Walk Away Wealthy: The Entrepreneur's Exit-Planning Playbook

ISBN-13: 9781626340848

Media Type: Hardcover

Publisher: Greenleaf Book Group Press

Publication Date: 07-01-2014

Pages: 264

Product Dimensions: 5.80(w) x 8.50(h) x 1.10(d)

Age Range: 3 Months to 18 Years

Mark Tepper is a CERTIFIED FINANCIAL PLANNER™ professional with over thirteen years’ experience. He appears regularly on CNBC and Fox Business, and his financial insights have been featured in publications including the Wall Street Journal, Kiplinger’s, and CNN Money. A sought-after public speaker, Mark has presented at Cleveland Clinic, Vistage, Entrepreneurs’ Organization, and numerous colleges and universities.

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Secret #1

Create Your Exit Plan Before You Need It

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
— Paul Samuelson, economist
The Facts
Peter Alternative is an investment banker with Mirus Capital Advisors in Burlington, Massachusetts. One day, he polled a group of entrepreneurs working with the Massachusetts Institute of Technology Enterprise Forum and found that for every twenty entrepreneurs he surveyed, fifteen had received unsolicited offers for their businesses.

That’s not surprising. In my experience, if you’re running a successful business, you are very likely to receive an unsolicited offer at some point. What I do find surprising about Peter’s account, however, is the fact that not a single one of the entrepreneurs he surveyed had a cohesive plan in place for responding appropriately to the offers they received.

You can chalk that up to a lack of exit planning, something that is a huge problem for most business owners. If you get an unsolicited offer for your company next Thursday and you don’t have a comprehensive exit plan, what will you do? Will you know if the offer reflects an accurate open market value of your company? If you accept, will you soon find yourself improvising your legal strategy and tax planning? That’s a recipe for financial disaster.

Unfortunately, not all entrepreneurs see the value in early exit planning. In fact, when it comes to exit planning, I’ve found that entrepreneurs fall into two basic camps:

1.    Those who treat their businesses as investments and make decisions that build sustainable long-term value, including putting a solid exit plan in place
2.    Those who operate their businesses as cash-generating engines to fund their lifestyles, with little or no thought or planning beyond the next quarter

If you are part of the first group, you’re already doing many of the things that will increase your company’s long-term value. If you got an offer from a prospective buyer tomorrow, you’d be much better prepared to negotiate an attractive deal. If you’re in the second group (which is much larger), then it’s unlikely that you have even given more than a passing though to your exit strategy. You’re not thinking for the long term, so you haven’t designed your company to grow sustainably over the years. You could be squandering millions of dollars in potential company value.

Sound exit planning will increase the value of your business in a buyer’s eyes. Despite this, many entrepreneurs believe the myth that they can put off exit planning until they are “ready to sell,” whenever that is. Big mistake. Procrastinating leaves them unprepared not just for an out-of-the-blue offer but for an orderly exit on their preferred terms. These entrepreneurs are not in a position to understand how an offer impacts their sale price, tax burden, or future wealth. And they lack the knowledge to negotiate effectively with a potential buyer. More than a few owners have been forced to turn away an offer because they didn’t have their ducks in a row, only to find out the hard way that it was the only offer they would ever receive.

It’s not difficult to understand why many entrepreneurs are reluctant to think about exit planning at the beginning of the business life cycle. When you launch your company, you spend most of your time in survival mode, doing whatever you can to generate income and keep the lights on. Planning for your exit seems like a frivolous waste of time. Entrepreneurs also ignore exit planning because of other misconceptions:

•    They assume that when they are ready to sell, a buyer will appear.
•    They don’t understand the complexity of selling a business.
•    They don’t like thinking about retirement or mortality.
•    They assume they will just pass the company on to their kids or sell to a group of employees.

