Exit Planner Spotlight

Posted on March 18, 2018 by John F. Dini

Kudos to our ExitMap Affiliate Jim Wisdom in Westlake Village, California, who has this article published in The Pacific Coast Business Times last week.

Prepare for an Exodus of Business Owners

Throughout their lives, baby boomers have had a profound impact on our society. One key reason for their large influence is the sheer size of their generation, which is estimated to be about 76 million people.

According to John Dini, a prominent exit planning strategist and author of the book “Your Exit Map,” Baby Boomers formed businesses at a rate 250 percent greater than the norm from 1976 to 1985 — a rate that hasn’t been approached since. Dini discovered these statistics after reviewing data from the Small Business Administration, the U.S. Census Bureau and the Department of Labor.

So, why are these statistics important? Because baby boomers, who are exiting their businesses in increasing numbers while also phasing into retirement, are headed toward a demographic “headwind” that they may not even realize yet. This headwind could severely limit the boomers’ ability to meet their objectives of transferring their business interest when they want, to whom they want, and for the amount of money they need.

Let’s take a look at the staggering numbers. Of the estimated 28 million businesses in the U.S., anywhere from 3 million to 5.4 million are owned by boomers with five or more employees.

The key problem? There are projected to be far more sellers of businesses by boomers in the next seven to 10 years than buyers looking to acquire businesses. In addition, the buyers are likely to be Generation X buyers, which represents nine million fewer individuals and has a different outlook on life and work than that of the workaholic boomers.

The Tsunami

The number of boomers that are currently reaching age 65 is about 10,000 a day. That number translates to about 100,000 business owners reaching retirement age each year.

However, the brokerage industry only sells about 8,000 companies a year. The mid-market (M&A and private equity groups) accounts for only another 1,000 per year.

Using the most realistically conservative assumptions possible, we are still short on third party acquisitions by 6,740 a month, or 300 per day for the next 20 years. Boomers can delay their decision, but not indefinitely. They will eventually exit their business — voluntarily or involuntarily. Notes Dini: “Sooner or later every business owner leaves his or her business, and the transition of the boomers will be like nothing ever seen in the small business universe.”

Some business owners believe that an Employee Stock Ownership Plan is a viable exit alternative. While ESOPs can be an attractive exit option for the right seller, the owner has several requirements to meet. ESOPs are an ERISA Qualified Benefit Plan, and they require (among other things) annual audited financial statements, annual certified appraisals and compensation testing. The cost of implementing an ESOP generally ranges between $250,000 and $750,000, as well as $50,000 per year for ongoing compliance.

What should boomer business owners do? Ideally, they should start the exit planning process at least three to five years (or more) prior to their exit. There are two key theoretical exit dates that the business owner should have in mind: the date they stop managing the business on a daily basis and the date they divest themselves of the company. It’s impossible for business owners to effectively plan their exit until they establish at least a theoretical target date for these two events.

Also, the business owner should retain an exit planning adviser who is skilled in coordinating the exit planning process with the other advisers that are integral to the process, such as attorneys (business and estate planning), a CPA, a financial adviser and insurance professional.

In summary, the longer the lead time for exit planning the better. In his book “Finish Big,” author (and columnist for Inc. Magazine’s “Street Smarts”) Bo Burlingham studied business owners who were either about to go through the exit planning process, were going through it at the present time, or had just completed it. He stated that only one business owner identified the right successor the first time. The message: leave extra time for setbacks and surprises, because they will almost certainly occur.

After all, selling one’s business is usually the biggest financial event of an owner’s life. Therefore, it is only prudent for the business owner to properly plan for their own departure.

The success or failure to plan properly could have a major impact on the business owner’s lifestyle in retirement.

If you are an ExitMap Affiliate, let me know about published articles. I’m happy to give them a circulation boost.

Posted in Exit Planning | Tagged , , , , , , | 2 Comments

2 Responses to Exit Planner Spotlight

  1. Steve Vesey says:
    March 18, 2018 at 9:13 am

    Another spot on article . The numbers supporting the supply and demand issues are staggering especially when combined with the fact that nearly all of these business owners have failed to ffund their retirement at an adequate level makes this message all the more compelling

    Reply
  2. John McAllister says:
    March 19, 2018 at 5:08 pm

    Baby Boomer Business Owners…keep on keeping on…at your own risk! Just returned from The National Land Conference, sponsored by The REALTORS Land Institute in Nashville, TN. Next recession…May, 2019. Each day that goes by means fewer Baby Boomer Business buyers for your business…help us, help you…call or email so we can begin an assessment of your situation.

    Reply

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Business Buyers and Disintermediation

Posted on February 24, 2018 by John F. Dini

In the last post, we discussed the reluctance of many prospective business buyers to deal with the regulatory burden of being an employer or service provider. You may be among the lucky few whose profession doesn’t require licensing. Even better, you may have qualified employees who are able to run the business without you.

