Exit With Style, Grace, and More Money - Chapter One

From our audio book here's chapter one - It's All Personal.

Hope you enjoy it.

John Martinka
Jessica Martinka

Contact us via either website or give us a call and be sure to check out our blog pages with new posts weekly.

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Transcript

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Chapter one. It's all personal. This chapter has very little to do with your business, yet it's the most important chapter in the book. Before you even think about the steps needed to sell your business, you need to get prepared personally. This means be ready. Emotionally, financially, family-wise. Realize every business owner thinks about selling, even if they don't talk about it. If you are listening to this book and thinking you should create a plan to sell your business, you are in the top 10% of owners. Years ago, the Wall Street Journal published an article on a study that showed only 10% of medium-sized businesses were ready to sell for full value. We, John and Jessica, with our combined 36 years of mergers and acquisitions, MA experience, have talked with thousands of business owners and agree with the journal's assessment that only 10% of businesses have a solid plan and are ready to sell for full value. It's rare to see a company prepared to sell with an owner who is also ready. The analogy we like to use is most owners don't get up one day and think, I want to sell my business in three to five years, so let me turn up the dimmer switch so the business is bright and shiny for buyers. In reality, they get up and say, I'm ready. Flip the switch, let's sell. Owning and operating a business can be rewarding, stressful, invigorating, discouraging, exciting, boring, stimulating, challenging, hard, better than being an employee. All at the same time. You can't decide to sell because of a bad day, week, or month, and especially a bad year, since that's never the time to sell. Ask yourself, so you're ready to answer the following question when a buyer asks it, Why are you selling? The answer can make or break a deal, and you don't want to blow a deal with a great buyer because you aren't prepared. We'll provide a lot more on the good and bad reasons to sell shortly. Let's start with why you would want to own a business. Over the years, we've asked 300 plus audiences why they wanted to own a business. The top answers control, independence, financial, income and equity. Creativity. Reap the benefits of my hard work instead of shareholders doing so. Be the boss. Flexibility. Those are the reasons individual buyers often have for buying your business. When you are large enough for institutional slash professional buyers, then like private equity. It's more about growth and earnings. I hope fun was on your list when you started or bought your company. If it's not fun, why do it? This is not like getting a job, then not liking it and getting a new job. Whether it's still fun or not, as you think about selling and exiting, start by answering the following. What's my next great adventure? What does your spouse want your next great adventure to be? That may be an even more important question. We have three clarifying questions we like to ask owners who are thinking about selling after we discuss why they are thinking of selling. The first is, why are you selling? The second is, what's your next great adventure? And the third is, if your next great adventure is retirement, does your spouse want you around 24-7? And yes, some owners have changed their immediate plans when asked these two questions. He did what? One time, a business owner hired us to facilitate selling to a buyer team who had approached him. We had discussions, answered questions, provided information, etc. When the prospective buyer made a nice offer, our client said, Well, I guess I better tell my wife. She exploded. The main issue was the lack of trust she felt because her husband hadn't told her he was approached by the buyers. Once she had calmed down a little, we had a meeting with the couple CPA. The wife asked, What if I refuse to sign the contract? and stormed out of the room. The sale didn't happen. It took the wife five years to get over the lack of trust. By that time, the company's value was lower because the husband had become more interested in fishing than the business. When they say it's not about the money, it's really about the money. Look, it's about the money, isn't it? Which is why my fourth initial question is, have you talked with an investment advisor about your financial situation? Before you go much further, do a financial assessment to ensure you can afford your next great adventure. I highly recommend working with a financial advisor you know and trust who can run projections and probabilities of what your financial future will most likely be like. All major advisory firms can do this. Often, the urge to retire or do something different clouds our vision. We get enamored by the thought of not working, or in an owner's case, not managing people, cash flow, or customers. We fall into the fire ready aim category, and then wonder what the heck we were thinking. Make sure you've thought it through and have discussed it with your team. And, speaking of your team, it should include an MA advisor. We're biased on this. An MA attorney who does deals in your size range, a CPA with deal experience, a financial advisor for planning, an estate planning attorney. You may need others as well, including a human resources expert, an environmental consultant, a fractional CFO, works with multiple businesses on a contract or project basis, an industry expert, etc. What to think about? Here are seven things to consider when selling. I'm sure you'll have more based on your personal situation. 