“My estate planning attorney recommended that I begin giving my business to my children. What do you think?”

“I’m getting tired of running my business every day. My accountant thinks a sale to a third party is a good idea. What’s your opinion?”

Sales to key employees, Employee Stock Ownership Plans, transfers to children and sales to third parties can all be excellent exit strategies. But if questions like these are the foundation for your Exit Plan, you may be like the car buyer who asks if the Mercedes, BMW or Lexus is the best vehicle. We admit to owners who ask which particular exit path is best for them that, “We have no idea.”

While owners may not be keen on paying us for this response (or non-response), it is the only honest advice to give an owner whose Exit Plan is obviously adrift. When an owner asks questions out of the blue like the ones above it can indicate that his advisors lack experience as well as a coordinated approach to helping their business owner clients. They have not asked the questions necessary to start the owner on the path to a successful business exit.

As advisors, unless and until we know more about an owner’s company and what goals he or she wants his Exit Plan to achieve, we cannot possibly know which route is best. It is the job of your Exit Planning advisor to help you plan and implement your exit strategies by asking the questions that help you to clarify your goals. Experienced Exit Planning advisors ask the right questions so that you know where you are going, who is going to help you get there and the route you are going to take.

We recommend that you begin your Exit Planning journey with two things: 1) a road map and 2) an experienced guide. The road map describing an Exit Planning process is simple and relatively easy to create. Finding and using experienced advisors may not be as easy. Of course, if an advisor has provided you with a copy of this article, you already know one advisor who can help you with Exit Planning.

Who should be on your Advisory Team?

An Advisory Team should consist of the following professionals:

• Financial/Insurance Professional
• Business/Estate Planning Attorney(s)
• CPA, and
• Business Consultant (as needed).

If a third party sale is likely, you should also have a:

• Transaction Intermediary (Business Broker or Investment Banker) and
• Transaction Attorney.

Why should I have all of these Advisors?

First, no one professional has all of the answers. The issues you face in exiting your company are complex and will require input from professionals in a number of disciplines. For example, an accountant skilled in Exit Planning brings a host of skills (especially tax minimizing techniques) to the process that your attorney may not possess and vice versa. In addition to being skilled in a particular practice area, each advisor should also be familiar with, and better yet, experienced in Exit Planning and should know how to work for you as a member of an Advisory Team.

Lawyers and CPAs are expensive. Won’t this Team cost me more money?

Assembling and meeting with your Advisory Team not only facilitates the exchange of information and ideas but it can reduce your costs by increasing the efficiency of each advisor. Instead of your advisors proceeding in a disjointed and inefficient manner, have a single meeting with all advisors present to coordinate everyone’s efforts.

How do I find Team members?

Many business owners are familiar with many of these professionals and have worked with them individually in the past. What you may not have done is assembled them as a team charged with a common goal: helping you to leave your business in style. No one advisor can guide you through this process.

Get started today on planning for the single, most critically important financial event of your life – the transition out of your business because the reality is – you only have one chance to get it right!

• A stable and motivated management team.
• Operating systems that improve sustainability of cash flows.
• A solid, diversified customer base.
• A realistic growth strategy.
• Effective financial controls.
• Stable and improving cash flow.

In a strong Merger & Acquisition (M&A) market, buyers compare the relative strength of your company’s value drivers to those of your competitors. In today’s M&A market, however, buyers want companies that possess all of the characteristics of a well-run business. Additionally, tighter credit forces buyers to use more of their own capital to buy businesses, so they look for acquisitions that carry minimal business risk. Companies with strong value drivers in place carry less risk. Companies lacking one or more value driver(s) simply will not attract interested buyers. This harsh reality means most owners have a lot of work ahead.

Luckily, the economic forecast – at least for the foreseeable future – gives owners exactly that: time to install and energize the value drivers in their companies. It also gives them time to demonstrate, over several years, the sustainability of the value drivers they create. Buyers want to know that the success or growth charted in one year can be sustained over a number of years. They bank on (and pay for) your company’s potential to grow under their ownership so they look very carefully at how long your company’s value drivers have yielded positive results.

Experienced owners know that change takes time. Really experienced owners know that positive results from those changes take even longer — likely longer than even they expect.

