Business owners have an exit strategy issue. There’s a consensus among exit planning professionals that their clients often don’t think about their plans until it’s too late.
“It’s one of those things, like an estate plan, that everyone knows they should do but it’s easy to put off,” said Shawn Pearson, an attorney at Woodburn and Wedge in Reno. “It’s like exercising and getting eight hours of sleep, it’s easier said than done.”
There has been a rise in owners thinking about exit strategies, Pearson said, but it’s still incredibly low. At the depth of the Great Recession, he said there were essentially zero business owners thinking about their exits. Now, with the economy strong, business owners are instead focused on dealing with the day-to-day operations ensuring they are capitalizing on the opportunity to make money.
As Baby Boomers age out of their careers, the Exit Planning Institute estimates there’s 4.5 million businesses and $10 trillion worth of value expected to transition in the next 10 years in the United States. It’s likely only a small percentage of those businesses will successfully transition, said Robert Glaser, president of the Southern Nevada chapter of the Exit Planning Institute. The wealth those businesses holders maintain could also near $30 trillion.
Glaser said it’s possible the number of businesses that end up successfully transitioning is in the 1 to 3 percent range, because of an estimated 50 percent failure rate before even reaching a point transition is possible. Because so many businesses potentially could transition and so few actually do is why there’s a growing segment of professionals seeking a piece of the exit planning pie in the corporate realm, Glaser said. If they can help the 80 percent of businesses that don’t sell have a successful transition, that could turn out to be a hefty profit.
For the business owners who are able to pass on their business, there are several ways for them to make the transition. The business can be sold to an internal or external buyer, private equity or strategic acquisition, enter into an Employee Stock Option Plan, or transition the business to a family member.
“All those options have their pluses and minuses,” Glaser said. “There’s also a lot of ways to structure deals and some have more risks for sellers.”
The vast majority of businesses end up just closing as most businesses barely are scraping by with their financials, said Brad Bottoset, a business broker at The Liberty Group of Nevada.
Bottoset said in his experience up to 95 percent of business owners he works with have no plan. Bottoset said the first thing an owner wants to know in their meetings is the worth of their business, and it’s rarely the level they believe it is.
“It is one of the sad things I come across way too often,” Bottoset said. “My core business is helping buyers buy and sellers sell. Way too often when people come in and [they realize the business is] not worth what they thought it was.”
What’s the Value
A good way for business owners to get an idea of their position is to use the Value Builder System, a nationally recognized program to help identify a business’ strengths and weaknesses and provides recommendations for improvement.
An issue for a lot of business owners is they treat it like a “lifestyle business,” said Chuck Mohler, president and founder of Eagle Corporate Advisors.
“And many look at the business as a cookie jar, a way to fuel their lifestyle of trips, cars, boats or other activities. Everything is in the mentality of a write off to live my lifestyle. It’s not what can I do and should do in the business to make it valuable and sustainable.”
Glaser said those “lifestyle” businesses often don’t end up transitioning well and if they do, the business owner is in for a wide-awakening in their retirement budgeting. With retirement on the mind, Glaser also suggests owners truly think about their financial needs in retirement as well as what they’ll do with their newfound free time.
“What a lot don’t think about is after they sell, what are they going to do with themselves,” Glaser said. “They go from people wanting to talking to them, courting them, to being a retired guy with nothing to do.”
Business owners also are likely to get their best offer on a Letter of Intent and further due diligence often turns up points of the business leading to deductions from the offer price, Glaser said.
A really well-run business can be prepared for a successful transition in less than a year, Glaser said. Less prepared businesses can take up to five years to get everything in order for a buyer.
“Very few are ready to sell right now,” he said. “Most sellers are not attractive to potential buyers without preparing. A lot of exit planning is simply helping a business owner know what they don’t know and give them an opportunity to prepare for whatever their ultimate transition might be.”
Having a Plan and Team
For companies with multiple partners, it’s especially important to get a buy-sell agreement in place to provide a framework for how a business might end up as early as possible, said Pearson.
“It’s a lot like a prenuptial agreement, it’s always better to discuss the breakup of a business when things are going well, folks are detached and thinking pragmatically,” he said. “It sets up rules between partners and if they try to do that in the midst of a crisis or dispute, it’s much more difficult. Having that framework in place, even if they end up doing something completely different, is valuable when it’s time to break up.”