There are other issues that concern younger buyers, however. One of these is the threat of disintermediation. That’s a trendy word for what we used to call “bypassing the middle man,” but it applies to many businesses that are being made obsolete by technology.

Disintermediated Businesses

How many business people still rent cars to attend a couple of meetings in a city? With Lyft and Uber, it is frequently easier to call a ride than leave a car in the (expensive) hotel parking for 90% of a visit. I’d be very skeptical of buying a car rental business today.

What happens when (not if) autonomous vehicles become part of daily life? Long-haul trucking will move to non-peak traffic hours, reducing the need for drivers, training schools, highway expansion, truck stops, and perhaps the number of trucks themselves.

Service businesses where the middleman lends expertise (easily duplicated by Internet research) or access to vendors are feeling the crunch already. The warning bell is sounding for mortgage companies, real estate agents, insurance and benefit brokers, employment agencies, printers, publishers, and travel agents.

These businesses won’t go away, but there will be fewer of them, and their margins are eroding.

The rise of robotics and artificial intelligence threatens even the most skilled professions. Legal databases, automated interpretation of medical imaging and free online tax filing are a few examples.

This quote is from a  February 21 essay by Rob Kaplan, President of the Federal Reserve Bank of Dallas.

As I have been discussing for the past two years, technology-enabled disruption means workers increasingly being replaced by technology. It also means that existing business models are being supplanted by new models, often technology-enabled, for more efficiently selling or distributing goods and services. In addition, consumers are increasingly being able to use technology to shop for goods and services at lower prices with greater convenience—having the impact of reducing the pricing power of businesses which has, in turn, caused them to further intensify their focus on creating greater operational efficiencies. These trends appear to be accelerating.

The Impact on Sellers

The overview of the business seller’s marketplace is straightforward. As I’ve been proselytizing for over a decade in my “Boomer Bust” presentations and books, selling a business will be more challenging, but that doesn’t mean any particular business is unsellable.

As with any other competition, the response is to create differentiation from the rest of the pack. There are a few key factors that top the list of appealing differentiators for business buyers.

  1. Build a business that can run without you. The more you work in your business, the less it is worth.
  2. Train effective management. Employees who understand how to run a profitable business are highly appealing to any prospective buyer. In addition, they can provide you with an alternative to a third-party sale.
  3. Upgrade the value-added component of your offering. If the only benefit you offer to a customer is time and place utility, you are probably toast.

There is another factor that may sound counterintuitive. Design your business so that it requires more expensive employees. If low wage workers are the backbone of what you do, you risk losing the technology arms race with larger competitors. I’ll expand on this in my next post.

The population of business buyers is younger, more technologically savvy, and less inclined to long hours than the generation that is selling. Winning in a competitive marketplace demands that you offer what business buyers want.

 

Posted in Building Value, Entrepreneurship, Exit Planning | Tagged , , , , , , , , , , , , , , , | 2 Comments

2 Responses to Business Buyers and Disintermediation

  1. Paul Cronin says:
    February 28, 2018 at 6:49 am

    Great post John. As we say at Successful Transition Planning Institute, you have to know your goals and address your fears to have a great business transition. Fears about disintermediation are not often raised by the owners, but a wise advisor must raise them. Otherwise the owner’s goals may simply be fantasy. For those owners whose business is likely being dis-intermediated, and cannot offer differentiation (or it is too late to do so without significant, risky investment), the owner can still set goals for winding down the business and protecting personal assets, as well as creating a meaningful life.

    Reply
  2. MuslimMummy says:
    March 6, 2018 at 11:28 am

    Scott: I ran into the same problem with ebay buyers trying to hold our feedback rating hostage by getting an undeserved partial refund. Our “full, unconditional refund rather than a “partial refund policy was set in stone during a rare 78 collection ebay sale. Although the collection was mint, untouched store stock and sold items were packed in expensive Uline 78 mailers several buyers claimed the 78″s arrived warped and wanted a partial refund. Statistically the number of “warped in shipping seemed way too high but we offered a full refund instead of a partial one to all buyers. Not one of them replied or sent their purchases back which made us assume they were all lying in order to get a refund. As Seinfeld said, “People, they”re the worst!.

    Reply

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What’s Wrong with the Buyer Generations?

Posted on February 3, 2018 by John F. Dini

Many of the upcoming buyer generations can’t or won’t run Baby Boomer businesses. This is (or should be) of concern to sellers everywhere.

“The children now love luxury; they have bad manners, contempt for authority; they show disrespect for elders and love chatter in place of exercise. Children are now tyrants, not the servants of their households.” Attributed to Socrates by Plato.

