Mapping Your Business Exit Strategy: Business Exit and Succession Planning

Presented by Jeff Vekony -

Business and Executive Coach, FocalPoint Business Coaching

Jeff Vekony -

Certified FocalPoint

Business/Executive

Coach & Trainer

Certified FocalPoint Business and Executive Coach

MBA from the University of Chicago (with a focus on Marketing and Business Policy & Strategy) and Bachelor of Science in Electrical Engineering (BSEE) from Case Western Reserve University in Cleveland, OH

30+ years of sales, sales management, business development

and strategic planning experience. As a FocalPoint Business Coach, focused on helping business

owners and executives improve their businesses and their lives by helping them gain a new or renewed focus and clarity on their goals and strategic vision, improve their time & task management and leadership skills, build more effective work teams, increase revenues through sales and marketing training and defining and executing on plans for business succession and exit strategies.

Presentation Topics

• The Importance of Proper Business Exit Planning, The Pending Boomer Exit and The Need

to Increase the Value of Your Business • EBITDA and the Value Drivers For Your Business • Types of Business Buyers • Business Succession/Exit Options To Consider and Advantages and Disadvantages Of Each • The Exit Planning Team • The Exit Planning Process, LOI, Due diligence and the Sales Purchase Agreement • FocalPoint Overview – The Value of Business Coaching and Key Concepts

Will Departing Business Owners Be Leaving A Lasting Legacy In Their Community?....

And Helping Maintain A Thriving Town When They Exit Their Business?.....

VS.

• The sale or transition of a business will likely be the single largest and most important financial transaction of a business owner’s life………and it’s level of success will impact the rest of their life in retirement.

• Mapping out a successful plan to exit the business can help business owners:

• Avoid unnecessary or excessive taxes • Minimize risk during the transition • Realize the full value for their life’s work

• In recent years only 20 to 30% of businesses listed for sale ended up being sold……And many of them

did not sell for what the owners initially thought they were worth.

• The failure to plan and manage succession well is the greatest threat to the survival of a family business:

• 41% of family businesses plan to pass ownership and management of their business to the next generation in the family

• Yet…..only 30% of family businesses last into the 2nd generation, only 12% into the 3rd generation and only 3% into the 4th generation and beyond.

• The key to exit planning is that it isn’t actually about the exit itself…….it’s about the planning for the

exit…..the staging process that leads to a happy ending for the business owner, bringing them maximum value for the business when it’s sold.

63% of private U.S. businesses are currently owned by Baby Boomers The average age of Baby Boomer’s is now 60 years old 80-90% of their wealth is tied up in their businesses 76% will transition these businesses within 10 years, 48% within 5 years 4.5 million businesses…….$10 trillion of wealth……..to be transitioned/exited in the next

10 years 76% of those owners aren’t aware of or don’t understand their transition options 88% do not have a formal transition team in place 86% have no formal education or training related to business transition 50% have no plans regarding what they’ll do post business transition/exit

CLEAR MESSAGE………There is a HUGE need for business exit planning and

education with Baby Boomer (and all) business owners

A majority of businesses don’t sell, yet most of their owner’s personal wealth is in the business

A successful business exit strategy includes 5 key ingredients:

1) A written exit plan, and related documentation, based on the owner’s objectives

2) A team of professional advisors to each help with their areas of expertise

(Business Coach, Attorney, CPA/Accountant, Financial Advisor, Banker, Insurance Advisor, Business Broker, etc.)

1) Positive cash flow in the business and determining a quantified business value 1) A strong management team 1) Enough time to prepare for a successful exit (typically planning 3-5 years,

minimum, in advance of an exit…..the more time prior to the owner’s planned retirement age, the better)

• Who knows what the “Baby Boomer Generation” is?

The Baby Boomer generation are those people born from 1946 through 1964. As of 2017, they are now ranging in age from 53-71 years old. Starting in 2013, the first of the

Boomers reached age 67, the typical age of retirement.

• The Baby Boomers have had a SIGNIFICANT impact and caused a major cultural and economic shift in everything related to their lives……

Between 1945 and 1957 the annual number of new births in the country increased by 53%, from 2.8 million to 4.3 million…..new schools couldn’t be built fast enough to support all of these new kids.

From 1966, when the first Boomers turned 21, through 1975, the rate of college graduations in the US tripled on an annual basis, from just over 600,000 to 1,700,000 per year.