1. Can you leave it? In other words, is your identity tied to the business? I've met many owners who don't have a life outside their businesses. One owner was 88, and his son was about 50. The son was the top revenue producer, but Dad said, I don't think he's mature enough to run the business. Keep in mind, with Dad at the helm, the business's sales were flat, despite the son increasing his sales annually. If your business has become a prison, exit sooner, not later. Feeling you are in prison is a sign of burnout. We'll cover other reasons to exit shortly, but take this advice from someone who sold their business. The best time to sell is one year before you're burned out. If only it were so easy. Seriously, no matter what your reasons, sell when the business has been and is still going great, when sales and profits are up, the pipeline of orders is full, and realistic projections show a nice upward trend. Not just for one year, but for at least the three preceding years. If you have a flat three to five years, followed by one good year, and then put the business up for sale, it raises suspicions. Why sell now? What are you worried about? It may be tough to leave when things are going great, but it's a lot more lucrative than when they aren't. 2. Family. Do you have kids in the business? Are they capable of running it, paying you for it, or paying off a bank loan, and interested in owning it? If the answer to any of these three questions is yes, the first thing you need to do is have a frank discussion on value, deal structure, your role, and other basics. 3. Management. A similar talk may be necessary if you have a manager or management team who can run the business and wants to own it. I've seen a few instances where the management team loved the idea of buying the company until they found out they'd have to sign on a bank loan, put up collateral, and make personal guarantees. On the good news side, we've helped create and implement succession plans so employees could buy in over time, often using their bonuses to buy shares. 4. Timeline. When do you want to sell? We'll talk more about this later, but for now, make sure you're not expecting selling your business will be like selling a house or it can go super fast. Allow yourself at least a year. 5. Estate plan. Use an estate planning attorney, your financial advisor, and a tax advisor because estate and gift tax laws are confusing. Especially if your state's laws differ from federal estate tax laws. It can get tricky if you have multiple children and some work in the business and some do not. This involves specific planning and may require life insurance to make things equal. 6. How will you exit? Do you want to slide or high dive out? This means, do you want to phase out over two, three, five years the slide, or be done after 90 days of supporting the transition, the high dive. There's no right or wrong. It depends on you, your role, the buyer, the size of the business, etc. If you are selling your small business to an individual buyer, you will probably be out sooner, not later. If you are selling to a larger firm, a family office, or to private equity, you as the seller and or your management team will probably stay on for at least two years. 7. Emotions. Given the above thoughts, can you emotionally handle giving up your baby? There is no sense in thinking about selling if it will cause you too much stress. You must be sure the time is right. Obviously, the decision to sell can get complicated. Why sell? People have two general categories of reasons to sell a business. The good reasons and the bad reasons. Let's start with the bad reasons to sell. If you're selling because something happened to the business, that's bad. A distressed sale is never good for the seller. The problem could be losing money, dominant customer leaves, legal issue, little barriers to entry. Think franchising enters your industry. Insufficient competitive advantage. Bad business decision when all your eggs are in one basket. I was referred to a business owner in a state of panic. He wanted help finding a buyer or investor for his business. He was in a world of pain because his primary customer got a new CEO who shifted their business to a friend of his. As a contract manufacturer, the prospects weren't pretty. I worked on a handful of distressed company deals and found a bad business decision is behind most of them losing money. It's not just the initial bad decision, but the reaction to it, which is usually fight versus moving on. The best advice any owner can get to exit with style, grace, and more money is don't let the business suffer. Buyers don't like that. On the personal side, a bad reason is something catastrophic. The more catastrophic the event, the more urgency there is to sell, and you lose leverage. This could be divorce, death, disability, health issue, serious dispute, family or partnership. Here are a few examples. MK was getting divorced, and it was bitter. His wife didn't want anything to do with the business or him. He was forced to sell at a price much lower than it could have or should have been, one reason being timing, and the other being the divorce was so time consuming and stressful. The business suffered. Roy took over his wife's business when she got a debilitating illness, which she died of after about a year. He was a retired engineer and had no interest in running the business, other than collecting the income. Those distributions decreased severely over time, and he sold for less than 10% of the business's previous value. Darren had a food manufacturing business with great products, reviews, and solid growth. He also had a health issue, partially related to all the heavy lifting he did while growing the business. His doctor told him if he didn't quit, he, the doc, wouldn't do any more surgeries on him. A forced sale for sure. Now for the good reasons. The best reason to sell. The best reason for selling is I started planning to exit five years ago. And the business and I are ready for new ownership. But what would this entail? We'll cover that in the next two chapters. The rest of the good reasons. The business has outgrown the owner. We recently helped sell a business whose owner said he was done managing people. The business was growing, and he couldn't handle managing people anymore. The buying group solved his problem, and he stayed on to do sales and client strategy. Too good an offer. A friend got an offer from a large firm in a complimentary industry. The timing was close to his timeline for selling, so he couldn't turn down the offer. Burnout. People change jobs