Elders have been complaining about their offspring for 2,500 years. The complaints change only in the activity bemoaned. “Chatter in place of exercise” is replaced by those damn radios, or automobiles, or television, or rock’n’roll, or cell phones or texting. It’s amazing when you realize that we’ve somehow managed to thrive through eons of generational deterioration.

The Buyer Generations

But one thing is true. Generation X and the Millennials are not attracted, as a group, to many of the businesses run by Baby Boomers. We’ve discussed the macroeconomic trends, demographics, sociographics and psychographics, at length in this column and in my latest book Your ExitMap: Navigating the Boomer Bust.

For the next few columns, we’ll talk about other forces that deplete the number of available and interested buyers, and what you as a seller can do about them. Note that I said “deplete” the number. An attendee at one of my presentations a few weeks ago raised his hand during Q&A and said “There will always be someone willing to buy a profitable business.”

That is probably true, but in any competitive sales situation the challenge is to find and attract a qualified buyer. Most of us do that by targeting our offerings to the buyers we seek, then making certain they are aware of what we are selling. The buyers we seek are those who are willing and able to pay the price we ask. In other words, we play the odds. What we are discussing here is finding willing buyers who are able to pay your asking price.

Regulatory Obstacles

One issue in selling your business is the regulatory environment. Since the 1970’s, Americans have come to accept that basic business qualifications should be legislated. Some 30% of all products and services now require some form of government permission (licenses or certifications) to operate.

When the owner of a business is the sole qualified practitioner for its offerings, he or she has a problem. Selling the business requires either continuing to work in it personally until a new owner is legally qualified, or providing licensed employees with some insurance for the new owner of their retention. (See our column on Stay Bonuses.)

This issue drives many owners’ decision to sell the business to qualified employees. You can include a few licensed practitioners in an ownership group, frequently combining them with non-licensed managers or executives who are more suited to running operations. With a few years of advance planning, an owner can exit with the sale price in hand on the day he or she gives up control.

To be blunt, if you are the only person legally capable of creating, presenting or approving the work of your company, you have a job more than a business. The first step in preparing a saleable enterprise is to make sure it can operate without you.

Posted in Building Value, Entrepreneurship, Exit Options, Exit Strategies, Management | Tagged , , , , , , , , , , , , , , , , | 5 Comments

5 Responses to What’s Wrong with the Buyer Generations?

  1. Minella says:
    February 4, 2018 at 11:13 pm

    There are an increasing number of business owners in the environmental and facilities services industry who are preparing to retire.

    Reply
  2. Gary Weinman says:
    February 6, 2018 at 7:41 am

    Good article , John. I enjoy reading your posts.

    Reply
  3. App Development Company Delhi says:
    February 7, 2018 at 1:06 am

    Hey keep posting such sensible and significant articles.

    Reply
  4. John McAllister says:
    February 9, 2018 at 4:09 pm

    Trip Holmes of Sabre Capital, Inc. find this to be true. Especially if the three Ds are involved…dark, dirty or dangerous!.

    Reply

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Death, Taxes and Exit Planning

Posted on January 14, 2018 by John F. Dini

(This post was published in the Sageworks/ProfitCents blog earlier this week)

Understanding the Post-Ownership Void

As advisors, we understand that our business clients should be preparing for the biggest financial event of their lives – the sale of their business. However, when we ask, “How are you exit planning for your retirement from the business?” we seldom get a straight answer.

Instead, we get any number of comments like: “I still enjoy my business, I’m not thinking about it right now.” “I have a good company. I can sell it whenever I choose.” “Everything is available for the right price. I just haven’t heard it yet.”

These are all ways of evading the fact that they haven’t thought about their life after the sale of their business, and they don’t want to. Why is having the exit planning discussion so challenging? Because, like planning one’s own funeral or purchasing life insurance, it is frightening to contemplate the end of one’s professional career.

What I Do is Who I Am

Most business owners, particularly founders, find it difficult to separate their business from their own identity. The business is who they are. At family gatherings they overhear, “There’s Bob. He owns his own business, you know.”

The ownership of their business permeates their relationships. They are, “Bob Smith, the owner of Smith Manufacturing.” Not only in their business circles, but also at their church, in their children’s schools and their friendships. The business is their persona.

Contemplating life after ownership is scary. Who am I if I’m not me? Will I be treated the same? Can I command the same respect if I don’t have employees? Will my opinion still matter? Will others see me as successful without the trappings of a company around me?

Some owners have the confidence to leave a business with no concern about how others will perceive them. Most, however, associate retirement on some level with failure. While owning their business, they got a small shot of adrenalin every time they were asked to make a decision, which was usually many times a day. They fear a life without those little rewards, albeit unconsciously.

Understanding this reluctance to explore the void that retirement creates is a vital part of an advisor’s ability to serve their business clients. It’s easy to say, “Okay, I’ll be here whenever you want to talk about it.” But this alone is a disservice. Planning the most important financial event of a client’s life should be a priority, not an afterthought.

