Great Exit Planning Conference in Boston Oct 2-3

Thank you to John Leonetti and the staff of Pinnacle Equity Solutions for the great 2-day conference this past week.  Special thanks to Frank O’Shea, Mindy Jones and Jesse Giordano for their efforts on the Conference Committee organizing a great line up of learning and training experiences on industry topics, transactional information, sales and marketing, and best practices.  Also, thank you to all of the speakers, panelists and sponsors who made the event possible.  It was a great time interacting with current colleagues and meeting new ones.  The exit planning industry continues to emerge.

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“My Mental Readiness for an Exit is LOW”

A recent release of findings from an ongoing research effort being conducted by Pinnacle Equity Solutions, Inc., a national leader in the emerging field of exit planning, reveals that 85% of business owners who are considering a future exit from their privately-held business currently have a Low Mental Readiness for their exit.  This newsletter discusses these findings and provides insights for owners of privately-held businesses to learn how you might begin planning for your own business transition or exit in the future by knowing more about what your peers are thinking and doing. 


Exiting Your Business, Protecting Your Wealth – Financial and Mental Readiness

In October of 2008, John Wiley & Sons published John Leonetti’s book, Exiting Your Business, Protecting Your Wealth – A Strategic Guide to Owners and Their Advisors.  This seminal book on the topic of exit planning provided a system for owners and their professional advisors to plan a business exit.  This exit planning system provides two (2) initial components that an owner should assess – their Financial Readiness and their Mental Readiness for a future business exit.

An owner’s Financial Readiness is simply a measurement of the amount of wealth that is held outside of their business, and/or other sources of income, that can pay for maintenance of their lifestyle.

A business owner’s Mental Readiness is an indication of how much longer the owner would like to continue working in their business.  For example, a business owner with a High Mental readiness is someone who is NOT enjoying working in their business today and would like to move on from the business.  However, a LOW Mental Readiness reflects an owner’s desire to continue working in the business because they enjoy the continued challenge and thrill of running their business.

The data presented in this newsletter are the initial results of more than seventy-five (75) owners of operating companies who have completed an assessment conducted by Pinnacle.  The results provide a view through which we all can better understand an owner’s attitude and preparedness for their future business exit.

Traits of LOW Mental Readiness

The following attributes apply to the 85% of owners who have a LOW mental readiness for an exit.  As a group, they generally:

–          Have no written plans for an exit

–          Have not thought about a future without them working in their business

–          Take less than 3 weeks of vacation per year.

–          Are performing at the ‘top of their game’.

–          Lack the management team to replace their responsibilities at the company

–          Continue to have a high level of enthusiasm to work at their companies.

These traits vary in degree among different owners who completed the Pinnacle report, but are the general areas where they all reply positively to the survey questions.

How Can You Apply These Survey Results to Your Exit Plans?

As you review the list of traits in the preceding paragraph regarding owners with a LOW Mental Readiness, you may see many that apply to you.  If so, you may begin to consider your own Mental readiness for an exit and how this could impact your planning.  And, notably, if your desire is to continue to run your business into the future because owning and running your business is what you enjoy doing, then you are in the majority of your peers.

However, our important message to you in this newsletter is the following:  just because you desire to remain with your business does not mean that planning should be ignored or put off until a later date.  In fact, ‘exit planning’ does not (and should not) mean that you are leaving your business.  Rather, planning for an exit includes growth planning (i.e. increasing the cash flow and value of your business), leadership planning and development (so that the business can run without you), personal planning (so that you have the peace of mind that you can afford an exit) and contingency planning (to assure that you don’t lose what you created if someone unforeseen should happen to you).  These are all very important areas that you can plan for today, even if – like the majority of other owners – you do not plan to exit for a number of years.

Concluding Thoughts

We hope that this newsletter has accomplished the objective of having you understand what your peers are thinking and doing for their exit plans so that you can better define your own.

© Copyright 2014 Pinnacle Equity Solutions, Inc.

