach and insure the company’s future. The new CEO’s management and leadership style likely will differ in some way from your style. Let the new CEO find his or her own path unless you see a disaster in the making.

10.  The Lame Duck and Letting Go:

For each CEO, the succession process is different but the same. You will feel like a lame duck, it will be more emotional that you thought it would be and you must focus on life outside the business.

Eventually your phone will stop ringing, managers will bypass you and move directly to the new CEO, and you will be out of the loop. The good news is the process is working as it was designed to and you have succeeded where most CEOs fail. Congratulations, and welcome to the lame duck club.

For additional free educational information, go to Kevin's website, www.beaconexitplanning.com, for my 24-page succession white paper and newsletter archive.

Kevin Kennedy is the President of Beacon Exit, LLC. The content of this article is based on his personal experience successfully exiting his 63-year-old roofing company, the transfer to the company’s third succession team and his

training. The information is not intended to be legal, accounting, insurance or tax advice. Please contact your licensed business advisers for specific advice. Beacon is a process consultant that provides written plans and support programs to private business owners for succession and exiting their businesses. For more information, visit www.beaconexitplanning.com

When getting ready to exit your business, it is important to set a plan.  One of the most valuable insights into designing an exit is to remember that the skills that you used to build a successful business are not perfectly transferable and useful for designing your exit.  From this bit of wisdom comes the quick conclusion that you need to think differently in order to form and execute your business exit.  The following bullet points address the general business areas that you should be considering for your business exit.

Who will take over the business?

Do you know who you want to run your business after you?  This question is easier asked than answered.  You see most owners have not given due consideration to the pros and cons of each potential future owner for their business.  For example, an outside company can provide money and management skills to help run your enterprise into the future.  If you don’t need either of those, you may consider a management buyout.  Or, if you want a partial exit, keeping control of your business, you may choose an ESOP.  Or there may be a combination of these strategies to assist with your planning.  Let’s examine each of them. 

Know your Exit Options – External Transfers versus Internal Transfers

Transfer to outsiders

If you envision selling your business to a competitor or to a financial or equity group, you need to look at your business the way that they would see it.  What are your value drivers?  Are you the primary asset or can the business run without you?  What resources are available to sustain your business in your absence?  Do you have protected and unique property that can be acquired in the transaction? 

If you can ask these questions and envision a future sale, than you can also ask the next series of questions to validate your notion of selling to an outsider.  Are you very concerned about the future of your managers and employees?  Remember that a sale of your business means to sale of control to an outsider.  Many owners get stuck here as they feel responsible for employees and family. 

Do you have family in the business who may not remain employed?  Are you concerned about your business legacy and its impact in the hands of an outside owner?  Are you aware of fees and taxes that you would pay in an outside deal?

Answering these questions will assist you in understanding whether you are candidate for an ‘external’ transfer.

Transfer to insiders

If a transfer of your business to an outsider does not feel like the best course of action, you can look to internal transfers to meet you goals.  Employee Stock Ownership Plans (ESOPs) and Management Buyouts are two ways in which you can convert your illiquid business into cash.  Each exit option has its pros and cons.  You should first reflect on the answers above and then determine whether or not your staff can lead your company in the future.  This approach will get you closer to the exit path that is appropriate for your business.

How will revenues and profitability be sustained – are you a bottleneck in your business?

Be honest with yourself as to how vital you are to your continued, profitable operations.  Many owners underestimate what they do and what they represent for their businesses.  Employees and managers will almost always defer to your expertise before making important decisions on their own.  They are usually not incentivized or empowered to do otherwise. 

Here is a good litmus test:  can you take a three (3) week vacation, without checking-in with your business, and have it run smoothly without you?  If the answer is ‘no’, begin to examine which parts of your role in the business are most transferable to someone else.  Then ask the question again to see if your business is more sustainable with your improved procedures.

What you will likely find is that exiting is as much about ‘letting go’ of control as it is about structuring a transaction.  You have developed a close working relationship with those around you.  Engage in some exercises that help you objectively evaluate your team’s ability to run the business without you.  Eventually you will no longer be running your business.  Take a pro-active approach to this contingency by making these evaluations today.

How is your management team aligned?

It is likely that your management team is not aligned with your exit goals.  You may have been relying on someone who cannot fill your shoes.  Or you may have one or more managers with strengths in certain areas, but fatal weaknesses in others.  Take the time to organize your managers and to put in place an incentive program that not only focuses them on profitability, but also focuses them on management and leadership within your business.  Remember that one day your guidance will not be available to your managers.  Tools such as financial incentives help to begin and/or facilitate the transition.

Aligning your management team

One tactical strategy that you can employ is to shift bonus dollars that are paid in ‘cash’ to ‘deferred & contingent’ payouts (similar to the way that vesting schedules may exist in your retirement plans).  Today’s economy has provided an opportunity to re-evaluate your manager’s compensation and to restructure the manner in which it is paid out to them.  Remember, these strategies are not about increasing your bottom line, but more focused on getting the buy-in from your managers on their interest in taking enhanced roles within your organization.

Financial statements and operations clean-up

If you have been remiss in ‘cleaning up’ your income statements, now is the time.  Begin to critically evaluate the personal expenses that you ‘run through’ your business, as well as your ‘excess compensation’, discretionary contributions, and your other perks.  Remember that each of these items impacts your cash flow.  Even though you may have employed these strategies to minimize your taxes, you want to be able to demonstrate to your future owner(s) your company’s true potential for generating free cash flow.

Organizing your advisory team

You have likely built a successful business by relying upon the expertise of others.  Now is the time to assemble your business (and personal) advisors to convey to them your intention to execute a successful exit in the future.  The insights that each of your advisors will provide to you will help you in addressing many of the following areas:

·       Taxes that you may owe for different transfers

·       Legal agreements that you may need to sign

·       Capital that you may need to attract

·       Cash flow projections that you may need to provide to successor owners

·       Insurances that you may need to purchase to protect your wealth

Remember that each of these different business issues is a specialty unto itself.  The sooner you can begin to gather and organize these various parts of your business exit, the faster you will be able to move forward with your plan.

Conclusion

No exit is easy.  The myth that business owners simply decide to exit one day and sell the next is simply just that – a myth.  Every owner struggles with finding the right exit path and developing the proper plan.  By thinking in new ways and gathering key pieces of information, you can align your resources and assemble your advisory team to assist you with a successful exit.

Frank has been very helpful in establishing and maintaining our Company’s new banking relationship.  He has also been instrumental in improving both our internal and external financial reporting systems.  Frank’s interpersonal style makes problem solving an effective and rewarding experience for myself and ultimately the organization.  I highly recommend Frank for any business solutions you may need.

Rick Tessier
Controller
Innovative Mold Solutions

"I’m glad I made the call to Frank to come in and evaluate our organization’s financial strength. He approached our situation with a one step at a time focus that allowed us to recognize our financial reporting shortfalls and improve our accounting processes. Frank has also been very flexible in allowing us to bring him in as needed. In addition to helping us feel more confident in our financial structure, Frank has been valuable for my own professional development. He does not just do the work for us. He teaches us, allows us to follow through and is there to review our changes and reporting."

Cliff Grimm
Finance & Administrative Manager
EpiVax, Inc.