Have a Safety Net

When a client avoids the exit planning question, have a safety net. Selling a business is a competitive endeavor. No smart owner would enter a new market without knowing what his competition looks like. Just because someone isn’t thinking about an exit doesn’t mean that he or she shouldn’t do anything today. Getting the conversation started is one of the most valuable services you can offer.

Posted in Building Value, Entrepreneurship, Exit Options, Exit Planning, Exit Strategies, Life After | Tagged , , , , , , , , , , , , , , , | 2 Comments

2 Responses to Death, Taxes and Exit Planning

  1. Paul Cronin says:
    January 25, 2018 at 7:42 am

    At Successful Transition Planning Institute, we find that Fear drives this behavior. Fear of an Unknown future, Fear of Falling into a Black Hoe, Fear of Missing Out, and Fear of Death itself. Good post John. By helping owners express these fears and then helping them counterbalance them, the owners are free to logically think about the future of their business and themselves. We also find that that owners need to express their goals for the transition process, the outcome (the money and more). These goals become motivation for the owners to accomplish their business transition.

    Reply
  2. Jim Wisdom, CFP says:
    February 26, 2019 at 6:48 pm

    John: Great post. You are spot on here.

    Reply

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Employee Retention Before and After Your Exit

Posted on December 31, 2017 by John F. Dini

In most businesses, employee retention is a material factor in valuation and transferability.

The ability of a buyer to assume control of a fully-functional organization has substantial influence on his or her perception of a company’s value. Any need to pay the seller for an extended period of training adds a redundant executive salary to the projected operating costs. Concern that key personnel may resign or be recruited away by a competitor adds a level of uncertainty to the transfer.

Of course, the basic premise of “The more you work in the business, the less it is worth.” always applies. Even if you’ve effectively delegated most of your operational responsibilities, however,  there remains the threat of an exodus of corporate knowledge.

Many exiting owners don’t believe that the problem is theirs. “These people work for me because I treat them well.” they say. “A new owner should have no problem if he or she does the same.”

True enough, but every buyer’s confidence level is greatly increased by a mechanism to support employee retention through the transfer process.

Stay Bonuses

Stay bonuses are so named (quite logically) because their purpose is to get key employees to stick around after a transfer of leadership. They can take a number of forms, but one of the most common is to escrow a portion of the sale proceeds for later payment if certain conditions are met.

The amount of the bonus can vary, but a general rule of thumb is about six months’ salary for two years of continued employment. Depending on the deal and the number of employees involved, this could be substantial. We suggest allocating about 5% of the sale price when planning such bonuses, but it could vary widely. Here are a few examples.

You sell your company for $5,000,000. Your four top executives each earn $200,000 a year. Six months of their salaries would be $200,000, or 4% of the sale.

On the other hand, if you have seven top executives at that level, $350,000 is 7% of your sale proceeds. That might be too rich a commission for your taste. The 5% guideline would make their bonuses about $35,000 or about 18% of salary.

Only you can decide whether the amount is motivational. Differing amounts based on position are normal. There is no requirement (such as in ERISA) that you apportion the funds by longevity or salary level.

Conditions of Payment

If you choose to make the bonus available, it only enhances the buyer’s confidence. Because the bonus is the seller’s liability, the new employer has no added financial motivation to keep or terminate any particular individual.

Bonuses are customarily forfeited upon resignation or termination for cause. Unlike other non-qualified deferred compensation plans, bonuses are typically not paid out in the event of the employee’s death or disability. This isn’t synthetic equity or a reward for general tenure. Qualification for payment is dependent on a specific condition being met at a specific time.

Also, unlike most NQDC plans, there is no buildup or gradual vesting of value. An employee who stays for 18 months isn’t eligible for three-quarters of a bonus. That should make stay bonuses free of claims in the event of an employee’s bankruptcy or divorce.

Employee Retention Alternatives

Employee retention is an issue in the transfer of any business with skilled personnel.  Only you can determine whether it is worth the investment of offering stay bonuses.

If you are confident in employees’ loyalty to the company, one alternative is to place some of the sale price into an escrow account, to be released if turnover remains below a certain percentage for a specific time. This still allows you to retain the entire proceeds, but transfers some of the financial risk of turnover (even for non employment-related causes) to you.

The other approach is to rely on inertia and security to maintain your workforce in place. Those are strong motivations, and are sufficient in most cases.

Regardless of a buyer’s demands, remember that no one gave you financial guarantees of loyalty. You earned it, and it isn’t unreasonable to expect a buyer to do the same.

Posted in Building Value, Exit Options, Exit Planning, Exit Strategies, Management | Tagged , , , , , , , , , , , , , , , , | Leave a comment

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