Whether interested in selling in the near future, or not, it makes eminent good sense for owners to concentrate on those elements of their businesses that create more cash flow, more sustainability, and more future value (aka value drivers). After all, isn’t this why you are in business?

Working on value drivers also has the benefit of increasing an owner’s flexibility. With value drivers in place, an owner can respond quickly if “things” change. “Things” include the health of the M&A market or the health of the owner, the sudden appearance of a deep-pocketed buyer, or underlying conditions in an owner’s marketplace.

Increasing flexibility also applies to Exit Planning. With a more valuable company, owners increase their “successor” options. More valuable companies are attractive to third party buyers such as Private Equity Groups and can often attract recapitalization funds.

Finally, when owners concentrate on improving their companies’ value drivers (in order to increase company value), they often explore and pursue strategies that they may have ignored in the past. For example, many owners who thought acquiring another company involved too much effort will take a new look at growth through acquisition when their future financial well-being is at stake.

Installing value drivers in your company is the best thing you can do to increase both the salability of your company and its price tag, but doing so takes time. Today’s economic downturn gives you the time you need to prepare your company to sell when the M&A market recovers. When it does, will you and your company be ready?

Know that in your indecision, you are making a decision. As Winston Churchill observed, “I never worry about action, but only about inaction.” When you take a passive attitude toward the irrefutable fact that you will–one way or another–leave your business, you are deciding to settle for a least profitable exit for yourself and for your family.

If you are an owner who isn’t sure about what you want, or when you want to leave, why is it so important to decide to act today? Why can’t you wait?

• Preparing and transferring a company for top dollar takes time—on average about 5 years. Most of those years will be spent preparing the business for the transfer. If you decide to sell to employees or children (two groups who rarely have any money), they’ll need that time to earn the money to pay you for your interest.
• More time often equals greater reductions in risk. Time can be used to design and implement income tax-saving strategies, build value, strengthen your management team, begin a gradual transfer of ownership (not control) to key employees or children. If you wait too long, you probably won’t have time to implement these strategies and you’ll likely end up transferring your business on less-than-ideal terms.
• The market does not operate on your schedule and may not be paying peak prices when you are ready to sell to an outside party. Witness the state of the Mergers & Acquisitions (M&A) market in 2008 through 1011: activity is almost non-existent in many business sectors and down in almost all.

If leaving a company you’ve worked so hard to build and having little or nothing to show for it, is unacceptable to you, let’s look at a few of your options.

Wait for a buyer. According to Deloitte’s Entrepreneurship UK: 2008 survey, 35 percent of business owners said they will wait for a third-party offer for their businesses. Owners in this group believe that one day a buyer will contact them, negotiate a sale, and that will be that. Well, this is a decision of sorts—but one that flies in the face of reality. While few businesses are being sold today, there will likely be a significant number of Baby Boomer business owners vying with you to sell their businesses when the M&A market recovers.

In a competitive buyer’s market, only the best-prepared businesses sell for top dollar. And the owners of those well-prepared businesses will be those who made the decision to act to prepare their company years ahead of the actual sale.

Liquidate. Liquidation is a common exit path for owners of companies whose cash flow is flat and has little probability of improving—absent the design and execution of a business/exit plan. If you find yourself in this group, we recommend that you meet with your tax and other advisors to do the planning necessary to create the most tax-efficient liquidation possible.

Decide to exit and plan accordingly. Start today and take the following steps:

1. Fix a departure date.
2. Determine your after-tax financial needs.
3. Decide whom you want to succeed you.
4. Have your business valued to see if: a) should you sell today; and/or b) it has the value necessary to meet your financial and other exit objectives.

Based on your objectives and the realities of your business, use a skilled Exit Planning Professional to forge a plan with accountability/decision deadlines.

Deciding to do something now to create the best possible exit path is not difficult. The failure to act, however, can potentially be fatal to a successful exit. The success of your business exit is simply too important to you (your family and your employees) to leave to chance. Why wait? Why decide not to decide?

A successful business Exit Plan achieves three important owner goals:

1. Financial Security. (The business sale or transfer provides the amount of income the owner, and owner’s family, needs after the owner’s exit.)
2. The Right Person. The owner chooses his or her successor (children, key employees, co-owners or a third party).
3. Income Tax Minimization maximizes the amount of cash in the departing owner’s pocket.