regularly. So it's natural some owners want to do something different, find new challenges, or do something that allows them to work at a slower pace. Life happens. The seller went through a divorce, had a special needs child, and had to put her parents in a nursing home. When both parents died within a week of each other, she realized she couldn't run the business like she wanted and needed to. Retire. This is a legitimate reason. A client was selling after a great year and a half, preceded by two mediocre years. COVID effect. When I asked how he explained selling at this time, he simply said 70, as in, I'm 70 years old and need to slow down. Sometimes an offer or life sneaks up on us. This is all the more reason to pay attention to the next section, which is a segue to the next two chapters on getting your business ready to sell for maximum return. You want to be ready if an unexpected great buyer comes along with a solid offer. Exit Plan Basics. Here are the main elements of your exit plan. Communication is a prerequisite to the following steps. It's touchy to think about telling your employees your plans, isn't it? But at some point, you may have to or should bring in key people. In the meantime, it's a good start saying things like, I'm getting to retirement age. Wow, time flies. That vacation was great. I need to take more. My spouse really wants to travel more. The bigger the secret, the bigger the surprise, the harder it is to gauge your team's reaction. You need solid financial systems, and thus accurate financial statements. Do an internet search for what to do when preparing for a business sale, and the following will, or should be, on every list. 1. Put great people in roles that fit their skills. Don't call a bookkeeper your accountant or controller. Don't call your data entry person your bookkeeper. 2. Write clear procedures with checks and balances. Hold people accountable to these standards. 3. Use good accounting software. QuickBooks is great up to a point. When it's not, invest in more robust software. 4. Monitor and forecast cash flow regularly. 5. Reconcile all accounts, including inventory, and don't expense inventory when purchased. If you do, you're understating income. 6. Ensure as you grow that your people get the right education on best practices, laws, trends, etc. Build a good management team. You need more than just capable people in each role. Know where you need to shore up your team and when. For example, if you're an operations expert, you probably want to build up other parts of the team first. Think about the future, not just current skills. Can your people grow, take on more leadership responsibilities, and do it all enthusiastically? Let them do their job. This means delegate. Seek out people with diverse backgrounds and experiences. Encourage collaboration and open communication. Invest in their education and development, perhaps by hiring a coach. Finally, lead by example. This includes ethics, communication, accountability, and transparency, not to mention supporting your team as they grow. Grow the business. Don't just say you can grow it. Do it. Buyers are skeptical by nature. Look at all the ads for businesses for sale, and you'll see why. A lot of owners get to a certain point and then coast, and you can only coast downhill. Buyers look for an opportunity to instantly create value. Be prepared to show them what you did. Document it and show how the buyer can replicate your success. He could have got much more. The owner seller was doing fine. He built the business from startup to about $1 million in profit after his salary and perks. He was happy, didn't want to work any harder, and life was good. The buyers came in, changed the compensation plan to reward employees, put in an aggressive marketing program, and were up 66% after one year. Whether the seller needed it or not, he left a lot of money on the table by coasting. Recruit and retain great people should be your mantra, especially given the cost of replacing people. Here are some numbers. The Society of Human Resource Management says it costs 6-9 months of a person's salary to replace them. The Center for American Progress says it costs 16% of an hourly worker's annual income, and up to 213% for exempt employees. And this is just the financial burden. What about institutional knowledge, the effect on morale, or damaged customer relationships? Retaining your people should be your top priority because that's what every buyer is really buying. Avoid customer concentration. Your top customer and you may love each other, play golf together, etc. But to a buyer, it's risky to have too many eggs in one basket. Many small businesses have a customer who accounts for more than 10% of their gross income, but when it gets to 20, 40%, or 60%, it's scary. Diversify, diversify, diversify your customer base. A bonus is you'll alleviate pricing pressure if you don't have a dominant customer. No dominant supplier. Years ago, a banker friend told me they were lending money to a business and were spooked because the business only had one supplier. The bank didn't offer the loan until they had done due diligence on the supplier to ensure they were healthy. The lesson is, have multiple options for products or services. Get your tech together. This goes two ways. First, use whatever technology you can to improve productivity. One new owner eliminated the need to write most checks by switching to automatic payments on credit cards, a payroll service, and ACH payments. Second, don't use technology just for the sake of using it. It may be fun, but it can be a time suck and costly. Conclusion, ask yourself the tough questions. Be ready to answer tough questions from your advisors and buyers. Plan, plan, plan. Use your team because the less day-to-day work you do, the better. Remove as many blemishes as you can. All businesses have some because there are no perfect businesses and no perfect deals. Above all, realize if you have a mature, profitable business, you control the deal. If it's losing money, the buyer controls the deal. That doesn't mean letting your ego get in the way. It means you have the luxury of selling to whoever you want to sell to. Sell when you're on top.