But the most common problem may be that entrepreneurs think about their exit as an isolated event—they accept an offer, get a check, and book their flight to Bermuda. But an exit is not an event; it’s a process that can take at least two to three years—a process that should continually be subjected to revision and updating. Creating your exit plan should be a time-intensive process; this is a dynamic situation, not a static plan. You don’t have to create the plan again and again into perpetuity, but it will need to be recalibrated and fine-tuned as the facts change. The most successful businesses are those whose owners view them as an investment—and thus begin the exit planning process as soon as possible.

If you view your eventual exit not as an ongoing investment but as a disconnected moment in time, you won’t take the long view of your company’s development. You’re more likely to neglect the strategies that build long-term value—and value is what brings the life-changing payout, the pot of gold at the end of the rainbow.

Like it or not, exiting your business is inevitable. You’d better plan for it, because ignoring it will cost you. As a fictional example, let’s say that in 2012, Jim Smith told his financial advisor he wanted to leave his company in five years by selling it for enough cash to live comfortably post-exit. The advisor saw that yearly cash flow was around $1.5 million, while the company’s value was estimated to be around $6 million. Jim’s salary—of $600,000—came out of annual cash flow.

Jim and his advisor set about increasing the company’s value, decreasing taxes, and maintaining the existing value, but they never got down to creating an actual exit strategy.

After five years, Jim’s company had only changed for the worse. A recession had impeded cash flow, and Jim was getting discouraged about the prospect of selling. He hadn’t done anything to improve cash flow through the difficult period, nor had he documented and updated his business systems. His leadership team hadn’t been restructured, and this under-motivated group had little chance of keeping the company running after Jim was gone. It looked like Jim was looking at another five years.

That’s why it’s so critical to begin the planning process as early as possible in the life cycle of your business. When you wait until there’s an offer on the table, there’s no way to put that time back on the clock.

The Secret
If you want to sell your business for the highest possible value, begin looking at your business as an investment in your ideal future—not as a job that you’ve created for yourself—and start developing your exit strategy as soon as possible. If you can, start today. It’s never too late to put a smart exit plan in place, provided that you begin planning now.

No buyer wants to purchase a job. Buyers want an investment that will increase in value while providing predictable, growing cash flow over the long term. Designing your business to do both makes it more likely that a buyer will see it as a valuable, sustainable source of profits that is worth paying a substantial amount to acquire.

Adopting this investment-based view will change the way you see your company. It will enable you to develop your business model in such a way that you can weave value-creating strategies into the business organically. These big-picture strategies become just a normal part of how you run things.

Here are some important steps you can take in planning for your exit:

•    Find the heart of your exit team. You’ll need a certified public accountant (CPA) and a CFP® professional who have managed multiple successful owner exits. (I’ll explain later why a CFP® professional is likely your best choice.) Selling a business is extremely complex and will impact your tax burden and wealth for the rest of your life. While you may never have sold a business before, an experienced CPA or CFP® professional will have presided over numerous sales and transfers. With these advisors on your team—people who will become as familiar with your business as you are—you’ll be better equipped to set sound goals, enact systems that will increase the company’s value, and make business decisions based on facts, not emotions.

You may already have relationships with a CPA and a financial advisor. But if they don’t have experience selling businesses, consider replacing them now with experienced people. You’ll avoid having to replace them later in the process.

•    Develop an operational model that keeps the company running smoothly with minimal daily involvement from you. Some entrepreneurs fail to find buyers because they spend years working in their businesses while not working on them. They’re neck-deep in every department and every transaction; nothing moves without their say-so. While this can be satisfying for the ego, it’s poison for the bank account. From the outset, a smart owner puts in place people, technology, and processes that encourage the business to grow even when he or she is not part of everyday operations. This makes the business more attractive to buyers who aren’t interested in buying you along with your company.