The Boomers went info a very competitive workforce full of many others with similar qualifications.

This led to many Boomers going into business for themselves… From 1975, when the first Boomers turned 30, until 1986, the formation of new businesses in

America increased from 300,000 to 700,000 per year. By 1990 when the oldest Boomers turned 45, the number of new business formations fell back to 600,000 annually and has remained there since.

• As the US population grew from 190 million to 310 million, the number of new business start-ups in that time has remained flat. The next-generation is not opening as many new businesses at the rate that the Boomers did for years…..

• Who knows in what years Generation X’ers were born? 1965 through 1984

• Who knows why they’re called “Generation X”?

• With their focus on higher education and their careers, the Baby Boomers delayed their marriages and child-bearing years and broke the mold of having larger families starting in their early 20’s.

• As a result, the 10th generation born as United States citizens (known by their Roman numeral as “Generation X”) was smaller than the Boomers that preceded them by almost 10,000,000 people.

• Generation X’ers will be the group of likely buyers of the businesses that the Baby Boomers are starting to exit as they begin their retirement years.

• Based on Boomer and Generation X birthrates, in the upcoming years of 2018 through 2022,

when the largest group of Boomers will be reaching 65 years old, almost 5 million fewer Gen X’ers (23% fewer) will be turning 45, and entering their prime business buying years.

• This will have a significant impact on the pricing and competition for selling businesses

when there will be 3 buyers for every 4 sellers. We’re rapidly approaching the worst imbalance between small business sellers and potential buyers in history, and this will continue for the next 20 years.

• Business owners wanting to sell their business in this competitive marketplace must increase the value of their business and be taking the following steps to do this now:

Training employees Developing managers Documenting systems Increasing sales and profits Developing long-term customer relationships and recurring revenue Creating a competitive advantage Building a business that doesn’t need you to be in it to be successful

• You must START YOUR EXIT PLANNING NOW

• This process often takes 3-5 years. With effective business coaching this can be

accelerated and often done in 12 months or less.

• Business coaching will help you define your goals and implement the plan and steps needed to successfully do this……

Valuation| How is “True Cash Flow” Calculated

EBITDA is commonly used as a proxy for Cash Flow

E arnings

B efore

I nterest

T axes

D epreciation and

A mortization

Valuation| What’s a Good EBITDA

Private Equity Firm’s Expectations: Revenue: $5,000,000 EBITDA:

• $500,000 or 10% ….. Good / OK • $750,000 or 15% ….. Very Good • $1,000,000 or 20% ….. Great

(Note: FocalPoint Finance benchmark reports can help with determining and analyzing this)

Valuation| What is Risk?

Risk factors are the things that make your business “unattractive” compared to other options for the potential buyer

Or

Focusing on the positive:

What makes your business interesting and attractive?

What Are Your Value Drivers?

Valuation| Examples of Value Drivers

• Industry (growing, interesting) • Company Growth • Revenue Model (recurring or not) • Customer Risk (1 customer = 10% + of total revenue) • Financial Statement (Quality) • Team ( I vs. We) • Systems • Competition • Intellectual Property (Secret Sauce)

These are just a few……

Quick Value Assessment Scorecard

1 Industry Rating

0. Industry in decline 5. Mature industry - slight growth 10.Industry in rapid growth

2 Company Rating 0. Start up 5. Established - good infrastructure 10.Well established - very good reputation

3 Product/Service Rating 0. New - no customer experience 5. Solid - good customer feedback 10.Dominant product/service in market

4 Personnel Rating 0. We have no key employees - high turnover 5. We have 1 key employee and are training more 10.We have several well trained key employees

5 Competition Rating 0. Low cost of entry - highly competitive 5. Average amount of competition 10.High cost of entry - little competition

6 Company Growth Rating 0. Declining revenues 5. Steady 5-10% growth 10.Rapid growth

7 Recurring Revenues 0. No recurring revenues 5. Revenues 50% recurring 10.Revenues 100% recurring

8 Financial Presentation Rating 0. No internal or CPA financials 5. Some financials - not audited 10.Complete audited financials

9 Systems Rating 0. No system documentation or automation 5. Limited system documentation and automation 10.Systems well documented and automated

10 Customer Base Rating 0. Very dependent on single or few customers 5. Top 10 customers less than 50% of revenue 10.Revenue evenly distributed among customers

11 Lease Rating 0. Business location dependent - no lease 5. Rent predetermined with 5 year lease 10.Building owned or 12 year lease with predetermined rent

