Small Group Counseling – Exit Strategy: Planning for Your Retirement

Women’s Enterprise Development Center

Ted Zink, Partner -- McCarthy Fingar LLP July 29, 2016

INTRODUCTION

• WILL COVER THE FOLLOWING TOPICS– THREE “UNIVERSAL” EXIT GOALS – YOUR “GAP”– THE CONCEPT OF “TRANSFERABLE VALUE”– BUILDING TRANSFERABLE VALUE AND CLOSING THE

“GAP”– EXIT PATHS– POST-EXIT INVESTMENT AND PRESERVATION OF VALUE– SOME “NEXT STEPS”

BACKGROUND

• YOUR EXIT IS “INEVITABLE”• 7 OUT OF 10 BUSINESS OWNERS WANT TO

EXIT THE BUSINESS WITHIN THE NEXT 10 YEARS

• ONLY 1 OUT OF 10 HAVE A WRITTEN PLAN ON HOW TO EXIT

INTRODUCTION

• PERHAPS THE MOST SIGNIFICANT TRANSACTION OF YOUR FINANCIAL LIFE

• IF NOT PREPARED (THE “BIG THREE”)– CAN’T LEAVE WHEN YOU WANT– WITH THE MONEY YOU NEED– OR LEAVE THE BUSINESS TO THE PERSON YOU

CHOOSE

INTRODUCTION

• THE IDEAL– LEAVE THE BUSINESS TO THE SUCCESSOR OWNER

YOU’VE CHOSEN– ON THE DATE YOU’VE PICKED– WITH ENOUGH MONEY TO SATISFY YOUR NEEDS

AND WANTS FOR THE REST OF YOUR LIFE

INTRODUCTION

• IMPORTANCE OF PLANNING• WHAT IF SOMEONE OFFERED YOU $2 MILLION

FOR YOUR BUSINESS NEXT WEDNESDAY?

INTRODUCTION

– DO YOU REJECT THE OFFER BECAUSE YOU CANNOT EVALUATE ITS MERITS -- AND RUN THE RISK THAT THE OFFER IS THE ONLY ONE YOU WILL EVER RECEIVE?

– EXIT IS NOT AN ISOLATED EVENT – IT IS A DYNAMIC PROCESS THAT CAN TAKE 2 TO 3 AND PERHAPS AS LONG AS 10 YEARS

INTRODUCTION

• THINK OF THE EXIT PROCESS IN THREE STEPSSTEP ONE: BUILD VALUESTEP TWO: MONETIZE VALUESTEP THREE: PRESERVE VALUE

INTRODUCTION

• ASSESS WHAT FINANCIAL RESOURCES YOU HAVE NOW– THE BUSINESS ITSELF– PERSONAL ASSETS

– DETERMINE WHAT YOU’LL NEED IN RETIREMENT – COMPARE WHAT YOU HAVE TO WHAT YOU’LL NEED– THE DIFFERENCE IS YOUR “GAP”– YOU WANT TO CLOSE THE GAP

INTRODUCTION

• GOALS EVERY0NE HAS (UNIVERSAL)– ACHIEVING FINANCIAL SECURITY OR

INDEPENDENCE– DEPARTURE DATE – LEAVING THE BUSINESS AT

THE RIGHT TIME FOR YOU – AND THE BUSINESS– FINDING THE RIGHT SUCCESSOR OWNER

FINANCIAL SECURITY

• CONTINUE WITH YOUR CURRENT LIFESTYLE?• OR SOMETHING MORE?• IN A PERFECT WORLD: ACHIEVE FINANCIAL

INDEPENDENCE NO LATER THAN THE DATE YOU GIVE UP CONTROL OF THE BUSINESS

FINANCIAL SECURITY

• HOW MUCH $$ DO YOU WANT?• WANT VERSUS NEED• FINANCIAL PLANNER CAN HELP YOU

DETERMINE WHAT YOU NEED (THE IMPORTANCE OF WORKING WITH A FINANCIAL PLANNER NOW)

DEPARTURE DATE

• MAY BE SECONDARY TO ACHIEVING FINANCIAL INDEPENDENCE

• DETERMINES, IN PART, YOUR ROADMAP TO EXIT

• HOW LONG DO YOU HAVE TO BUILD THE VALUE YOU NEED?

DEPARTURE DATE

• MANY VARIABLES– TAX INCREASES– ECONOMIC RECESSION– HEALTH– RESIGNATIONS OF KEY EMPLOYEES– CHANGES IN CONSUMER TASTES AND

TECHNOLOGY

DESIRED SUCCESSOR

• CHILDREN?• OTHER FAMILY MEMBERS?• KEY EMPLOYEES?• THIRD-PARTY BUYER?

