The AI role in Exit Planning

Posted on August 6, 2023 by John F. Dini

Is there an AI role in Exit Planning?

The media is packed with stories about Artificial Intelligence. According to the stories, because a smart search engine (which is essentially what a Learning Language Model [LLM] is,) can pass a Bar exam, it threatens all kinds of white-collar careers.

And in case you were wondering, no – I’m not writing this on ChapGPT. That “surprise” trope has been so overdone on every local television station that I hope I never see it again. Also, if you thought this column would be about how to write letters, proposals, and social media posts using AI, you’ll have to look elsewhere.

At ExitMap® we launched our AI upgrade in May. It does all the things I mentioned in the previous paragraph, but it can also be a useful tool for owners within its limitations. Writing a few hundred prompts (They used to be called “queries,” I don’t know the difference) has given us some insight into how it works, and where it doesn’t.

Using AI for research

What works for advisors also works for business owners. If you want to begin exploring our exit planning options using the free application of ChatGPT, here are some guidelines.

First, don’t ask AI for advice. Just about any prompt that begins with a first-person pronoun (I or we) will generate a disclaimer something like “As an AI, I don’t know the individual circumstances of the situation.” If you regenerate the response it will often drop the disclaimer. What follows is usually along the lines of “But here are some of the typical actions in such a situation,” which can be useful.

It’s worth it to ask things in different ways. For example, ask “What kind of incentives can help with employee retention after a sale?” The response will be more generic, like “a good culture, opportunity for advancement, job security, recognition, and stay bonuses.” If you add “structured financial” in front of incentives the response will include descriptions of stay bonuses, equity participation, performance bonuses, golden handcuffs, and phantom stock plans.

If you aren’t an attorney, you still know that a business with multiple owners should have a buy/sell agreement. Some owners say “Why? We’ve made it for 25 years without one.” Prompting AI for reasons to have a buy/sell agreement will generate comments on Succession Planning, Valuation. Preventing Unwanted Owners, Stability and Continuity, Funding Mechanisms, Conflict Resolution, and Tax Planning with an explanation of applicable situations for each.

I have clients who are already using AI to read X-rays, score Customer Service calls, and write employee satisfaction surveys. I work with one owner who creates orientation and training videos using an AI-generated animation of himself that reads AI-generated scripts.

The AI role in exit planning

What is the AI role in Exit Planning? Considering that exit planning as an activity involves multiple specialty advisors, you can save a lot of time and money by asking questions in various areas. Here are ten examples to start you off.

  • List the different exit planning options available to business owners
  • What is the difference between a certified valuation and a calculation of value?
  • What performance metrics can be used to assess a management team’s readiness for succession?
  • What situations indicate a need for a company to upgrade or revamp its purchasing systems?
  • Describe the differences between Core Values, a Mission statement, and Company Vision.
  • Explain the potential tax benefits of an ESOP for the company, owner, and employees.
  • How does owner centricity impact the Fair Market Value of a business?
  • List key components of a Business Continuity Plan.
  • What are common strategies that buyers use to finance a purchase?
  • How do you balance the needs of family employees and family stakeholders outside of the business?

Every business is different, and every owner is unique. No query can possibly take into consideration all of the variables inherent in every transition. That’s why we still need advisors.

The AI role in exit planning helps an owner to better prepare when talking to an advisor. It helps owners be better able to explore other options than the ones that are most obvious.

 

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

2 Responses to The AI role in Exit Planning

  1. David Cunningham says:
    August 10, 2023 at 5:22 pm

    Having answers to these ten queries gives a business owner a valuable checklist of issues to consider before committing to a selling process.
    In addition to these ten queries, I would recommend “How do you calculate the Fair Market Value of a business?” I believe that a business owner should perform an FMV calculation every year.

    Reply
  2. David Cunningham says:
    August 10, 2023 at 5:29 pm

    These 10 queries give the business owner an excellent checklist of issues to consider before committing to the sales process. I recommend one other question, “How do you calculate the Fair Market Value of a business?” I believe that business owners should do FMV calculations every year.