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Planning an Exit Requires a Relationship, Not a Transaction Mindset

For business owners who are thinking about exiting their business in the near (or not so near) future, there are many things to consider to assure the business transition happens in a smooth manner.  Owners are wise to seek the counsel of advisors in this complex and delicate area.  While discussing an exit with a professional advisor, owners are well served in asking how the advisor that they are speaking with perceives their role, as well as, how that advisor is compensated.  This newsletter makes the argument that in order for this process to go smoothly, owners should seek out the counsel of ‘relationship-based’ advisors in favor of ‘transaction-based’ advisors to create and begin implementing a multi-year exit planning process.

Understanding an Advisor’s Role in an Owner’s Life

 Advisors enter a business owner’s world mostly on a reactive basis, usually because there is a need for assistance with an outstanding issue.  For most owners the relationship with their accountant is the most consistent and often the most trusting in the realm of financial issues and that is simply because state and federal governments require, at a minimum, that businesses – and their owners – file their taxes each year.  This is, again, a reactive (albeit very important) approach to the process of finding an advisor.

However, some business owners buck this trend and actually take a proactive approach to working with their advisors, including a commitment to planning for the future.  These owners recognize the importance of ‘staying one step ahead’ and they seek out the best advisors for their short-term and long-term needs.

The Relationship-Based Advisor versus the Transaction-Based Advisor

So, given that most owners work with professional advisors, it is helpful to categorize them.  The world of professional advisors can be neatly divided into two (2) types; relationship-based advisors and transaction-based advisors.

Relationship-based advisors are those who come into the business owner’s lives and work with them, year-in and year-out, on a consistent basis.  Two of the leading relationship-based advisors are accountants (for reasons stated already) and attorneys (often at the beginning of a business venture and again when the need arises).  Many owners also confide and place their trust in financial planning professionals, insurance and risk management advisors as well as general business coaches and consultants.  These advisors take the approach that a relationship with a business owner exists over a long period of time and they remain available to these owners as needs arise.

Transaction-based advisors are those who approach the relationship with the owner with an eye towards addressing a specific, non-recurring issue for that owner.  These advisors might include real estate brokers, consultants who start and complete certain projects for owners, valuation professionals as well as mergers and acquisitions advisors.  These advisors enter the lives of owners to execute a certain transaction.  For the most part, these advisors also plan to leave the owner’s life shortly after the transaction / project ends.

Exit Planning is a [multi-year] Process, Not a Transaction

The process of exiting a business is not a transaction, but rather it is a process.  The process includes an owner thinking through all of the implications of the business running without their individual efforts as well as how the owner would live without the business.  Owners who go through this process ask themselves, ‘who will run the business other than me?’ and ‘what would fill my life in the absence of working in the business?’

Answering these seemingly simple questions and planning a separation from your business has a high level of complexity that takes time to understand and, once understood, to make critical decisions around.  Unlike a transaction, the exit planning process requires the benefit of time and self-reflection to decide what is best for you both from a business and a personal perspective. This newsletter suggests that a relationship-based advisor is a critical partner in helping to gain clarity around these issues.

Now, with all of that being said, an exit planning process may very well end with a transaction.  When this happens, those transaction-based advisors are invaluable to the process of completing a deal.  However, there are a few important caveats to remember:  (1) a transaction is the output of the process, not the immediate objective and basis for an engagement, and (2) the transaction-based advisor can learn from the exit planning process to execute on the transaction that best meets your goals.

Why Relationship-Based Advisors Are Ideal for Exit Planning

Given that exit planning is a process, it is important for owners to have a trusting relationship with the advisor who guides them through this multi-year process.  Relationship-based advisors set up their businesses to view clients as ‘lifetime clients’, coming in and out of their lives as needed.  And, as an owner going through an exit planning process, it is likely that you will want time to answer the sensitive questions that await you.  Your relationship-based advisor will take the time to help you reach your long-term goals while transaction-based advisors, generally speaking, are not equipped to conduct a multi-year process to guide an owner in this way. Rather, many of these advisors would prefer to be called at the time that a transaction is ready to be executed.  As an aside, if you find a transaction-based advisor who is truly willing to serve in a relationship basis with you, then you should consider yourself fortunate as these advisors are hard to find.

