Not having an exit plan is like jumping from an airplane without a parachute (usually not a good outcome). There are specific things that owners can do to maximize the value of their business and reduce risks, and taxes when they exit. But it requires planning ahead. Owners who have an exit plan will always have a better landing than those who do not plan.

It is a fact that every owner will transition out of their business in one of five ways; 1) sell to a 3rd party 2) transfer the business to insiders (family or key employees) 3) die 4) become disabled 5) liquidate (out of business).

Hire a professional to help create your plan and exucute the plan for a better outcome!!

Having an exit plan doesn’t mean you’re courting failure with your business.  You expect success and often a number of incidents and situations occur that cause you to exit or discontinue.  Even if you continue your business until death, you need to have a strategy for passing it on or selling it.

What exit plan do you have?  What plans do you have for passing it on when you can no longer continue?  What exit plan do you have if your business has become a dinosaur?

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Post from: Small Business Boomers

My favorite B&B has experienced this problem.  I wrote about Olde World B&B last year, after the new owners took over.  They are gone now, victims of the downturn and the very slow travel market.  The old owner took over the business, for which I’m thankful.  But I got to thinking about how difficult it must be to make the decision to close a business.

My husband owned a rental business in the late 1980s and he experienced the same thing – he had to close within the first year because he just didn’t have enough capital to keep it going.  So how do you know when to give up on your business?

The first sign. The first indication that you will have to close is when you can’t pay your bills.  That sounds obvious, but for many small businesses, it may seem like a temporary situation.  They keep thinking, “It will get better.  We’ll sell more next month and things will be fine.”  Then next month comes and the negative cash situation continues.

The next sign. After a few months of not being able to pay the bills, two things happen:  You begin to think, “Maybe I’m not going to make it,” but also, “This is just temporary.  I will get more cash to ride it out until things start improving.”  You start using your business and personal credit cards to finance day-to-day operations.

The next sign. Soon it becomes apparent that you might be able to let a few bills slide, but you can’t ‘make payroll.’ Since it’s not likely that people will continue to work for you if you don’t pay them, you have to lay some off.  You try to keep a few, but when you can’t pay even those few, it gets closer to the time to shut the doors.

The final sign. When you can’t make the monthly payments on your bank loan, the loan manager calls you in for a talk.  At that point, you realize you aren’t going to get out of this without either (a) Winning the lottery or (b) Having someone hand you a wad of money.  So you talk to your attorney about business bankruptcy.  Maybe you can keep going in Chapter 11.  Most likely you can’t.

At the end. You announce that you are closing the doors.  You have an auction, like my husband did, and get as much money as you can from your business assets in order to pay the bills. You don’t want to see any creditors get stuck, but the bank wants its money first, and the rest of them get what is left over.

After a few months, the hurt fades a little, but not much.  And you think, “If only I had had a little more time, another ad, another sale, a few more customers…a little more money.”

The mark of a true entrepreneur is the person who says, “I’d like to try again.”

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Post from: Small Business Boomers

A recent Wall Street Journal Small Business Link article notes that small business owners are increasingly forced to provide contracts for buyers.  If you need to sell your business, here a couple of tips:

Get Your Business in Order. I mean, clean up.  Clean the offices and your production areas before you invite potential buyers.

Prepare financial documents. Buyers will want to see your business tax returns for at least three years, your sales for the past two years, and all contracts you have signed with vendors. As part of the sales process, you will need to have an appraisal of your property and of all assets; you can also have your CPA give you the depreciated value of equipment and vehicles.

Determine goodwill.  You will need to estimate the value of your customer base, to find goodwill.  Since goodwill is an intangible, you will have to substantiate it with sales figures.

Find your bottom line. Actually, you will need to have two figures in mind – a publicized sales price, and your actual bottom line, for the negotiations. The difference will probably be goodwill.

Determine your selling options. Think about the terms of a sales agreement that would be advantageous to you.  How long would you like to be paid?  How much would you want each month, each year?  Talk to your tax adviser and look at the effect of options on your tax situation.

Think about transition. How long do you want to stay to help smooth the transition?  A longer transition might help the buyer, but it might not be right for you.

Place Ads. BizBuySell and other online business advertisers (I wouldn’t call them brokers) can help you with online advertising.

Prepare contracts. You might want to get your attorney on board early, to prepare contract language if you need to act as the banker.