    Reply

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Delegation and Depth – Company Readiness for Exit

Posted on June 29, 2023 by John F. Dini

Delegation and depth are critical when presenting your business as a buying opportunity. For many business owners, exit planning means getting the company ready for sale to a third party. There are a number of approaches to enhancing preparedness for a third-party sale.

Assessing Readiness

Some planning software products begin with a comprehensive survey of the owner’s impressions of readiness. Note that we say “impressions.” A Likert scale questionnaire that asks a client to rate their understanding of a statement and its possible implications with questions like “How confident are you that you know the value of your business?” and a ranking from “no understanding” to “extremely well” often creates more questions than answers.

If an owner chooses “Fairly well,” for instance, does that mean he knows the value, or that he is fairly confident that he thinks he knows the value, or that he is really confident that he knows an approximate value? Nonetheless, some advisors will begin to build a plan around such subjective answers.

In fact, many systems take these subjective answers and use them to produce a score and a subsequent evaluation with a dollar figure for the presumed worth of the business. Regardless of the accuracy of the owner’s responses, they have created a line in the sand regarding value.

Keeping “Score”

The next step is often to assess different areas of operations. Depending on the expertise of the advisor, this may focus on operating efficiencies, sales processes, marketing approaches, financial record keeping or product and customer mix. Then the advisor runs a second evaluation, presuming that these areas have a higher score.

All this is intended to lead to one question. “Would you rather sell your business for $7,000,000 or for $12,000,000?” I know very few owners who would have the temerity to choose the first option, whether they have personal enthusiasm for embarking on a reorganization of their business or not.

The methodology is legitimate. There is ample evidence that improved operations and greater profitability lead to a higher selling price. It may, however, create a scenario where the owner is boxed into the strategy that works best for the advisor, regardless of whether it matches the client’s objectives (“Get out as soon as possible,” for example) or the company’s capabilities.

Delegation and Depth

The first issue, an owner’s objectives, should be addressed by deeper discovery. That is what we preach and teach with our ExitMap® tools. The second, company readiness, is more a matter of delegation and depth.

delegation and depthNo business can embark on a comprehensive improvement process without a management team to implement it. That’s why we address Owner Centricity™ as the only area of company readiness that matters in the discovery phase of every engagement. If the client is already overwhelmed with personal responsibilities, new initiatives will just add more to an already over-full agenda. That’s a recipe for failure.

We map out the management team starting with the owner’s responsibilities. Then we add those employees who are next in line for those duties, along with a 1, 2 or 3 score. One indicates that the employee is fully ready to assume the day-to-day activities of the job. A two means that the employee is generally familiar with the area, but not ready to assume primary responsibility. A three indicates that there is no knowledge or capability for this area. A 3 is also used when there just isn’t anyone available to train.

Company Readiness

Diagramming the management team in such a depth chart permits a far more comprehensive look at which improvements are possible now, and which will require additional training or recruiting. It also gives the advisor a better understanding of the areas the owner will have to delegate to make the business more saleable.

In operational analysis, the capabilities of the management team are the principal determinant of the company’s readiness to grow.

The owner’s willingness to discuss such delegation is by far the best indicator of his or her preparedness for any value enhancement efforts.

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The Role of a Coach in Exit Planning

Posted on May 19, 2023 by John F. Dini

Defining the role of a coach on your exit planning team doesn’t just happen. Like any other aspect of working with consultants, you need to set expectations upfront.

Many advisors like to characterize themselves as the “quarterback” of a transition planning team. I’ve always objected to that. We regard the business owner as the quarterback of the planning process. After all, the coach never gets sacked by a 300-pound defensive lineman. The advisor may want to win every bit as much as the business owner, but it’s the owner who actually has skin in the game.

A Coach’s Responsibilities

It’s one thing to say that you are a coach and another to act like it. Here are seven basic rules an owner should expect from the coach on a planning team.