Next Steps in the Exit Planning Process

This newsletter is not written to judge one type of advisor as better than another.  Rather, it is crafted to remind owners that an exit planning process is one that should not be conducted alone and should include the patience and approach that relationship-based advisors bring to the owner.  We hope that you find this helpful in advancing your exit planning forward.

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What Factors are the Largest Detractors of Value for my Business?

Business owners who are thinking about an exit often-times want to know what challenges they will face in a sale process and whether or not someone else will want to own their business after them.  A solid exit planning process includes both personal and business factors to be considered.  On the business side, it is helpful for an owner to know about the elements that are likely to reduce the value of their business in the eyes of potential buyers.  When an owner is aware of these factors, it is likely that these ‘risks’ can be mitigated over time, leading to a higher exit value for the business.  This newsletter takes a look at the factors that generally reduce the value of a business and provides some recommendations as to ways that owners can address these items years in advance of an anticipated exit or sale transaction and therefore increase not only the potential value of the business, but also the overall likelihood of a successful sale.

What Buyers Fear Most

As an owner who is thinking about a future exit, you are well served in understanding the concerns and fears of potential buyers for your business.  The largest fear that a buyer has is that of the unknowns and the risks that accompany not knowing what the future holds.  In other words, privately-held businesses do not report earnings shareholders and do not disclose ‘material’ and ‘non-material’ items to research analysts in the manner that publicly traded companies do.  Therefore, when it comes time for a buyer to review your business for purchase, they will have countless questions about how the business operates, the markets that it serves, key people who run the day-to-day operations, as well as the overall strategy and business plan for the future.

As each question is answered, the buyer’s concerns should be reduced.  Ideally, those concerns are reduced to a point where a future buyer is eager to write you a check to take ownership of the cash machine that is your business so that they can become the next owner / partner in the company.

Pre-Sale Risk Reduction

Although every privately-held business is different, there are common factors that can be identified which contribute to the overall riskiness of a business in the eyes of a potential, future buyer.  Some of those items include:

  1. High levels of dependence upon the owner
  2. The lack of a management team (which goes along with owner dependence)
  3. Lack of a clearly-defined strategy for growth
  4. Low levels of profitability (relative to industry comparable percentages)
  5. High levels of customer or vendor concentration
  6. Incomplete or non-existent operations and procedures [manuals, etc . . . ]
  7. Incomplete or non-existent marketing and selling programs
  8. Poorly kept, non-GAAP compliant financial statements

The factors listed above exist in the majority of small businesses today and as you look through this list of factors, you will likely see many that apply to your business.  If you look ahead to what a future owner of your business will see as important, the manner in which you can answer questions relating to these [and many other] items is likely to significantly impact the success that you have in selling your business. 

How Many Years Does it Take to Fix These Issues?

Some factors are easier to fix than others.  An approximate time-frame to address each of the factors listed above is provided below:

Factors That Can be Fixed in Less than One (1) Year

  • Lack of a clearly-defined strategy for growth
  • Poorly kept, non-GAAP compliant financial statements / records
  • Incomplete or non-existent operations and procedures [manuals, etc . . . ]
  • Incomplete or non-existent marketing and selling programs 

Factors that Take More than One (1) Year but Less than Three (3) Years to Fix

  • Low levels of profitability (relative to industry comparable percentages)
  • High levels of customer or vendor concentration

Factors that Take More than three (3) Years to Fix

  • High levels of dependence upon the owner
  • Lack of a management team

Timing Your Eventual Exit

An owner’s exit from their business is primarily a personal decision and should be lead by that owner’s goals and objectives, both personally and professionally.  With that as a background for this important level of planning, the time frames listed above should help you understand how long it can take to plan and execute your exit.  For that reason, it is recommended that you begin your planning sooner rather than later because the factors and timeframes listed above are merely estimates.  Your company may take longer to fix many of these issues and, if you sell before they are addressed, you will likely be transferring the business at a lower value than you may desire (or otherwise deserve).

Concluding Thoughts

We hope that this newsletter has accomplished the objective of having you see that there are many factors that increase the riskiness of your business in the eyes of potential buyers, thereby reducing the value that you might otherwise be paid.  Knowing what these factors are and having the time and commitment to fixing them may allow you to substantially increase the value of your business prior to your envisioned exit.

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