A successful Estate Plan achieves three important personal goals:

1. Financial Security (for the decedent’s heirs).
2. The Right Person. The decedent (rather than the State) chooses who receives his or her estate.
3. Estate Tax Minimization reduces the Government’s bite leaving more funds for one’s heirs.

Once owners see that the two processes share the same goals, they can appreciate how to leverage the time and money they spend developing their Exit Plans into the design of their estate plans.

For example, when you engage in Exit Planning you most likely determine your objectives and secure an estimate of value on your business before you start working to create more business value. In securing an estimate of value, you possess a piece of information that’s critical to both your business continuity and estate plans.

Thinking of exit and estate planning in tandem brings the owner’s entire picture into focus:

• If you don’t make it to your business exit date, how will you provide your family with the same income stream they would have enjoyed if you had?
• How will you make sure that your business retains its previously determined value?
• If your exit strategy involves transferring part of the business to the children, or if it does not, does your estate plan reflect and implement your wishes if you don’t survive?
• If you die before you exit the business, are you certain your family will still receive the full value of the business? (This question is especially important to answer if you are the sole owner. Sole owners are unlikely to have a buy-sell agreement because there are no remaining co-owners to purchase and/or continue the business.)

Your estate plan can manage these issues, but does it?

Another goal of the Exit Planning process is to protect your assets from creditor attack during your lifetime and to minimize tax consequences upon a transfer of your ownership. Does your estate plan also work to minimize creditor risk—not only yours but that of your heirs? It is possible to achieve these goals through both your Exit and Estate plans.

It is worth repeating that you must devote the same energy and analysis to lifetime transfers (benefiting you) as you do to a transfer occurring at your death (benefiting your family). Since both planning your exit from your business and planning your exit from this life are based on the same premises it can be relatively easy to develop a consistent outcome.

Two last issues may help you to determine which task to undertake first:

1. Estate taxes are easier to avoid than income taxes.
2. Estate planning techniques often involve funding from life insurance proceeds (which pay in cash upon death) whereas exit planning techniques often involve the owner’s own funds (accumulated over decades).

There isn’t one right answer to the “Estate or Exit Planning?” question. In the end, you must take action on both fronts since a failure to act in either creates lasting problems not just for you, but for your business and for your family.

If the thought, “Why exit plan when I can’t sell my business now or anytime soon?” has crossed your mind, consider the case of fictional owner Rudolfo LeMonde.

Rudolfo LeMonde’s hospitality services business had grown steadily until the last few years. Although revenues had flattened, Rudolfo maintained profitability by reducing overhead and working more hours.

This was Rudolfo’s situation when a would-be buyer approached. At age 55, Rudolfo hadn’t actively considered selling his business, but was beginning to think that life after work might have something to offer. His business wasn’t providing as much fun as his other activities, especially since business growth (and more importantly, profitability) had been slowing for the last two years.

Rudolfo scheduled an hour to talk to that interested buyer and, in 60 minutes, his eyes were opened and his priorities turned upside-down.

The buyer, a large national company seeking to establish a presence in Rudolfo’s community wanted, like most buyers, to acquire a business that could grow with little other than financial support and the synergies it brought to all of its acquisitions.

This meant it sought companies with a number of characteristics that we call Value Drivers. Some important ones are:

1. Capable management apart from the owner. Rudolfo’s buyer (again, like most) did not have its own management team to insert into the business. Rudolfo had not attracted or retained solid management (nor had he created a plan to do so).
2. Strong and increasing cash flow. Unfortunately, Rudolfo’s company had been experiencing declining cash flow.
3. Sustainable and comprehensive systems throughout the organization (from human resources to marketing and sales to work flow). At best, Rudolfo’s business was a hodgepodge of stand-alone, as-needed systems created over time to respond to particular emergencies, and positioned Rudolfo at all decision points.
4. A plan to grow the business focused on enhancing a company’s unique position in the marketplace. Rudolfo had never created a written plan, let alone identified or clarified his company’s competitive advantage.

When Rudolfo failed to satisfy the buyer’s concerns about his company’s Value Drivers, he understood that his company’s value, management systems and growth all depended on his active and continued presence in the business.