Talking to an attorney is one of the first recommendations Bottoset provides clients as well. He’s had clients lose out on sales because the value driver of the business, 200 client contracts, weren’t assignable to a new business owner.
Likewise, Bottoset said an appointment with an accountant is very important to ensure the books are as clean as possible. Then it’s time to chat with a financial planner to figure out the money the business owner might need in retirement.
Exit planning is best done with a team, Glaser said. Having a team of competent and trusted partners in the process is invaluable, he said, including a banker, CPA, attorney, insurance agent, and wealth advisor. Glaser said if a business owner has one solid professional, they likely can help point to others.
“You have to make sure you have the right people,” Glaser said. “Business owners are typically too busy running their business, which is also not a good sign. It says they’re working in the business instead of on the business.”
Few business owners, no matter how confident, can do all the aspects needed to successfully plan for a profitable exit, Bottoset said. The lack of ability to plan isn’t a shot at the business owners, but rather the strong focus and skills that made them a business owner in the first place.
“The biggest challenge is they work in the business as opposed to working on it,” Bottoset said. “When they’re at a seminar and hearing about it, it all makes sense. But then they have to go back and they have machining to do or pies to bake and the notes sit on the credenza.”
Advisors can help put together a team, although often each professional can recommend similar-minded colleagues. Altogether, the advising team will help a business owner get to the point down the road.
“There’s a gap between A and Z, gaps in the business, the personal life, the financials and the emotions,” Mohler said. “We can built that bridge with all these professionals and they all have different tools to build the bridge.”
Other aspects looked at by perspective buyers including the rest of the staff, the operations and whether or not the business can succeed without the business owner.
Through the end of 2018 and into the first portion of 2019, the stock market has been volatile. While exit plans are most often executed within private businesses and not reliant on the stock market as an indicator, Pearson said the stock market and its general relation to the U.S. economy can play into how much business owners can get for their business in a sale.
If the economy stays strong and the stock market begins another steady rise, it’s best the business owners keep working on making the business as profitable as possible. If the market tanks and takes the economy with it, Pearson said some businesses will look at it as an opportunity to take a partner out of the business.
“Maybe the economy can’t support as many folks at the top,” he said. “From a sellers perspective, it may mean you’re not paid top of the market prices and that can be a hard pill to swallow.”
Glaser said there are a lot of private equity and venture capital firms with a lot of money, perhaps up to a trillion dollars, looking for businesses to put their money into for a solid return.
“Buyers are getting more selective,” he said. “There’s lots of money out there, the trouble is they only want good deals that get the returns they want and there are so few out there to get done. You also see the trend that private equity is keeping businesses longer than typical, in part because there’s no better opportunities.”
Bottoset has been a business broker for 19 years and he was the busiest he’s ever been last year. No indications point to a slowdown. He said the Great Recession plays into the business owners looking for their exit before it happens again.
“When it was really strong in the mid-2000s, a lot of business owners didn’t have to work all that hard, just show up, turn the lights on and make money,” he said. “Then 2008 happened, so suddenly a lot of these guys didn’t make it and those that did, suddenly they’re working twice as hard for half the money.
“Fast forward to 2017, 2018, they’re making money again, the economy is strong and they don’t want to go through it again, so they’re coming to me and saying, I’m ready.”
Nevada was one of the worst hit states in the Great Recession, but Bottoset said there’s a positive trend which can help bolster the exit strategies in Nevada, even if the national economy slides.
“We have so many people coming into the state, and a lot of them are middle managers from California, 45 years old, who don’t want to be a middle manager anymore,” he said. “So they can sell their house for $1.3 million, buy a business and be their own boss. There may be some signs of a recession in the not so distant future, but I don’t think it will impact Nevada that hard.”
Mohler said it’s ironic so many Baby Boomers left the grind of the corporate world to start their own businesses and live their version of the American dream, yet now as they approach retirement, there’s no money for their business if they don’t accurately plan for their exit.
“If their business isn’t in shape to sell or transfer, they don’t get that nest egg to move into the third phase of their lives,” Mohler said. “They must realize they need to begin now with the end in mind, to be three to five years ahead of the curve of when they want to consider getting out.”