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The Personal Aspects of Exit Planning for Business Owners

The Personal Aspects of Exit Planning for Business Owners

By Tom Flynn

Small business owners typically eat, sleep, and breathe their business. It is their passion, and it is consuming. Thinking about the day that will come when they will exit the business in some way is generally back of mind, and they don’t consider planning for that process. While there are many facets to the exit planning process, this article will focus on the personal readiness of the owner to exit, including planning what their lives will look like after they are no longer involved or fully involved in managing the business.

First, a business owner who has dedicated their lives to building something of value must be emotionally ready to let go. Are they, in fact, ready? They are relinquishing control of their life’s work. Becauseentrepreneurs spend their lives managing the highs and lows of everyday business, they are left with an emotional void, stemming from a lack of purpose or just, simply, things to do. Planning the logistics of the exit will create, for the owner, a picture of what their new life will look like. It will help them to mentally prepare for this picture.

Second, they must have a personal financial plan for life after exit. This will be based on their current personal assets, what lump sum they receive for the business when they exit, and any residual income they may earn from the business. Based on these factors, the financial plan must address:

●  Will they be able to receive adequate income from sources such as dividends or interest from the investment of their assets, residual income from the business (if any), and retirement benefits? Will the income enable them to maintain the lifestyle they desire? Will this income be sustainable for their lifetime?
●  Will they have funds to do the things they want to do during retirement such as travel, buy a new car, help family members, etc.?
●  Will they have funds for their own long-term care?
●  Will they be able to maintain funds that they wish to pass on to their heirs?

The plan will involve determining how to invest their assets, what insurance they may need such as long- term care and life insurance, and how they will receive income distributions from various sources.

Third, they will need to consider how they will spend their time during retirement. As mentioned before, they will be left with a void in their lives. Their time has been consumed for years by managing the business. They need to consider what they will do on a day to day basis. For some, this may not be a problem. They may have a hobby or travels that they have always wanted to pursue, or want to spend more time with family. But not every business owner has considered how they will spend their time. Completing their business exit and suddenly having time on their hands that they don’t know what to do with could take an emotional toll. This is why planning “life after exit” is a critical part of the overall exitplanning process.

In later articles, I will address the nuts and bolts of exit planning decisions and strategy, but the personal planning aspect is something I felt was critical to address.

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Business Exit Strategy – Maximizing Value

Business Exit Strategy – Maximizing Value

By Tom Flynn

Every business owner will, at a point in time, exit their business in some way. Most, however, don’t think about how they will exit until they are almost ready. I have found that most business owners are so engrossed in running their business that they don’t think about selling until six months before they want to exit. Unfortunately, this is a poor strategy. Effective exit planning takes time.

A survey was conducted by the Exit Planning Institute, in partnership with Grant Thorton, PNC, and theOhio Employee Ownership Center at Kent State University. This “State of Owner Readiness“ survey found that 75% of owners who sold their businesses had “seller’s remorse” because they felt as though 1) they did not receive a fair monetary value and 2) were not prepared for the emotional impact ofselling their business. Seller’s remorse can be rectified by beginning to plan for the exit transition three to five years before an owner wants to exit.  

The typical exit plan will determine an “Attractiveness Score” and a “Readiness Score”. These scoresreveal the areas of improvement needed for a successful transition. The attractiveness score indicates what is needed to make the business attractive to a buyer. The readiness score addresses the questions:

  1.  Is the business at its ultimate value?
  2.  Is the owner ready to sell?
  3.  Does the owner have an adequate financial plan?

The goal is to utilize information from the attractiveness and readiness scores to determine what actions need to be taken to build the company to its maximum value over three to five years, no matter whtype of exit the owner will choose. An added benefit of this process is normally an increase in profits and cash flow during the growth period because of the actions taken.
 

This focus of this article in on building the business value. How, specifically, to do this varies from business to business based on many factors, but the end goal is the same to create an entity that will provide maximum value to the new owner or owners, and therefore create the maximum exit return for the current owner.