DESIRED SUCCESSOR

• SOME THINGS TO CONSIDER WHEN CHOOSING TO WHOM YOU WANT TO LEAVE THE BUSINESS– FAMILY HARMONY– YOUR LEGACY– ACKNOWLEDGING EMPLOYEES– TAKING BUSINESS TO NEXT LEVEL– MAINTAIN CULTURE– COMMUNITY INVOLVEMENT– QUALITY RETIREMENT

SOME GENERAL RECOMMENDATIONS

• DON’T POSTPONE PLANNING UNTIL ALL GOALS ARE SET IN STONE

• AS YOU GAIN CLARITY, YOU MAY WANT TO CHANGE YOUR GOALS

• CONSIDER ASSEMBLING A TEAM OF PROFESSIONALS TO HELP

POSSIBLE TEAM MEMBERS

• VALUATION EXPERT• MANAGEMENT CONSULTANT• INVESTMENT BANKER/BUSINESS BROKER• TAX SPECIALIST (CPA OR LAWYER)• TRANSACTIONAL LAWYER• TRUST AND ESTATES LAWYER• PERSONAL FINANCIAL PLANNER• PUBLIC RELATIONS SPECIALIST

KEY CONCEPT

• “TRANSFERABLE VALUE”• TRANSFERABLE VALUE IS WHAT

YOUR BUSINESS IS WORTH, TO SOMEONE ELSE, WITHOUT YOU

• TRANSFERABLE VALUE IS THE PRINCIPAL DETERMINANT OF YOUR SUCCESSFUL EXIT

BUILD VALUE TO CLOSE THE “GAP”

• HOW TO INCREASE:– TRANSFERABLE VALUE– CASH FLOW– EBITDA

VALUE DRIVERS

• TRANSFERABLE VALUE IS A FUNCTION OF TWO KEY NUMBERS:– EBITDA, AND– MULTIPLE (USUALLY 4 TO 7 TIMES FOR

BUSINESSES WITH REVENUES BETWEEN $5 AND $150 MILLION; 2 TO 3 TIMES FOR BUSINESSES WITH LESS THAN $5 MILLION)

VALUE DRIVERS

• EBITDA = EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION

• MULTIPLE IS FUNCTION OF THE NUMBER AND STRENGHT OF “VALUE DRIVERS” YOUR BUSINESS HAS

PRIMARY VALUE DRIVERS• NEXT-LEVEL MANAGEMENT• OPERATING SYSTEMS THAT INCREASE SUSTAINABILITY OF

CASH FLOWS• DIVERSIFIED CUSTOMER BASE• PROVEN GROWTH STRATEGY• RECURRING REVENUE• GOOD AND IMPROVING CASH FLOW• DEMONSTRATED SCALABILITY• COMPETITIVE ADVANTAGE • FINANCIAL PREDICTABILITY AND CONTROL

NEXT LEVEL MANAGEMENT

• CAN YOUR EXISTING MANAGEMENT TEAM TAKE THE BUSINESS TO THE NEXT LEVEL?

• IF NOT, CONSIDER IMPROVING MANAGEMENT TEAM WITH DEMONSTRATED TALENT

• ATTRACT AND RETAIN NEXT-LEVEL MANAGEMENT

• MANAGEMENT CONSULTANTS TO ASSESS AND TRAIN

OPERATING SYSTEMS

• E-MYTH REVISTED (BUILD A FRANCHISE)– REPEATABLE AND STANDARDIZED PROCESSES AND

SYSTEMS IN ALL ASPECTS OF THE BUSINESS TO ENABLE SCALING WITHOUT SIGINFICANT ADDITIONAL INVESTMENT

DIVERSIFIED CUSTOMER BASE

• NO SINGLE CLIENT ACCOUNTS FOR MORE THAN 10% OF SALES

• AVOID CUSTOMER CONCENTRATION• CONSIDER NEW AND PROFITABLE MARKETS

PROVEN GROWTH STRATEGY

• WRITTEN PLAN ON HOW TO ACHIEVE GROWTH GIVEN INDUSTRY DYNAMICS AND DEMAND FOR YOUR COMPANY’S PRODUCTS

• NEXT-LEVEL MANAGEMENT AND PROVEN GROWTH STRATEGY PARTICULARLY POWERFUL

• OUTSIDE CONSULTANT TO IMPROVE SALES FUNCTION

RECURRING REVENUE AND PRODUCTS RESISTANT TO COMMODIZATION

• RECURRING REVENUE IS A HIGHLY VALUED DRIVER FOR ANY BUSINESS– DETERGENT VS. WASHING MACHINE– RAZOR BLADES VS. ELECTRIC RAZOR– “TOLL BOOTH’ TYPE BUSINESS

• PRICING MARGINS RESISTANT TO COMMODIZATION– BUYERS WILL PAY MORE FOR DIFFERENTIATED

PRODUCTS

DEMONSTRATED SCALABILITY

• MAINTAIN AND IMPROVE PROFITABILITY AS REVENUE INCREASES

• BUYERS DEMAND SCALABILITY BECAUSE THEY ARE ONLY INTERESTED IN BUYING BUSINESS IF THEY BELIEVE IT CAN GROW WITHOUT SIGNIFICANT ADDITIONAL INVESTMENT

• FOR EXAMPLE “SEE’S CANDY”

