Go to the Light – Start Exit Planning Now

“I don’t know where I’m going, but I’m making good time.” – Quote from a former client.

I just completed a series of discussions with some mature business owners on potential exits from their businesses. As usual, I tend to take away common themes and I thought of this quote from a former client. He used it to describe people he had encountered who were so absorbed in what they were doing, they thought they were making progress.

Through his eyes, he thought they were lost. The latter tended to describe these owners. Each had a valid reason to address the need for exit planning – age, paradigm changes, timing – these were all present and culprits in raising the very thorny question as to “What’s next?” There is an abundance of tools to help an owner through the exit process, but getting started – now there’s the rub.

I hear loads of excuses as to reasons to delay. Many who advise in this space have what are perceived of as ulterior motives – money managers who want owners to sell so they can manage their liquid assets, life insurance sales people who want to make sure owners and their families have the annuity or insurance to cover them as they go on their journey, etc. Unfortunately, while well intended, they give the owner an out by raising questions regarding true intent. I have had some success in this space because I do not care what the result is, I just want to make sure that an owner has all the facts before they make their decision. But I will admit, it is a tough battle.

Having said that, I believe the major reasons for delay are psychological. Fear is often downplayed and yet I think it is one root cause of most owners becoming part of the majority who either have no exit plan or start to plan too late. In his 2000 Year Old Man albums, Mel Brooks cited fear as the great motivator for everything from transportation to the development of the handshake and dancing. One problem for the owner is often the absence of someone they can confide in to discuss their fears. Often seen as the patriarch or matriarch, showing fear is often perceived by them as a sign of weakness. So, they seek solace in finding a solution. This keeps them busy and avoids the need to discuss the obvious – starting an exit plan.

The absence of a “life” after the business is gone is also an issue. Often left with little time to develop hobbies or other interests, the lack of something to go to leads the owner to complacency about staying where they are. Making the business stronger is a great defense and considered “progress” perhaps ignoring at times risks like the paradigm shift which may be too great to overcome.

So, to owners, I say start the process now. Have others tell you it is too early, but I never think it is. My advice has always been not to get into a business without knowing how you will get out. Also, find an advisor you can trust. They do not have to be skilled in the exit process, but they have to be capable of listening and telling you things you may not want to hear. With some guidance, you will know where you are going and have a successful completion to your journey.


What is an Exit Plan?

“We’ve Gotta Get Out Of This Place” – classic 1965 song by The Animals

I have come to expect the “exit” question from my mature business owners but I am hearing it more from emerging businesses these days. At times prompted by reaching inflection points, changes in key personnel or just pure exhaustion, owners want to know the best way to “exit stage right.” The key questions center around, “Is the timing right?” and, “Am I at the point of getting the most from what I have built?” Well as Robert De Niro’s character Paul Vitti said in “Analyze This,” “It’s a process.” So let’s take a closer look.

I had the privilege of serving as Chair of the Business Exit and Succession Planning Committee of the NY State CPA Society and we had a process for both of these milestone events. The “seven steps” of an exit plan with some comments follow below:

  1. Identify owner(s) exit objectives. This is the gaiting factor. The owner has to be confident it is time to move on and most importantly, that he or she has something to go to. This is particularly important for more mature owners.
  2. Quantify business and owner financial resources and needs. Tied closely to the first point, the calculation of “what you need” many times governs “what you want.” You have to complete the exercise to calculate what you need to live, and I will assure you your estimate of this amount will be grossly underestimated.
  3. Maximize and protect business value. Performing a SWOT analysis on your business and even some sell-side due diligence (see my 11/18/16 post Seller’s Due Diligence – An Emerging Tool in the Sales Process) will help you clarify how others might see you and what pieces have to be “fixed” before you start on this journey.
  4. Consider ownership transfer to third parties. Sometimes the hardest decision to make; especially for family owned businesses who hate to see control of the company go outside the family. But if liquidity and exit are important, this may be your best alternative.
  5. Consider ownership transfers to insiders. So you want to keep it all in the family. A common transaction is a sale from one generation to the next. It may not maximize liquidity but it accomplishes a very common emotional objective.
  6. Ensure business continuity. Nobody wants to buy a business (or at least pay good money for it) that is winding down or appears to be at the end of its useful life. I know it sounds counterintuitive but regardless of the exit plan, a robust program to keep the business intact and growing should be part of your exit strategy.
  7. Complete wealth and estate planning. Whatever you reap from your successful exit, you need to do some planning in advance to make sure taxes are minimized both for you and your estate.

So there it is; a brief journey through the exit plan process. As you would suspect, there are professionals who can act as your guides to help ensure your plan is a success and as in all things in life, the more time you have to prepare the higher the chance it will be successful. So while it might be “the last thing you will ever do,” follow the process and hopefully your journey will be a success.

Seller’s Due Diligence – An Emerging Tool in the Sales Process

“A lack of transparency results in distrust and a deep sense of insecurity” – Dalai Lama

I hope this quote doesn’t set too serious a tone for this blog, but much like the probable impact of the most recent election, change is in the air. Over the past couple of years, we have seen a concept emerge which, as one of my favorite clients would say, is “counter-intuitive.” That concept is referred to as seller due diligence (also at times referred to as a Quality of Earnings report) and it is increasing in popularity in mid -market M&A transactions. In the past, we were often approached by investment bankers or companies considering a sale to perform either an audit or a review. But more and more, that request is being modified to incorporate a seller’s due diligence report. But what is it and how does it work? First a little primer.

Accountants are guided by professional standards as to how and what they can say in a report. When it comes to financial statements, the most common accountants’ reports are called audits or reviews. Now the accountants out there will beat me up a bit for my layman’s description, but a review says nothing has come to the accountant’s attention that leads them to believe the financials are not fairly stated. This is often referred to as “negative assurance.” (We are accountants and not literary geniuses.) In an audit, which is more expensive and requires a lot more work, the accountant states in their opinion the financial statements are fairly stated. So in both cases, the focus is basically on the fair statement of the financials and those horribly worded phrases called footnotes. It is more that the numbers appear OK versus what do they really say.

In a due diligence report, there is more color as to the why. For example, an audit or review will show that margins this year may be lower than last year but there is no explanation as to why. A due diligence report would cover this as well as trends, details on balance sheet components and other analysis of the business. So right now, you might have two questions:

  1. Why not get a due diligence report vs. an audit or review?
  2. Why show a potential buyer your weaknesses by providing such a report? Keep in mind, this type of report highlights both the good and the bad.

To answer the first question, the audit and review both provide some assurance that the numbers are fairly stated. There is no such assurance (even limited as in the case of a review) in a report on due diligence. More and more, we are being asked to do both a review and a sellers’ due diligence report.

As to the second point, most transaction professionals will properly advise their clients that big checks are not written by buyers without a due diligence report, so why not make it easier for a potential buyer to understand the inner workings of a target. Being prepared on your own terms for this process is becoming a “best practice” for companies seeking substantial investment or a full exit.

So if you are contemplating this type of transaction, consider a seller due diligence report. I just completed a deal and am convinced its use helped to both identify a serious buyer more quickly and significantly expedite the whole transaction process.