12 Supplier Rating 0. No relationship, no backup, and no contracts with suppliers 5. Some relationship, backup, and contracts with suppliers 10.Good relationship, backups , and contracts with all suppliers

13 Scalability Rating 0. Significant expense required for growth 5. Some growth possible without added capital expense 10.Rapid growth possible without capital infusion

14 Operating Ratios Rating 0. All operating ratios below industry norms 5. Most operating ratios slightly better than industry norms 10.All operating ratios well above industry norms

15 Liquidity Ratios Rating 0. Company burdened with heavy debt 5. Most liquidity ratios slightly better than industry norms 10.Liquidity ratios well above industry norms

16 Bankability Rating 0. Lenders unwilling to fund growth or transfer 5. Limited financing available 10.Substantial financing available

17 Intellectual Property Rating 0. No IP & no special skills 5. Some IP & limited special skills 10.Company has patents, copyrights, & special skills

Quick Value Assessment Scorecard Summary

TOTAL SCORE_______ • Your total score can give you a general benchmark of what your risk rate or

capitalization rate. If your score is:

• Greater that 130- your risk or capitalization rate would be between 15-25% (Low Risk)

• Greater than 105 – your risk or capitalization rate would be between 22-30% (Medium Risk)

• Greater than 60 – your risk or capitalization rate would be 30-50% (Higher Risk)

• This is only a general indicator. More importantly…… identify areas where you

scored low and put a plan in place to remove that barrier to value generation

Exit or Succession | 3 Types of Buyers

Strategic

• Fair market value +

• 18-36 months of marketing/selling

• Minimal seller involvement

Entrepreneurial

• Fair market value

• 6-18 months of marketing/selling

• Moderate to high level of seller involvement

Opportunistic

• Little as possible!

• 0-6 months of marketing/selling

• Zero to lots of seller enslavement

Which type of Buyer is your business positioned for?

Buyers Perspective| Prep for the Best Buyer

Goals:

• Prepare your business to match a buyer’s needs

• Maximize cash flow EBITDA

• Reduce Risk Enhance Value Drivers

• The greater the cash flow the greater the value and the lower the risk the greater the value

Exit Strategy….It Can Be Confusing…. Which route should you take?

Business Succession/Exit Options

• Transition or sell to family member(s) • Sell to employee(s), current managers or

other shareholders • Sell to a third party • Close the business (liquidation)

Transition or sell to family member(s)

Statistics show that 50 percent of typical business owners want to transfer their business to their children. In actuality, this happens with less than one-third of businesses. Because this option has a low success rate, a business owner considering this must also develop a contingency plan that involves transitioning the business to another type of buyer.

Advantages: • Personal goal……keeping the business and family together (family legacy). • Could provide financial well-being and a career to younger family members unable to earn a comparable

income from outside employment. • Could allow the original business owner to stay actively involved in the business with their children. • Could provide to the owner the luxury of determining how much he wants for the business.

Disadvantages: • May create or increase family discord and feelings of unequal treatment among siblings. • Family members cannot usually afford to pay cash at the business closing. As a result, the selling family

member has to accept payment for the business over time. • Financial security and business performance is often diminished over time (especially if the buying family

member cannot run it properly). • Family dynamics and issues may diminish the new owner’s control over the business and it’s operations

significantly.

Sell to employee(s), current managers or other shareholders

The business owner can sell all or part of the business to the company’s management team (or part of the team). This is done either as a Management Buyout (MBO) or Leveraged Buyout (LBO). In these cases the management team uses the assets of the business to finance a significant portion of the purchase price. If the business owner wants to sell the business to the company’s employees rather than just the management team, an Employee Stock Ownership Plan (ESOP) may provide a good means of cashing in a part of the owner’s interest in the business.

Advantages: • The business stays in the “extended family” who are familiar with it. • Fellow shareholders, current managers and/or employees don’t have to be convinced of the value of the

business. • Less risk because the management team and key employees may not be disrupted and can continue to

operate as they always have. • The shares for the ESOP are bought with pre-tax dollars and an ESOP is an employee benefit. • Owning shares in a company usually makes employees think and act like owners and increases their

productivity.

Disadvantages:

• The departing owner may be locked into selling his shares only to fellow shareholders, creating a limited market and depressing the company’s value.