While Rudolfo had naively steeled himself for a lowball offer, the buyer instead disappeared. In today’s financial and economic climate if a buyer is willing to acquire a company that isn’t a turnkey operation, it will not do so without the owner’s continued involvement. Buyers do not have the time, the risk tolerance or the in-house talent to correct deficiencies.

While too many owners of outwardly successful companies share Rudolfo’s fate, the heart of the problem lies in their failure / inability to do anything about it.

How long will it take you to avoid Rudolfo’s fate and prepare for the sale of your company for top dollar? We don’t know. But we do know that it’s a lot easier to bury your head and go about working in the business than it is to devote the time, energy, and resources to prepare for your exit.

If you spend your time waiting passively for improvement in the M&A market or for a rising economic tide to lift your boat, those events may occur. But if they do and you have not actively used your time to make your company attractive to buyers (by installing Value Drivers) your business will still not likely sell, and if it does, it will not sell at a premium compared to other companies in your sector. Creating Value Drivers takes time; time buyers are not willing to take.

For Rudolfo and for most owners, it takes at least five (and often as many as ten) years to execute an Exit Plan to make a business saleable. Factors that lengthen the Exit Planning Process include:

• Unforeseen threats posed by downturns in the economy, your health or in the composition of your management team.
• An owner’s overly optimistic assessment of how rapidly the company and its employees can adapt and embrace change.
• The likelihood that you are more motivated than either your advisors or your employees to work toward your successful exit.
• The probability that everyday business crises will divert your focus from long-range planning.

Given that it takes time not only to create the plan but also to implement and to achieve measurable results, it is time for you to start planning the most important financial event of your life—your exit from your company!

General Eisenhower’s point was that the process of creating a plan provides value because it forces the planner to consider (and make provision for) “What if events don’t proceed as planned?” A plan not only provides context and the basis for adapting to new and unanticipated events, it also provides alternatives based on assumptions about goals, objectives and resources that may need revision.

As advisors, we know that business owners who create business plans are able to react more quickly to new events—events of the past few years in this economy and this world come to mind—than can those without plans.

Unfortunately, even owners who have business plans will fly without Exit Plans, co-pilots, or maps to help them when storms force them to alter course toward their business exits. If an unanticipated event arises (such as a deterioration in the economy), they shelve their exit planning thinking (and thinking is all they have since they haven’t created a written plan) because their only option is to wait for conditions to improve. These successful owners would never consider a similar passive response to be acceptable in a business plan.
If the value of an Exit Plan isn’t obvious yet, let’s look at a few hard, cold facts.

First, you are far from the only fish in the sea. Estimates indicate that there are approximately 7.5 million business owners in the United States (Sell-Side-Trends: The Business Transition Tidal Wave by Roger Winsby, Acg Hub News (http://www.imakenews.com/acgboston/e_article000178731.cfm) and according to a 2005 PricewaterhouseCoopers’ survey of 364 CEOs of privately held, fast-growing companies, “65% of the respondents planned to leave their company within a decade or less: 42 percent within five years and 23 percent in five to ten years” (“Wide Majority of Fast-Growth CEOs Likely to Move On Within Ten Years, PwC Finds, ” PricewaterhouseCoopers, LLP “Trendsetters Barometer,” released January 31, 2005). That could result in a glut of companies on the market, driving down valuations and giving new leverage to buyers.

Second, if you are a Baby Boomer (born between 1946 and 1964) the generation following you is not nearly as big so expect far more sellers than buyers in the marketplace. This too, adds to the glut.

Third, even during boom times less than half of the owners who tried to sell their business actually were able to sell (2005 Business Reference Guide, Tom West).

Fourth, unless your company is superior to its competitors because there’s something about it that a buyer can use to make more money than you do (or other businesses in your industry do) that rising tide is going to lift you only as much as it lifts that glut of competitors.

Fifth, if you select “wait for rising tide in the economy and the M&A market” as your exit strategy, you’ve lost control of the timing of your exit, how much and the terms of payment you’ll receive, and even the type of buyer. Are you confident that the next boom cycle will appear when you need it?