First, of course, creating maximum value involves increasing revenue and the bottom line. Achieving these goals may involve increasing sales and marketing efforts utilizing techniques that provide the maximum ROI. Other initiatives may involve expanding into new markets or diversifying the company’sproduct or service offerings. Any of these actions or other growth initiatives will require capital, so before beginning any growth efforts, it must be determined where this capital will come from. These are a few options:

  1.  Current assets Is there cash on hand or are there other liquid assets available? How much is available? What are the risks vs. returns of using these assets?
  2.  Cash flow Is cash flow being maximized by the effective management of accounts receivable, payables, and inventory? More cash on hand can be used to fund growth.
  3.  Capital raising Is there a potential to raise debt or equity financing? This is a complicated issueexit implications of capital raising must be carefully considered. It can have a serious impact on the market attractiveness of the business if not managed correctly.

Second, growth much be managed. Increasing revenue will require an increased ability to fulfill orders, additional customer service, and other potential expenses.

Third, the company needs to have a sustainable competitive advantage, and that advantage should be strengthened as much as possible.

Fourth, making the business attractive to the market will require a stable and experienced staff who will be likely to stay after a change in management.

Finally, the business’s reliance on the owner must be considered. If the expertise or customer relationships of the owner are keys to the business, there must be a plan in place to transition these to another key manager or to the new owner.

The value growth initiatives we have discussed are not all inclusive and must be part of a comprehensive plan, the formation of which requires the skills of an experienced professional. This plan, again, must be created and initiated at least three to five years before the expected time of exit.

 

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Exit Options for Business Owners

Exit Options for Business Owners

By Tom Flynn

As a small business owner, your goal from the beginning was to build value, but at some point you will exit the business. If you have executed an exit strategy plan over three to five years, as discussed in my previous articles, and created maximum value, you have options.

  • Continue to grow your business and pay yourself a healthy income.

  • Hire someone to run the business for you while you benefit from the profits.

  • Transition the business to your family or other management.

  • Sell the business.

Let’s discuss the sale options in more specific terms.

**Note that tax implications must always be considered when choosing an option.

You may choose to put your business on the market to sell if for a fair market value.

Here are some things to consider when determining if this is the right option for you:

  • Will you be able to get the price you need in the time frame you have in mind?
  • How difficult will it be to find a buyer?
  • How much do market factors impact your business, and what is projected to happen in your industry and the market in your desired sale time frame?
  • What are your goals for the terms of the sale? Is this realistic? 

Your business may be in a position to be acquired by another company that has a similar product or service, or a similar customer base. That company may want to acquire you for a variety of reasons your company assets, access to your customers, intellectual property, or to remove you as a competitor.  

Here are some things to consider: 
 

  • What companies are potential acquirers (if there are any)?
  • What is your value to an acquirer compared to your value to a buyer in the open market? Itcould be more or less, based on the why the other company wishes to acquire you. In some cases, the value may be much greater if the company is acquiring you for strategic reasons.
  • Will you be required to stay with the company for a transition period? This is often the case. Doyou want to do this? What are the risks to you if the acquisition/merger does not go well? You should make sure that the terms of acquisition include adequate protections for you.

    You may set up an Employee Stock Ownership Plan (ESOP) that allows your employees to purchase the company over time. This can often be a favorable option for business owners who want to significantly improve the tax impact of the sale of their business.

    Here are some things to consider:

    • How should you structure your ESOP in order to create the most favorable tax outcome for you, as well as a positive outcome for your business and employees?
    • Do you have long-term valuable employees? If you do not, and have a high turnover of employees, an ESOP will not work well.
    • What are the future prospects for your company? Your company needs to have a realistically viable future based on your current financial position (which should be low debt, good cash flow) and favorable long-term market conditions.You may choose to sell the business to a person(s) who is already involved in the business. It may be an employee, customer, friend, or family member. Often, in a friendly sale like this, the business owner finances the sale over a period of time. A friendly sale can also just mean that you are passing the business to your heirs, but often still taking an income from it during your retirement.

