Tag: exit planning

Family Business Services

What’s going to happen to the family business?

Are you the owner of a family business? Then, you probably already know you face unique challenges that other companies don’t have to worry about. And, those challenges only grow more intense as you start thinking about an exit strategy.

More than 70% of businesses put on the market never sell.   That’s 70% of those put on the market, don’t sell.  And countless more businesses never even get listed but rather die quietly due to an owner’s unexpected death or illness.

Only 34% of family businesses survive to the 2nd generation.  That’s 2 out of 3 never successfully make it from mom and dad to the kids.  And only 14% of family businesses survive to the 3rd generation.

Why?  Simple:  Failure to properly plan for the succession of the business to a buyer/next generation and failure to plan for the successful exit of current owners.

Bottom line: Business owners wait too long to begin planning for this HUGE transition. It’s a major issue afflicting our society, and one that will only grow over the next decade as hundreds of thousands of baby boomers look to sell.

As we well know, the first step in solving any problem is recognizing there is one. In the case of the aging business owner, the simple act of talking openly with someone about exit planning can spark action. And action can mean the difference between a seamless transition at fair value or a disastrous failure. If you are a loving spouse, child, parent, friend or confidant of a business owner that is avoiding tackling exit planning for their business, this article is written for you. As this tsunami swells, it is critical that you – the child, the spouse or the close friend – assume a vital role: Starting the Conversation.

Whether you are the business owner, next in line for a business succession or simply a concerned loved one, here are some tips for starting the conversation :

  1. Have empathy. It’s the ability to understand someone else’s feelings, attitudes, and perspectives. The ability to “put yourself in someone else’s shoes”. Start by opening your mind to think about the situation exclusively from their side. Think about how they feel about their business. Think about the hours they put into it, the hard times they have endured, and the success they have achieved. Respect and embrace those thoughts, and keep them with you as you talk.
  2. Treat it like a business meeting. This is a BIG deal. Do not treat it as you would if you were talking about last weekend’s college football games. Don’t bring up in passing or with playful jests. Doing so diminishes the importance and may provide an avenue for the owner to continue avoiding the topic. Set aside time for this conversation, as you would with an important business matter. Ensure there are no distractions. Doing so will set the tone that it is a serious conversation. You words will instantly come across as more sincere and genuine.
  3. Prepare yourself. Come into it with a list of things you would like to say and questions you would like to ask. Mentally, have an open mind and be prepared to listen. Emotionally, try to remain neutral so they can express themselves completely.
  4. Understand your ideal outcome. The ideal outcome may be lightly different for everyone having this conversation, but it generally looks something like this:
    • You effectively express your own concern and love for this business owner.
    • You are able to ask a few questions.
    • You schedule a time to revisit the conversation at a later date (with more information, a 3rd party, after serious thought).
  5. Don’t be discouraged if they aren’t ready. It is very likely that they won’t be ready to open-up the first time you talk. Don’t be discouraged! Be respectful of their process for dealing with this, and focus on committing to another time to talk in the future (a couple weeks later). The business owner will probably think and process extensively over the next couple weeks, before coming to your next meeting much more prepared.
  6. Seek the help of a 3rd party — eventually. Not for the first meeting – you may risk blindsiding and/or offending the business owner. You want them to open up, not shut down. However, assuming an initial conversation went well, you may suggest having a 3rd party present for subsequent meetings in order to help facilitate discussion. Look for their most trusted advisor – whether a financial planner, banker, accountant or attorney. If they don’t have a most trusted advisor, look for a Certified Exit Planning Advisor (CEPA), as they have a deep understanding of common concerns, as well as strategies to move forward.
  7. Just do it. We all want to avoid having the difficult conversations – its human nature. Most will avoid it, ignore it, and make excuses not to do it. Be one of the few. You aren’t doing it for yourself, you’re doing it for someone you care about. Someone who is woefully unprepared. Someone who’s future happiness depends on you Starting the Conversation. Your choices will make the difference between implementing a successful exit or the destruction of a lifetime of work.

Thinking about the future can seem overwhelming. But, it doesn’t have to. At Epiphany Law, we partner with our clients and their families to help them find the best path forward. We are known for helping family business owners navigate complex issues and find innovative solutions. To learn more about how we can help your family business write its next chapter, call us at 920-996-0000 or contact us here.

Exit Planning: When to start?

 

Legal matters, business strategy, and life perspectives from the mind of a non-attorney.

A few weeks ago, we sent out emails to several business owners, inviting them to attend a presentation on Exit Planning. We met our desired room capacity pretty quickly, but we did get a few responses like this:

  • “I’m not exiting my business for 3 or 4 years, I’ll attend the presentation then.”
  • “We aren’t exiting until next year. Will you be doing this again in 6 months?”

Two separate business owners made a conscious decision to delay attending this kind of presentation until their exit is at arm’s length.

As a person who is very educated on what Exit Planning is and how much work it takes, let’s just say those decisions scare the s*** out of me.