•    Balance today’s need for comfort with tomorrow’s demand for value. Some businesses wind up becoming little more than an ATM designed to generate cash flow to fund their owner’s lifestyle. Revenues go to cover payments for luxury cars, country club membership fees, family vacations, and the like. There’s nothing wrong with any of those things; if you’re going to work an entrepreneur’s long hours, you deserve some R & R. But some decisions that increase cash flow in the present—such as taking on lucrative but resource-draining clients, giving away patents and trademarks, or going for cheap benefits packages that cripple your ability to attract the best people—can conflict with your real goal: building sellable value in the long term.

•    Develop your personal exit plan, and build your company to serve that plan. Do you know your “number”—the amount of money you’ll need to fund your dream retirement? If you want to pass your company to your heirs, how will you ensure that they are ready to run it? What will you do with all that time you currently put into your business? Transferring your company brings up questions about investing, taxation, lifestyle, family, and even your life’s purpose. Knowing your goals and asking critical questions early on lets you develop a business model that serves your financial, family, and personal goals.

How You’ll Benefit    
There’s no benefit to be had by delaying the exit planning process until you are “ready,” whereas there is nothing but benefit to be gained by starting now. By following a business model designed to grow sustainable value over a ten- or twenty-year time frame, you’ll build a stronger, more profitable, more valuable company that demands less of your time today.

A perfect example of this is the company built by Tim Nguyen. Tim is a thirty-two-year-old wunderkind who founded InHouse Solutions, which provides real estate valuation services and software to mortgage lending services around the United States. In ten years, he has built a sixty-five-employee business with about $20 million in annual revenues, but he’s designed the company with such efficiency and such an eye toward his eventual exit that he works only about one hour per week.

This arrangement has let Tim do something that would turn most entrepreneurs green with envy: keep his company and enjoy the comfortable lifestyle and charitable work that it funds, without feeling as though he’s chained to his office desk. He has planned his exit so well that now he doesn’t need to exit—he is already realizing personal freedom and financial independence.

“When I started the company, I didn’t know anything,” Tim says. “Through the process of building it and planning to sell, I realized that I didn’t know how to run it. When you don’t know what you’re doing, you work a lot and you get very tired. You can’t wait to get out. Now that I know how to run the company, things are different.”

 His secret? “Most small businesses grow only to the size of their owners’ egos,” he says. “You have to let go of your ego. You have to realize that there are people in the world who are smarter than you, work harder than you, and can achieve more than you. My job is to attract the right people, provide the resources they need, remove obstacles, and get out of the way. I don’t get involved in strategy anymore.”

Tim estimates that by 2025, InHouse Solutions could sell for $500 million. His experience demonstrates a core principle of smart exit planning: The best way to build value in your company is to build something that operates so flawlessly, with so little effort on your part, that you don’t want to sell it. Those are the businesses that will command the highest multiple.

Whether or not you see yourself holding on to your business for the next few years, there are plenty of other good reasons to start exit planning today:

•    You’ll know your business’s sellability. Wanting to sell your company doesn’t mean an investor will be interested in buying it. By planning in advance, you and your team will find out if your business has sellable value. If it doesn’t, you can choose to make changes that increase value, or you can leave things as they are and make other plans to fund your retirement. Either way, you’re not flying blind.

•    You won’t fear the ups and downs of the mergers and acquisitions market. The M&A market (the market for buying and selling privately held companies) tends to run in three-to-five-year cycles, during which multiples and valuations expand and contract depending on the stage of the cycle. If the time comes to sell and the market is in a trough, you won’t get the amount you want. Sometimes, a successful exit isn’t about when you’re ready; it’s about when the market is ready. When you have an exit plan in place, you can entertain offers when the M&A market is hot and accept a great offer even if it comes a few years early.

•    You’ll hold the power when negotiating. Some entrepreneurs jump at the first unsolicited offer that comes along, even if it’s not very good, because they haven’t done their homework. They don’t know what the business should sell for, but they know they haven’t optimized its value. They fear that nobody else will ask them to the prom, so they take the first offer—and wind up getting less than their business is worth. But having a realistic multiple supported by solid data puts you in the driver’s seat when an offer comes in. You can either decline a poor offer or negotiate a higher price from a position of strength.