       

      Here are some things to consider:
       

    • Is the buyer(s) qualified (and motivated) to manage the business successfully?
    • Consider the impact on your relationship with the buyer if the business has issues or fails in the future. Are you willing to take that risk?
    • Will you be able to sell with terms that will allow to achieve your financial goals? (i.e. are you going to be too nice to the buyer and put yourself at a disadvantage?)You may simply choose to let someone else manage the business and start taking as much cash out of the business as possible until you are ready to retire, and then sell it at a lesser value or just let it die. Here are some things to consider:
    • Will you be able to get enough, and save enough cash to retiremcomfortably?
    • Are you willing to sacrifice the value of the business by taking cash out rather than growing the business?
    • How does this impact your employees, now or in the future?You may choose to simply liquidate the business by selling it in pieces when you’re ready to exit. Here are some things to consider:
    • Are you so valuable to the business that it is unlikely to be viable without you? Typically,dissolving the business is only the best option if this is true. If the business won’t be successful without you, who will buy it?
    • What are the assets of your business worth? Is it enough?You may also, as previously mentioned, continue to run the business forever once you have achieved maximum value. Regardless of which option you choose, you must plan for it over time, and your plan should begin with the end goal in mind.
       

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My Career as a Fractional CFO

My Career as a Fractional CFO

by John Voglpohl

I was flattered to be asked to write a note about my experiences as a fractional CFO (aka outsourced CFO). It’s not for everyone and I guarantee this is not a job you can bluff your way through. My clients were patient as I learned “them”, but they value you for what you bring that they do not (know). If you have CFO type skills, this is a very satisfying way to be useful. And I frankly cannot imagine a better way than the FocusCFO model to practice it.

“If you have CFO type skills, this is a very satisfying way to be useful.”

The Arrangement

The agreement between FocusCFO and the CFO was easily worth the percentage the company retains of the billings. My experience in public accounting with people starting similar businesses (janitorial franchises, childcare franchises, personal trainer franchises, and many more) were inevitably problematic on the long-term since their actual service providers regretted the percentage given up and decided they could go on their own and have the whole pie. I never had an inkling of that feeling. I got immense value that I never second-guessed:

 

  • The powerful marketing, name recognition, and instant respect.
  • Effective “qualifying” of leads, so that when they make it to me, they are appropriate and likely
    productive. Focus sets rates and we don’t have to do that little bit of agony.
  • Making available a proven methodology to process referrals after the CFO first identifies one,
    with the potential of an override for the referrer.
  • Relieving me of nearly all administrative tasks, since they are provided by Focus.
  • Continuing education and learning from monthly team meetings and semi-annual All Hands
    Meetings, as well as the available resource of many other truly bright CFO’s, always ready to
    share experiences and advice.
  • Liability insurance coverage.
  • Support in the background when it is needed. The folks I reported to at FocusCFO were always
    welcome resources. They treated me as a respected co-professional. 

Customer Service – a Priority for Me

“I knew I liked the (accounting) business if it was primarily about helping to make good people, successful. “

Now, I was trained in customer service starting 45 years ago by Thomas R. Flynn at his accounting firm. He was the best example I ever worked for. I don’t think he remade me from something I was not, but he awakened a natural resonance. Like him, I knew I liked the (accounting) business if it was primarily about helping to make good people, successful. It was not about audits and debits and credits, it was about helping folks solve problems, and jumping off from the accounting products into “success services”. That has always been fun, and funny thing, it cements strong relationships and loyalty. For Tom (and me) it wasn’t simply a business style or tool, it was sincere and satisfying. I got to bring that to FocusCFO in spades.

Pivoting from CPA to CFO

Now, I digress: A switch from lifetime CPA (me – 38 years) to CFO was not an easy transition. I would discourage most CPA’s from doing it, and the company de-emphasizes CPA backgrounds – the first thing I did was retire my certificate. FocusCFO clients are glad you know GAAP when you need to know it, but it’s absolutely not why you work for them. Your valued skill set is not APB’s and FASB’s. Your valued skill set is strategic vision, problem solving, crisis averting, seeing the future, explaining dynamics of a business, especially financially, and sometimes simple coaching. READ THIS: Gray hair valued!! So the digression is that CPA’s have been trained to be 2-dimensional straight-line thinkers. Thank-you linear audit programs and little boxes to initial as you performed a step, so that when all boxes are initialed you can sign off that procedure, avoiding all thinking. Most accountants are lost when asked to think 3- dimensionally. Most accountants are unable to say what their product is (I won’t tell you what it is here). They know the correct answer is NOT a piece of paper with a signed letter on the front, but they practice as though that is their product; hence they have commoditized themselves. I may spend a bit too much time on this point but it is in order to contrast FocusCFO practice.