• Owners may receive little or no cash from the sale up front. • May require the participation of an outside investor, which could cause cultural or management-style conflicts. • For ESOP’s they’re typically complicated and expensive to set up and maintain, and they’re generally suitable

only for a gradual exit over time.

Sell to a third party

A sale of a business to a third party can take many forms. The buyer may be a competitor, customer, or supplier in the same industry. Or they may be a private equity group, venture capital firm or institutional investor. These are all types of strategic buyers. A strategic buyer may be the solution for an owner who has a specific business goal that he cannot realize on his own. For a well-prepared business, this may be the best way for a business owner to cash out.

Advantages: • Sellers often receive a majority (or all) of the purchase price in cash at closing. • Typically results in the highest valuation for a business (usually the fair market value, if not more). • Offers a seller the potential of access to buyers with a strategic or synergistic motive for buying the business. • May be the best option for a business that is too valuable or too high-priced to be purchased by someone in

the “extended family”.

Disadvantages:

• An owner who desires to stay on after the sale to a third party may find himself in the role of employee rather than owner, which can be very difficult.

• Many times, these arrangements require the seller to finance a portion of the purchase price with a seller note. If little or no exit planning was done and the company isn’t properly prepared for sale, this could expose the seller to risk.

• This process typically takes 9-12 months (or more) to execute. • Could result in the loss of customers and employees.

Close the business (liquidation)

If there is nobody interested in buying a business, it may have to be shut down and all assets liquidated. In liquidation, the owner sells their assets, collects outstanding accounts receivable, pays their bills, and keep what remains, if anything, for themselves. Liquidation typically makes sense only if a business lacks sufficient income-producing capacity to support the investment required in the company’s assets. If the value of the assets is higher than the value of the business cash flow, nobody will pay more for the business than the value of the assets.

Advantages: • The process is fairly simple and fast. • The entire company doesn’t have to be liquidated. The owner may decide to liquidate only a portion of the

company and keep the more profitable parts intact.

Disadvantages:

• Liquidation usually results in the lowest possible value for a business because it reflects the fair market value of only the assets with no consideration for client or customer lists, employee knowledge, name or reputation, or any of the other intangible assets of the business.

• The cost of liquidating a company is almost as high as the cost of selling an operating business. • Employees and managers lose their jobs, and this will have a negative impact on the local community. • Any legacy and business value created over a long period of ownership of the business, disappear upon

liquidation.

Types of Purchase

• Asset vs. stock purchase • Buyers almost always want an asset deal (buying the assets not the

company “identity”) • C-Corp vs. S-Corp tax impact

• Leveraged buyout vs. seller-financing

3 Basic Structures (These determine the amount and timing of cash received):

• Cash (paid up front) • Seller Financed (the seller will usually want about 20% down

payment and the balance paid over 3-5 years) • Earn Outs/Hold-Back Clause (typically 10-30% of selling price)…..

A provision written into financial transactions whereby the seller of a business will receive additional payments based on the future performance of the business sold (advantageous for the buyer)

Your Exit Planning Team

Working with a group of professionals, each expert in their particular focus areas, will make the business exit process

go much smoother and be much more effective, while helping to bring you maximum value for your business.

The typical team consists of:

Business Coach:

• Helps determine the strategy and timeline for exiting of the business • Helps to determine the key value drivers for the business and what needs to be done to improve and maximize each of these • Helps to establish the key goals necessary to positively impact these areas and bring maximum performance and value to the business • Holds the business owner and their team accountable for executing on the goals and plans established • Will also bring continuity to the new business owners, after the business sale, to help continue the success and growth of the business

Attorney: • Will have a focus and expertise from a documentation perspective • Prepare or review buy-sell agreements, employment, incentive and compensation contracts, covenants not to compete and stock transfer agreements • Many attorneys are knowledgeable in tax matters as well

Certified Public Accountant/Accountant: • Focus on the tax implications and savings available in a business transition • Advise on the most favorable entity, sheltering income and inheritance issues • Many CPA’s are also knowledgeable about employee incentive and benefits programs

Financial Advisor/Wealth Manager: • Helps put together the plan for what mix of investments to place the proceeds of the business sale into after the sales transaction is complete • Based on the amount of money to be invested, your lifestyle choices and expected years to live after retirement, they’ll help determine how to best invest

to maximize your quality of life after the sale of your business

Banker: • Helps to evaluate financing options for the business buyer and arrange any financing needed for the business sale. • Will help with investment advice for the business seller, along with payoff of any remaining debts related to the business, etc.