Yes, I know, there is a certain contingent of business owners who simply cannot – and will not – mentally or emotionally handle the task of planning for their exit. In fact, we even wrote a blog about it: Exit Planning: Why Do Business Owners Avoid It? Bottom line: It’s just too much for them, so they stick their heads in the sand.

Those responses we got – you know, a few weeks ago after the presentation – those felt different. To my mind, it feels like those business owners actually think it is OK to wait longer than they already have. Like, with the rational part of their brain.

They weren’t being emotional, afraid, or willfully negligent.

It seems like they were just living their reality.

If that is the case, I have failed you all miserably.

Why?

The truth is, executing an Exit Plan takes a hell of a lot longer than 6-12 months. If you wait until then to even start LEARNING about Exit Planning, you are way behind the 8 ball. You are asking for disaster. I’m not saying you are S.O.L, but I AM SAYING that you have effectively put the ball in someone else’s court and left value – i.e. MONEY – on the table.

Really?

Yep.

Okay… So how long DOES it take?

Internal Transition

First of all, did you know there are really only four (4) practical ways that you can transition a business internally?

  1. Intergenerational Transfer: The transfer of a business to direct heirs, usually children. About 50% of business owners want to exercise this option; only 30% do it successfully.
  2. Management Buyout: Owner sells all or part of the business to the company’s management team. Management uses the assets of the business to finance a significant portion of the purchase price.
  3. ESOP: Company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees.
  4. Sale to Existing Partners.

Here’s the deal: If I’m going to be your Exit Planner, and you are considering an Internal Transition of any kind, I want our initial meeting to be at least 10 years prior to your exit.

You heard me. 10 years.

Why? 2 Reasons.

  1. In all likelihood, you are not just GIVING this thing away. And you want cash at closing, not a promise to pay.
  2. In all likelihood, the person(s) you are selling it to can’t afford to buy it, and wouldn’t be able to secure financing.

If you come meet with me 10 years in advance, we can create a pot of money for your successor(s). The concept is simple: Money gets bonus-ed into the pot if – and only if – they achieve predetermined objectives that help you grow the value of the business. Pick your scenario:

  • Give successor(s) $0.00, have a company worth $2,000,000. In 10 years, receive a 20 year note and a $150,000 first year payment.
  • Give successor(s) $1,000,000.00, have a company worth $3,000,000. In 10 years, receive $2,000,000 and a 10 year note for the balance.

I know which one I’d pick.

If you come meet with me 5 years in advance, we cannot do that.

If you come meet with me somewhere in between, the numbers might work. They might not. It’s anybody’s guess.

External Sale

If you’re planning to pursue a sale to a third party, I will be thrilled if you give me a 5 year runway to work with.

You see, Exit Planning is a lot like flipping a house:

If you give me 5 years, we can update everything: new hardwoods, appliances, siding, and roofing. We can check the plumbing and electrical. We can remodel the kitchen and master bedroom. Hell, we can even toss on an addition. And the best news: All of that will be done in 2-3 years, giving us the opportunity to truly pick our spot and capitalize on favorable market conditions when they are present.

If you give me 3 years, we can still make a ton of updates. The house will truly be in great shape for buyers. Only problem: you aren’t giving yourself any time to play the market. Once the house is ready, you’re going up for sale, whether it’s a buyer’s market or a seller’s market.

If you give me 1 year, we can update a handful of things and slap on a fresh coat of paint. That’s it. Smart buyers – yes most of them are smart – are going to try and poke holes to drive the price down.

I know what you’re thinking: “Yeah, remodeling makes everything look great, but it ain’t free either. Is it really worth the investment?”

  • For most of you it’s going to mean the difference between a business that sells and one that sits on the market for 2 years before getting liquidated because nobody wants it.
  • We track ROI for our clients. We’ve never had someone come out in the negative. We generally EXPECT our clients to earn at least 30% on their investments in Exit Planning by the time it’s all said and done.

Getting Started

We generally kick off the process with a complimentary “exploratory” meeting. You’ll have the opportunity to ask questions and help us understand your true desires.

Assuming all parties agree to move forward, we jump into “Benchmarking” your business.

To stick with the remodeling analogy, it’s the basic equivalent of obtaining a real estate appraisal – on steroids. Yes, we deliver you with an estimate of value based on your financials. We also take it 5 steps further. We give you insight that says, “Hey, someone is going to fall in love with this house and pay 20% more if you gut the basement clean, paint the stairwell olive green and put a giant picture of Aaron Rodgers in the family room.”

At that point, whether you hire us to gut the basement and paint the stairwell, contract it out to someone else, or ignore our advice is entirely your prerogative.

 

Exit Planning: Why do Business Owners Avoid it?

Science has proved it to be an urban myth, but it was long believed that ostriches buried their heads in the ground at the sight of approaching danger.

Thus, the phrase “You have your head in the sand”, was born. It means: “To refuse to acknowledge or deal with problems, danger, or difficulty in the hopes that they will resolve themselves on their own.”

Business owners are notorious for “burying their heads in the sand” as they near the end of their runway. But why?

When so much can be gained by sucking it up and planning for an exit, why do business owners avoid it?