  1. He (or she) speaks the truth always, even (or especially) if you don’t particularly want to hear it.
  2. He must act as a Fiduciary, putting your needs first.
  3. He should offer options and alternatives, especially when you have a fixed idea of how things need to be done.
  4. He acts as the defender of your objectives and points out when other advisors on the team are drifting from those objectives.
  5. He documents the progress of your engagement, as well as that of the other advisors.
  6. He respects the work of other advisors and solicits their input.
  7. He delivers your contributions on schedule, but respects your need to attend to business first.

role of a coachThese “rules” can be verbalized or set out in writing, but it is important that your expectations are discussed at the outset.

Let’s continue with the coaching analogy for a moment. The quarterback must not only accept the coach’s advice, but in his role as leader of the team he should be telling the position players that his plays are the ones they are going to use. The quarterback understands that the route assigned to the wide receiver is only part of the picture. There are other men that are going to protect him so he has time to throw, or occupy defenders so the receiver can get open. The pieces have to work together as a whole.

Leading a Team

Similarly, the business owner must make plain that the coach’s responsibility includes overseeing the other members of the advisory team. No receiver would dream of coming into the huddle and saying “Hey guys. I just thought up a different play. Here’s what I want you all to do.” Some advisors, however, seem to think that is OK.

But if the receiver comes to the quarterback while the offense is on the sidelines and says “They are using the same coverage on me every time. I think I have an opportunity down the sideline,” it’s the quarterback’s role (and obligation) to bring that to the coach. Then an appropriate play can be drawn up that involves the entire team. Similarly, you should be open to other advisors’ input, but bring it to the coach right away.

Every team needs a coach. It’s his or her responsibility to help them work together for a single outcome. It’s not your job as an owner. You have neither the experience nor the time to devote to the task. Defining the role of a coach leaves you, the quarterback, the ability to focus on winning the game.

 

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Impressions of Value in Exit Planning

Posted on April 10, 2023 by John F. Dini

Business owners, advisors, and buyers frequently have widely different impressions of value when it comes to a business.

The Pepperdine Private Capital Markets Survey canvasses intermediaries who sell privately held Main Street and mid-market companies. One question is about the obstacles that prevented the sale of a business. The number one response is “Owners’ unreasonable expectations of value.”

That may be self-serving or an excuse. Nonetheless, valuation is a sensitive subject. Many owners have worked in the business for 30 or 40 years. They assume it will fund their next 20 years of retirement. Their target price is set only by their desired lifestyle after the business.

Different Values for the Same Business

Unfortunately, many owners have an opinion about the value of their business that is grounded in the multiples of public companies. Others are based on conversations with colleagues, salespeople, and articles in their trade publications.

Impressions of valueEven those who have professional appraisals of their business may not understand that the purpose for getting your valuation may skew the results. Valuations that are done for estate planning or internal transfers of equity often have little resemblance to a company’s fair market value.

Various people including H.L. Hunt and Ted Turner have said “Money is just a way of keeping score.” For many owners, the emotional tie between the perceived value of their company and their self-image of success is closely connected.

Some advisors skirt this issue by recommending that their clients get a professional opinion of the fair market value of the business. While this is certainly a safe approach, it can take substantial time. It also requires considerable assembly of the underlying data for the appraiser. This can slow down any consulting project considerably and may derail it entirely.

Impressions of Value

A coaching approach helps the owner understand the practical boundaries surrounding the value of the company without either dictating to him or taking the project in a tangential direction. We do that by helping the client model “lendable value.”

We start by explaining that most businesses are valued by their cash flow. There are certainly many areas where value can be enhanced. These include intellectual property, exclusive rights to a product, protected sales territory or long-term contracts. Owner Centricity™ or customer concentration can also reduce the fair market pricing of your business. In the final analysis, however, cash flow to pay an acquisition loan is of principal concern to a lender.

SBA minimums for financing include a cash-to-debt service ratio (1.25 to 1) and required owner compensation – usually $75,000 a year for acquisitions under $500,000 and twice that for larger deals. While not all lenders follow SBA guidelines, they are a useful national baseline for looking at your value.

The company may well be worth what you think it is, but finding a lender to finance it is a different problem. Understanding a lender’s impression of value before starting sale negotiations can save you considerable time and negotiation down the road.