I will have more about negotiating business sales contracts later this week.  In the meantime, is it time for you to start thinking about selling?  One of the most difficult tasks is getting your mind around the idea that you are selling this business you worked so hard to create.

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Post from: Small Business Boomers

What a mess! Family businesses are difficult in the best of times. The man’s story brought back some memories. I can tell you about them first-hand. For 5 years I worked in my ex-husband’s small business, along with his brother and sister-in-law and his mother. Problems in a small business come from a variety of sources:

Differences of Opinion. Take a small business like the one I was in. My ex-husband, his brother, and I all had strong opinions. In a non-family business, there would be a clear hierarchy and the boss would be the

Difficulty in Disciplining/Reviewing Employees. Try telling your mother she’s not doing a good job. Or your sister-in-law, who wants to just talk to her family instead of working. And forget about firing a family member.

Problems with Changes. In an ideal situation, the family would make a joint decision about changes. If the leader of the family would call everyone together and let them know and they would discuss what would happen and whether each of them would stay or leave the business. Maybe the family would decide to buy the business from the leader of the family.

Not telling the family is crazy. I realize that the buyer has the right not to take all the family members when he buys the business. In the business I was in, we sold and moved, but my brother-in-law and his wife stayed with the business, at the new owner’s request. Since I was asked my opinion, I told the owner to get his family together and tell them. The sooner the better. What would you do? What advice would you

Post from: Small Business Boomers

Who Wants to Buy Your Business? Your prospective buyer might be anyone, but I would guess they have several characteristics:

They are young – probably under 35
They are male, although more and more I talk to women who are buying businesses.

Inexperienced Buyers. The person buying your business has probably never bought anything more complicated than a car.  This means they are naive about the complicated process of buying a business.

They are in a hurry. Because they haven’t done this before, they underestimate both the complexity and the time it takes to go through the process.

They don’t have money. This works against them in a couple of ways:

• They don’t want to pay a lot of money to an attorney or a CPA.  This puts them in a difficult position for evaluating your business, since they don’t know much about evaluating financials or legal documents.
• They don’t have collateral and they may not be able to get a bank loan.  Which means “seller financing.”  That’s you.  Be prepared for the question and how you might want to structure a seller-financed deal.

Short on Negotiating Skills. Because they are inexperienced, these people are also short on negotiating experience.  They don’t know how to negotiate price or to get the terms they want.  They may not even know what terms they do want.  You will need to be patient with them.

They are Needy. Inexperience, lack of money, and being in a hurry all contribute to your potential buyer’s most striking characteristic.  He’s needy.  He is sure your business is the only one on the planet.  He may not even take a good look at your financials because he’s in such a hurry to get this “last chance” deal.

I hope you aren’t thinking of taking advantage of these poor people.  Maybe you’re wondering why you want to sell to someone who has no money, no experience, and no negotiating skills.  But if you are serious about selling your business, you will run into this type of buyer.  I guarantee it.

If you have sold or are selling your business, I would be interested in your experience and your thoughts.

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Post from: Small Business Boomers

By way of background, yesterday, I mentioned that John has created a picture of four different types of business owners, depending on their financial and mental readiness.  Some owners are mentally ready, but not financially; some are financially ready but not mentally.  Some are neither mentally nor financially ready (these people probably shouldn’t be doing anything!), and some are both mentally and financially ready. I talk to lots of baby boomers who are considering getting out of their businesses and I see all four of these possibilities.

John, which is more important – mental preparation or financial preparation?

Business owners need to focus on their own personal situation to determine whether ‘financial’ or ‘mental’ preparation is more important.  There are many business owners who have a high financial readiness – i.e. they have plenty of wealth and sources of income outside of the business.  However, these owners simply do not know what they would do with their time, effort, and energy if it was not continually challenged by their business venture – they need to work on their mental readiness.

Alternatively, there are just as many business owners – particularly today – who suffer from ‘burn-out’ and would like to leave the business right away – a high mental readiness for an exit – but they have not saved enough money outside of the business to provide for their lifestyle.  In this case, that owner will likely need to bolster their financial readiness over a number of years as they build on their eventual exit unless, of course, the business is saleable today (or they have another exit option that provides for their post-exit expenses).

Please explain the difference between “selling” and “exiting.”