How Long Does it Take to Sell A Business?

Once you decide you are going to sell:

• About 9 – 18 months:

• Prep (once decide to sell): 1-2 months

• Find Potential Buyers: 3-9 months

• Letter of Intent: 3 weeks – 2 months

• Due Diligence: 1-3 months

• Sales Purchase Agreement creation, financial terms finalized and signoff: 3-4 months

The Business Sales Process

1. Key Initial Meeting(s) • Initial inquiry/introductory meeting (if an outside buyer) • Many times arranged by a business broker, banker, coach, etc.

2. Letter of Intent (LOI) • 3 weeks to 2 months of meetings to finalize the LOI (3-10 meetings typically) • A Non-Disclosure Agreement (NDA) is often set up at the time the LOI is written

(usually done by the Seller’s Attorney) • Should document in the LOI any major terms that could become show stoppers in the

business selling process

3. Due diligence • Discovery period during which the buyer will dig through the business financial data,

HR records, contracts, customer agreements, IP filings, stock and ownership records, and may even interview key employees and customers.

• Usually lasts 30-90 days • Buyer should ask who the “top 10” customers are and if they can be contacted to get

their views on the business

4. Sales Purchase Agreement (SPA) • Typically written by the Seller’s Attorney at the end of the due diligence period

Typical Letter of Intent (LOI) Content

• Proposing a possible purchase of a business subject to the terms outlined in the LOI • Listing of all assets to be included in the purchase (attachment to the LOI) • Inventory to be included (if applicable) • The initially agreed upon purchase price for the business, including down payment and any hold-

back amounts or other adjustments over time that may be needed and agreed to • Non-compete Agreement for agreed upon period (1-2 years from closing date typical) • Term (period) of the due diligence discovery period and what records and other parts of the

business that the buyer wants to review • Planned closing period with agreed upon days after completion of due diligence period and/or loan

approval date • Term for seller to be available for ongoing help and support in the business and any compensation

to the seller for this (if applicable and as agreed to) • Any earnest money amount and terms • Clause regarding exclusive rights for the purchase of the business to this potential buyer for an

agreed upon term (of due diligence period typically) • Termination terms • Signatures by both parties

Typical Sales Purchase Agreement (SPA) Content

• The formal contract for selling/buying the business • Reasons for the Agreement • Terms for sale and purchase of the assets (including details of assets, inventory,

property, etc, included, along with the selling price, payment terms, etc) • Closing date and location • Deliverables at the closing • Representations and Warranties of the Seller • Representations and Warranties of the Buyer • Any closing contingencies • Listing of all assets as an attachment • Bill of Sale as an attachment • Non-Compete Agreement as an attachment • Any other legal terms and attachments as needed

Business Coaching Overview and Key Coaching Principles

What is a Business Coach Anyway?

3 Eyes of the Business Owner

From Michael Gerber, “The E-Myth Revisited”

Entrepreneur (Forward Looking - - Visionary - - Strategic View)

Manager (Backward/Data Looking - - Past Results)

Technician (Daily “Fire-Fighting” – Short-term Issues – 80% of time spent here typically)

3 Eyes of the Business Owner – Key Message

Work ON your business…..

not IN it

(as much as possible)

The Sigmoid Curve | Cycles and Phases

Learning Phase Growth Phase Decline Phase

Where are you, your staff, your business on this curve?

Opportunity Phase

Honeymoon

Trap

3 feet from

Gold Trap

Founder`s Trap

Success Trap Denial Trap

Goal Setting with SMART Goals!

Specific

Measurable

Aligned with your values

Realistic

Time-bound

Increased likelihood of achieving goals by 1000% if they are S.M.A.R.T.

If your goals are not SMART – you may get “anything”… or nothing at all

Four Essential Conditions for Change

1. You must want change.

2. You must be willing to change.

3. You must be able to continue to achieve change.

4. You must have some motivation

Towards Pleasure (Selling your business for maximum value when you

want to do this)

Away from Pain (Staying in business when you no longer want to and

running the risk of your business losing value)

Thank You…… For Further Discussion………..

Next possible steps……. • Hold a 90-minute Strategic Business Review to determine your goals and key areas

in the business to focus on for improvement and coaching (a free coaching session) • Complete the Quick Value Assessment Scorecard for your business to help

determine key areas for focus to help build up the business value and lower buyer risk.