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“Work From Anywhere” Comes Full Circle

Posted on March 14, 2023 by John F. Dini

Work from anywhere has been a necessity, an epithet, an obstacle, and an opportunity over the last 3 years. To paraphrase Aristotle’s axiom about Nature (“Horror Vacui”), business abhors a vacuum. Where one occurs, it is quickly filled.

Work from anywhere started as a COVID-induced necessity. During the lockdowns of 2020-2021 (and longer in some places) we all had a crash course in video calling, VPNs, and virtual meetings.

Employees quickly expanded the definition of anywhere. They tired of shunting the children off to a bedroom during conference calls, or using office-like backdrops to hide their kitchen cabinets. Soon they began changing their backgrounds to something more aspirational, like a mountain cabin or a scenic lake.

From there it wasn’t much of a leap to make the mental shift from a make-believe environment to a physical one. Pretty soon employees were calling in from real mountain cabins. In many cases, they shifted to someplace where the cost of living was much lower than in their former metropolitan workspace.

Work from Anywhere as an epithet and an obstacle

As employees moved further afield from their office environment, bosses began to sound off. “We aren’t going to pay Los Angeles wages to someone who has a Boise cost of living,” was a commonly heard complaint.  Most put up with it because qualified help was getting harder to find. Hiring remotely was too hard a new skill to master.

The complaints of employers grew louder as they began to ask employees to return to their former location of working activity. They made arguments about deteriorating corporate culture or a lack of mentoring opportunities.

At the same time, stories surfaced about workers who were getting full-time paychecks from multiple employers, or who were “quiet quitting” by doing as little as possible. The “Great Resignation” forced many organizations to put up with it. If you wanted to keep employees, you needed to accommodate their demands.

Then the work-from-anywhere poaching started. If an employee could do the job from a thousand miles away, why not just hire people from a thousand miles away? Now recruiters could dangle Los Angeles wages at candidates from Boise. Many employers saw work from anywhere as a curse costing them their best talent.

Work from Anywhere as an Opportunity

But as I said at the outset, business abhors a vacuum. Every action has a reaction. When the job can be done from anywhere, does that mean anywhere?

work from anywhereIf the higher cost of living centers can fill their needs by hiring people who are accustomed to earning less, why shouldn’t employers look at those candidates before the local talent? The Internet allows almost-instant communication across countries, what about across oceans?

In the last few months, I’ve worked with employers who are hiring accountants in India, staffing recruiters in the Philippines, programmers in Argentina, support techs in Colombia, and screening nurses in Nicaragua.  None of these employers are multinationals. Each one fits the SBA’s definition of a small business.

Their new employees are educated, English speaking, have the same hours as the employer, and are thrilled for the opportunity. Some are hired directly through a local placement agency. Others work for an organization in their home country that makes them exclusive to the client and promises to replace them if needed.

Most of the wages appear to be about 50% more than the same job would pay in the country of residence, and roughly half of what the position in the U.S. would cost.

Business has once again filled a vacuum. I wonder what is next?

Posted in Building Value, Entrepreneurship, Leadership, Management, Thoughts and Opinions | Tagged , , , , , , , , , , , | 4 Comments

4 Responses to “Work From Anywhere” Comes Full Circle

  1. Rick Simpson says:
    March 14, 2023 at 5:34 pm

    Great post John. As a retired employee that worked from home for 30 years, you have pointed out the good and the bad. I know from experience that many people can’t give 100% when at home; too many distractions. Glad I’m not hiring anymore.

    Reply
  2. John Seybol says:
    March 14, 2023 at 7:10 pm

    Great article John. Certainly lots to consider for business owners.

    Reply
  3. Jason Myers says:
    March 14, 2023 at 9:51 pm

    Hi John,

    Thanks for presenting several sides of this situation. As someone who has worked remotely since our agency was formed in 2010, we were at a slight advantage because our culture didn’t change during the pandemic and we had all of our systems in place. Yet we saw the challenges many of our clients faced with their changing workforce demands and expectations. I can sympathize with workers who got their first taste of WFH recently (I know I never want to go back to a traditional office). But I also feel for the business owners who want and need some of their folks back in the same physical space. Tough to get that genie back in the bottle.

    Reply

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