•    You’ll have more exit options. Maybe you don’t want to cash out. Maybe your dream is to pass your company on to your children. That’s great. But a successful transfer doesn’t happen overnight. You need to plan for the tax implications. You need to set up the financing. You need to make sure your heirs possess the interest and skills required to run the company. It takes years to put those pieces in place. Start now.

•    You’ll be prepared for the unexpected. I’ve talked about positioning your company to its full advantage to get the most from an unsolicited offer. But what if some hardship befalls you? What happens if you are disabled in an accident and can’t work? Who has legal authority to manage your company? Who else knows how to keep it running profitably? Your exit blueprint should include a clear succession plan and an organizational strategy that leaves the company able to function smoothly without you.

•    You’ll get more money at closing. I’ve seen cases where smart, proactive exit planning doubled—yes, doubled—the value of a company’s liquidity event versus a comparable business that didn’t do any planning. When the owner builds with the exit in mind, the company becomes more stable, sustainable, and valuable to quality buyers.

What to Do
1.    Determine what your endgame looks like, whether it’s a sale to an outside buyer or a seller-financed transfer to a group of your employees. Then build your company and your exit plan in a way that will make your endgame a reality.
2.    Begin assembling your exit team as soon as you can. I’ve already addressed the need for a CPA or a CFP® professional with exit planning experience. You’ll also need two more key people:
•    A mergers and acquisitions attorney to handle contracts and stay on top of issues related to regulatory and antitrust law
•    An investment banker or M&A advisor to handle issues related to financing, debt management, stock ownership programs, and other financial matters

Again, as with your CPA and your CFP® professional, you’ll want people with plenty of exit experience. It’s great if you already have a corporate counsel, but the attorney who sets up your articles of incorporation and advises you about intellectual property protection shouldn’t be managing the legal aspects of your exit, because that’s likely not his or her area of expertise.

Find people who understand the complexity of the exit planning process, give them time to learn about you and your business, and stick with them. Remember, you will probably sell a business once in your life, but the key members of your team may have been involved in the sale of dozens of companies. Trust their expertise.


Exit 911What do you do when you’re less than a year away from your exit date—or you even have an unsolicited offer on the table—and you’ve done no planning? First, don’t panic. Second, drop everything and find your one crucial team member: a CPA or a CFP® professional with extensive exit experience. He or she will advise you on other important first steps and on choosing other professionals for your team.

Did You Know . . . ?According to the Family Wealth Advisors Council, 90 percent of owners of family-owned businesses want to transfer the business to a family member, but more than 70 percent of those businesses do not survive the transition to the next generation. Sometimes family members just aren’t interested in running the company; others lack the skills to keep it profitable, so it fails. This often leads to the founder reassuming control of an ailing business and ultimately losing retirement income. If you want to pass your business to your heirs, start early by finding ways to get them involved in every aspect of the company’s operations.

Table of Contents

Foreword John Warrillow vii

Introduction 1

Part I Building Value

Secret #1 Create Your Exit Plan Before You Need It 15

Secret #2 Know the Value of Your Business 31

Secret #3 Value Is About More Than Cash Flow 49

Secret #4 Make Yourself Expendable 65

Part II Monetizing Value

Secret #5 Selling Is Your Best Exit Option 85

Secret #6 If You Can't (or Won't) Sell, Consider an Internal Transfer 101

Secret #7 Never Sell Your Business Yourself 117

Secret #8 There's More to a Good Deal Than the Sale Price 131

Part III Preserving Value

Secret #9 Have a Financial Advisor Create Your Personal Financial Plan 151

Secret #10 Plan for the Unexpected 181

Secret #11 Don't Bet Your Retirement on Starting Another Successful Business 197

Secret #12 Find Something to Fill the Void After Your Liquidity Event 215

Conclusion: Your Exit-Plan Checklist 233

Endnotes 241

Index 245

About the Author 254