In no particular order, here are several reasons:

  1. Afraid of getting old. Exiting the business represents “the end” of youth.
  2. Feel trapped. Used to a high level of income that accompanies business ownership. Afraid that they will have to take a “pay cut” in the last chapter of their lives. The tendency is to stay in the business, pulling off a heavy salary, as long as possible.
  3. Don’t know what to do next. Don’t have a purpose in life after work. Business is their identity.
  4. Afraid of being bored.
  5. Don’t want anyone to know they are planning to exit their business. They have an irrational fear that employees, customers, suppliers will leave if they find out a transition is happening. In reality, these people are already thinking about the business owner’s eventual retirement, and they would feel more comfortable if they knew the strategy for moving forward after you are gone.
  6. Have priorities that feel way more urgent than exit planning. “I don’t even have enough time in the day to run my business, how am I supposed to have time to plan for an exit”. This is the classic “saving face” excuse that many business owners are willing to voice when they don’t want to discuss their soft/emotional apprehension toward leaving the business.
  7. Misinformed and confused about what to do. In a world where most professional services have stood as pillars of industry for hundreds of years, Exit Planning is still in its infancy as a practice. It’s an incredibly confusing and very time-consuming process. And different advisors preach different things. Unfortunately, many advisors right now are taking a micro-view of “Exit Planning” that fits their personal expertise, because there is money to be made if they can play a role in an owner’s exit. For example, a financial advisor may map out a business owner’s projected retirement assets/expenses + reallocate their investment portfolio and call it “Exit Planning”. This is not Exit Planning. It is a very small piece of the much larger Exit Planning process.
  8. Genuinely don’t want to exit. They still have the drive for it. They still thoroughly enjoy what they do. Can’t even comprehend leaving in the next 10 years. This doesn’t mean they shouldn’t familiarize themselves with the Exit Planning process. There are certain concepts – particularly in the area of risk management – that all business owners should implement correctly many years before they feel “ready”. Taking some time to understand the process – to understand what buyers are looking for – can afford business owners a strategic advantage.
  9. Control issues. Some business owners are simply attached to the operations. Can’t let go, even if there are people in place, ready to assume more responsibility. If they aren’t in place, it usually is a simple process to cross-train people to assume more responsibility or hire an additional employee to assume some of the burden.
  10. Don’t understand all the options available to them. Many business owners have very misguided beliefs about the market for their business. A common mistake is to ignore a sale to employees because they “don’t have any money”. In many cases, if time is on the owner’s side, there are strategic ways of helping employees build capital.
  11. Heir-apparent (successor) is not working out. The most common situation is that the owner’s “heir-apparent” child does not possess all the qualities that the owner would like to see. In some cases, the concerns are valid. In other cases, the owner is being overly-critical. Regardless, owners whose heir-apparent isn’t “just so” undergo a great deal of emotional turmoil as they grapple with “what to do”.
  12. Can’t figure out how to be “fair” to everyone, including: children, spouses, employees, etc.

 

Fear and other emotional distresses play huge roles in a business owner’s decisions near the end of their runway. It’s common for the owner to vocalize a “rational” reason (like #6) to others, while concealing the true reason. The sad and unfortunate truth is that many business owners never work up the courage to face the true source of their distress. They simply avoid the situation entirely until they are forced from the business by some health-related factor. Businesses rarely survive that situation.

Question for the Crowd: Do you have personal experience dealing with an owner who stuck their head in the sand near the end of their runway? We would love to hear your story! Tell us what your role was (employee, child, spouse, etc.) and what you think the owner was avoiding. Is there anything you could have done to help the situation?  Please comment below or send an email to marketing@epiphanylaw.com (Re: Head in the sand) and we will post your comments anonymously.

Business Owners: There’s No Time Like the Present

The biggest asset for many small business owners is the value of their business and they count on it for retirement funds. However, most of those owners do not actually know the value of the business. How will they know when they can stop working or what to expect in retirement?

Having the information needed to prepare adequately for retirement is just one of the many benefits to a business valuation. Here are several others:

  • Increase value. In life, what is measured improves – this applies equally to business valuation.
  • Capital infusion. To raise money on the right terms you need to know your value.
  • Mergers & Acquisitions. You need certainty on your value to properly negotiate a deal.
  • Exit of an Owner. The more you understand the value, the more likely you will be to reach an amicable split.
  • Too often people guess or estimate and one side or the other losses.
  • Tax strategies. Good tax and financial planning requires beginning with good data. The best plan in the world won’t do you much good if the initial assumptions about value of your assets was wrong.
  • Employee incentive programs. Companies with employee incentive plans may want or need to share value information each year with employees.
  • Insurance planning. Many small businesses do not have adequate insurance coverage. In order to get adequate coverage, you need to know how much value you are covering.

Many business owners avoid valuation because traditionally it has involved an extensive, expensive, and invasive process. Epiphany Law is different and our technology has changed the process. Now we can provide a valuation report that costs a fraction of the traditional model and takes a fraction of the time.

To get started on your business valuation, simply go to https://epiphanylaw.bizequity.com/.