COMPETITIVE ADVANTAGE

• WHY YOUR CUSTOMERS BUY FROM YOU INSTEAD OF FROM YOUR COMPETITORS

• COMPETITIVE ADVANTAGE IS BEST DEMONSTRATED BY HIGH GROSS MARGIN IN RELATION TO YOUR COMPETITORS

• DON’T WANT TO COMPETE ON PRICE ALONE

COMPETIVE ADVANTAGES

• EXAMPLES OF COMPETITIVE ADVANTAGE– UNIQUE PRODUCT OR SERVICE– PATENT– TRADEMARK– EXCLUSIVE ACCESS TO NECESSARY RAW MATERIAL– EXCLUSIVE ACCESS TO IMPORTANT DISTRIBUTION

CHANNELS– PERMIT– FRANCHISE

FINANCIAL PREDICTABILITY AND CONTROLS

• THE IMPORTANCE OF RELIABLE FINANCIAL REPORTING, WITHOUT WHICH BUYERS WILL NOT BE INTERESTED

• NEED CONTROLS SO THAT GROWTH DOES NOT CONSUME THE BUSINESS

EXIT PATHS

• SALE TO MANAGEMENT TEAM OR CO-OWNER (MOST COMMON)

• TRANSFER TO CHILDREN (VERY FEW BUSINESSES SURVIVE A TRANSITION TO THE NEXT GENERATION)(START EARLY GETTING YOUR HEIRS INVOLVED)

• SALE TO THIRD-PARTY BUYER• ESOP• SHUTTING DOORS AND LIQUIDATING BECAUSE

YOUR COMPANY IS NOT TRANSFERABLE

CRITERIA ON WHICH TO ASSESS THE RELATIVE MERITS OF VARIOUS EXIT PATHS

• FINANCIAL SECURITY• TIME FACTOR• TIME MARGIN• TAX CONSEQUENCES• VALUE BASED GOALS• SUCCESSOR

FINANCIAL SECURITY

• STRUCTURE FLEXIBILITY• ABILITY TO CONTINUE TO REAP BENEFITS AND

SHARE IN GROWTH PENDING CONSUMMATION

• MANAGEMENT BUY-IN, ENTHUSIASM AND MOTIVATION TO ACCELERATE VALUE CREATION

TIME FACTOR

• LENGTH OF PHASE OUT AND ISSUES THAT CAN ARISE BEFORE CONSUMMATION

• OPTIONALITY

TIME MARGIN

• DOES THE PATH ALLOW YOU TIME TO SCALE BACK AND REALLY CONSIDER YOUR POST-EXIT OPTIONS?

• DOES PATH ALLOW MANAGEMENT TIME TO ADJUST TO THE NEW “STATUS QUO?”

TAX CONSEQUENCES

• OFTEN THE KEY CRITERION

VALUE-BASED GOALS

• LEGACY AND CULTURE• BENEFITS TO EMPLOYEES• FAMILY HARMONY

SUCCESSOR

• MAY BE THE MOST SIGNIFICANT AND DIFFICULT DECISION

ASSESSMENTTransfer to Insiders

Transfer to Family

Sale to Third Party

Sale to ESOP

This method appeals to me because:This method might be appropriate for my business because:This method might be appropriate for me because:This method is only appropriate under the following conditions:This method is inappropriate for me and my business because:

RANKING THE EXIT PATHSTransfer to Insiders

Transfer to Family

Sale to Third-Party

Sale to ESOP

Financial SecurityThe Time FactorThe Time MarginTax ConsequencesValue-Based GoalsSuccessor

PRESERVING VALUE

• FINANCIAL PLANNER CAN OFTEN PROVIDE INVALUABLE ASSISTANCE IN HELPING YOU ACHIEVE FINANCIAL GOALS

• “PRESERVATION” IS THE KEY

NEXT STEPS• IMPROVE THE ACCURACY AND TIMELINESS OF YOUR RECORD-KEEPING• TRANSFORM YOUR COMPANY’S REVENUE STRUCTURE INTO A RECURRING

REVENUE MODEL• REFRAIN FROM TREATING YOUR COMPANY AS AN ATM FOR PERSONAL AND

FAMILY EXPENSES• REDUCE CUSTOMER CONCENTRATION• ELIMINATE WASTE AND INEFFICIENCY IN COMPANY’S OPERATIONS• BUILD A STRONG TEAM OF MANAGERS• CREATE SYSTEMS AND PROCEDURES• GET YOUR CORPORATE MINUTES AND RECORDS UP-TO-DATE AND

COMPLETE• CREATE A REALISTIC AND ACHIEVABLE GROWTH STRATEGY• MAKE YOURSELF EXPENDABLE

ACKNOWLEDGMENT

• “EXIT PLANNING: THE DEFINITIVE GUIDE”SELL YOUR BUSINESS WHEN YOU WANT, FOR THE MONEY YOU NEED, TO THE PERSON YOU CHOOSEJOHN H. BROWNCEO OF BUSINESS ENTERPRISE INSTITUTE

ADDITIONAL RESOURCES

• WALK AWAY WEALTHY – THE ENTREPRENEUR’S EXIT PLANNING PLAYBOOK, by Mark M. Tepper