  • Price is less of an issue. With clear results/benefits, clients pay rates.
  • Accounting clients look at their watch when you visit, multiple times, and look nervous. Focus
    CFO’s are welcomed in weekly, in some clients almost festively. Accounting services and the like, are incremental services, lightly valued, use of which are to be minimized. A FocusCFO’s cost is a sunk cost, already committed; with an attitude which is “now let’s make the most of it”.
  • I said it above: my clients were also looking for wisdom, even if they didn’t say it that way. How wonderful to be pushing 70 and have that be a primary positive qualifier!
  • You actually get to use your brain, fully and meaningfully. Your input is welcome. You get to be a clear factor in your clients’ success.

“Your valued skill set is strategic vision, problem solving, crisis averting, seeing the future, explaining dynamics of a business, especially financially, and sometimes simple coaching. READ THIS: Gray hair valued!!”

My Day to Day Operation

How did I operate? Some of this comes from a bit of “learning the hard way”, but learning in time:

 

  • Insist on regular client conversations/facetime. (weekly?) Don’t let client busy-ness deprive them of this. They want it and need it even when it does not seem they do. A few weeks 
without personal contact can be the start of a problem.
  • Don’t make your product boilerplate. Don’t just fill in the blanks for a monthly report. I wrote 
all reports from scratch. For that matter, do written monthly financial commentary. They cannot remember all you tell them in verbal-only session. It can also be handy to remind clients you’d discussed a point multiple times. Facts and information is not enough. It must conclude
    with “what does this mean”?
  • Devise meaningful reports that grab important information and help develop GREAT metrics and 
KPI’s.
  • I loved teaching and coaching. My clients (mainly) did not understand financial statements well 
or financial concepts, but they can learn. To some degree that is an important function for a CFO. I want to lift my clients “out of the fog” at the very least. Blind faith in others, even their CFO, has only so long a life.
  • I managed strategic relationships, like the outside CPA’s, some lawyer services, insurance and bonding services, and the banking relationship. Sometimes “manage” means understanding conversations better than your client and explaining back to them what they must understand.
  • Solving problems. I’ve helped clients explain positions to collect Receivables, explain misperceived financial information to win customers/contracts (faulty D&B reports, for example). I’ve held CPA’s to a higher quality service and expected them to adopt better tax strategies, in one case reducing current year taxes by 7-figures.
  • Helping them manage and deal with their accounting team. One of the first questions each new client asked, was “is my Controller doing a good job”? On that note, help good controllers become great controllers (and, “No, they are not out for your job” – different skill sets and they know it).
  • Lastly – service, service, service. The weekly engagement can be a problem that you must overcome. You must be available, respond to Emails and Texts before “next week”. Meeting with critical business partners like bankers can’t always happen on your day of the week with the client. In asking one client to be flexible for a schedule adjustment for some other client, remind them that this is the same level of service you pledge to give him. That is always approved!

I was proud to be a CFO with FocusCFO

The Company had such a clear vision of who and what they were and were to be, that I felt great constancy at the helm. That is wonderful and sadly, rare enough. Their primary “secret” has been a commitment to hiring great people and trusting them. My most memorable experiences included:

 

    • Very frequent recognition of the name (on my shirt) and hearing the persons’ overwhelming positive perception and experiences. I felt like I worked in a prestige operation. That was nice!
    • All bankers and attorneys know us and like us. One Huntington banker told me that they sort of were coming to feel like FocusCFO was their “work-out” division!
    • I spoke to many FocusCFO clients over my time, and each was happy with the company, spoke highly of it, and bragged on their CFO. That says lots!

This is an especially great second career that pays very well. I was going to say “work as hard as you want to”, but that’s not true; you will always work HARD in this business; to some of us hard work is a gift which connotes value. But it is satisfying and rewarding work. What I would mean is work as many hours as you want. Enjoy the back-office support and services that Focus provides and you will be amazed at what you can do.

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