“Selling” a business is an event.  It is what occurs between a seller and a buyer and requires quite a bit of attention just to get a transaction completed.

“Exiting” a business is a process.  It is the planning that goes into the eventual disengagement of the business owner from the operations and financial dependency on the business.  “Selling” therefore can be a subset of “exiting”, however, many other exit options exist.  Therefore, an exit strategy plan is a process of assessing your readiness for an exit (both financial and mental), looking ahead to the future and your desired exit option (transfer to management or a financial group, partial sale to an ESOP, gifting to children or charity) and aligning the resources of the firm to accommodate that exit.

You say the period we are in now (2008-2010) is a “neutral market.”  Has your view of this market changed since mid-September 2008?

The cycle of business transfers is right on schedule in 2009 (see Robert Slee’s book, Private Capital Markets).  However, this time it is more severe than in the past cycles.  So, yes, the market is more of a ‘buyer’s market’ than a neutral market today.  However, due to the restrictions on capital being made available to fund business purchases, this marketplace is quite uniquely depressed.

The largest take-away that an owner who has not exited can glean from this market behavior is to not be caught in the next cycle.  An exit strategy plan takes years to execute.  Baby Boomers will be in their mid to late sixties by the time the next seller’s market appears.  Owners need to plan today for their exit when that window opens up again.  Don’t wait until prosperity (or market calmness) appears again to begin your planning.  Time is working against the Baby Boomers and they will continue to put their largest asset at risk if they do not take advantage of this recession to plan their exit in a few years.  There are many things that can be done today to set this plan in motion.  Owners need to take the time that this recession has created to align their decisions towards their exit and to be prepared when the next exit window opens.

Post from: Small Business Boomers

I recently read a book titled Exiting Your Business Protecting Your Wealth by John Leonetti and I talked with Mr. Leonetti about how Baby Boomer business owners can exit their businesses gracefully while getting the maximum value for all their hard work. I’ll be sharing some of his thoughts today and tomorrow.

How do Baby Boomer business owners assure that they get the highest value out of their business if they sell?

The decision to sell for the highest price generally requires a demonstration of the highest sustainable profitability that the owner’s company can generate for a future buyer.  Profitability, therefore, should be illustrated in a manner that convinces a buyer of the ‘true’ net profits of the business.  The owner should also be able to explain, in detail, the future prospects of the business as well as how the buyer can continue to achieve success – with or without the owner continuing to work.  An owner should be able to identify the personal expenses from the business in order to emphasize the ‘true’ profits of the business, i.e. the business should be as ‘clean’ as possible to show the buyer what it will truly like and how the business will run once that owner is gone.

How do you decide how long to stick around?  It seems many Baby Boomers want to keep a “finger in the pie” in the business, but does this generally work?

Every business owner will need to make their own personal assessment of their ‘mental readiness’ (EYB, chapter 3) to stop working.  However, the process of keeping an owner on board for a ‘neat and orderly transition’ is a part of the selling negotiations and is generally controlled by the buyer.

In general, business owners do not make good employees.  Therefore, once the business has been sold, that owner needs to be prepared for the fact that the new buyer has [likely] purchased control of both the finances and strategic decision making within the business.  Consequently, the new owner will likely want to implement changes.  This can be difficult for an exiting owner to adjust to.  Owners need to spend time thinking about what they will be doing after the business exit so that they can find productive and meaningful uses of their time.  This makes the transition much smoother, but is easier said than done for an owner who was driven by business success.

Four Types of Boomer Business Owners
Mr. Leonetti describes four types of business owners, according to their mental and financial readiness, and he takes readers through a series of questions to determine where they fall on the spectrum.  This is a valuable exercise that anyone who is interested in getting out of a business should undertake before jumping into the process.

Tomorrow, I’ll give you Mr. Leonetti’s response to my question about how the current market situation affects your business exit plans.

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John M. Leonetti, CFP, CM&AA, knows about businesses and exiting businesses.  He successfully exited a previous business and is currently the owner of Pinnacle Equity Solutons, an exit strategies firm specializing in exit strategy design and execusion services to advisors and privately held business owners.   He also teaches private finance to MBA students as an adjunct profesor at Suffolk University; has been a financial consultant with Smith Barney; a financial advisor with Merrill Lynch, Pierce, Fenner & Smith; a mergers and acquisitions associate; and a manager in his family business.

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Post from: Small Business Boomers