And finally, if your reason for putting “Exit Plan” at the bottom of the list is because you believe that until the economy improves your time and money are better spent preserving and growing business value, understand that working to create a valuable company is an integral part of any successful exit plan.

Among the benefits of exit planning are these:

•    laser focus on the value-building aspects of the business that buyers seek;
•    time-sensitive accountability for each action step necessary to build value; and
•    benchmark changes in business value.

Concentrating your effort today on growing business value either as a discrete project or as part of a comprehensive Exit Plan—affects both your ability to sell your company and the price you will be paid. In fact, your value-building plan will be inseparable from your Exit Plan.

Bottom line, the process of planning is what we mean by working on, not just in, your business. Only the planning process sets up the best opportunity to exit your business in style despite the glut of sellers, dearth of buyers, vagaries of the market and investment world, and the myriad of known and unknown influences on your business.

One of the most successful entrepreneurs and planners in American history, John Pierpoint Morgan, said, “The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.” Consider creating an Exit Plan today!

Business owners use ESOPs (Employee Stock Ownership Plans) as a tool to achieve three common Exit Objectives:

• To leave the business soon;
• To leave the business with cash adequate for financial stability; and
• To leave the business to employees.

An ESOP is a tax deductible retirement plan – like a 401k; however, it is a form of a Profit Sharing Plan.
Three Key Differences from a regular Profit Sharing Plan:

• Can borrow money.
• Can engage in transactions with “parties in interest.”
• Invests primarily in stock of sponsoring employer.

Armed with that basic information, let’s look at how an ESOP helped one ficticious owner to achieve his Exit Objectives.

Steve Victoria was the sole owner of VECI, a 35-person firm with annual revenues of $5 million and cash flow of $500,000. After exploring a sale to a third party, Steve’s business broker suggested that a cash sale was unlikely. A sale to employees was also problematic given their inability to obtain meaningful financing.Until Steve came across an article about ESOPs, he thought that his only exit option was to gradually diminish his involvement in the hope that VECI could continue to distribute earnings to him. The article outlined a far different exit option. It said that Steve could cash out for fair value, his employees could own his company and, best of all, Steve would pay no taxes on the sale.

ESOP Advantages

• The biggest advantage in the minds of many owners is the fact that the funding of a purchase by an ESOP is accomplished via pre-tax instead of post-tax dollars.
• Running a close second is that if, after an ESOP purchases the owner’s C corporation stock, the ESOP holds at least 30 percent of the corporation’s outstanding stock, the shareholder’s proceeds are tax-free so long as they are invested in U.S. stocks and bonds.
• Finally, national surveys indicate that a company’s productivity improves after an ESOP is instituted.

ESOP Disadvantages

For every silver lining there is a cloud and ESOPs are no exception.

• First, using (or establishing) an ESOP as your exit vehicle is expensive. Expect to pay between $25,000 and $100,000 depending on the complexity of your situation.
• Second, ERISA, the body of law that governs ESOPs, imposes significant responsibilities on its fiduciaries so that the interests of the participants and beneficiaries are represented and achieved. In fact, the sale of an owner’s stock to an ESOP must be an arm’s length transaction between the owner and an independently-directed and administered ESOP. If an owner makes any decision for the ESOP regarding the purchase or financing of his stock, he exposes himself to lawsuits claiming a breach of fiduciary obligation to the ESOP and its participants.
• Third, because an ESOP is required to repurchase stock from terminating employees, companies must make significant cash contributions to cover this liability — cash that would otherwise be used to grow the company.
• From the employee’s perspective, ESOPs are not always welcomed with enthusiasm. Key management groups are given total ownership responsibility but must share the reward with other employees.
• And last, but not least is the lending bank’s requirement that the ESOP have equity in the transaction before it will loan the ESOP the funds necessary to purchase the owner’s stock. To create this equity, the company must pre-fund the ESOP with cash that otherwise would have been bonused to the owner.

ESOPs do not work well for every company. To be successful, a company should have:

1. Strong cash flow;
2. A good management team that can carry on after an owner’s departure;
3. Little or no permanent debt;
4. A relatively large payroll base;
5. An alignment between shareholder and employee interests; and
6. Adequate capitalization to sustain future growth.

Having weighed the pros and cons of ESOPs, Steve decided, with the help of his advisors, to pursue this exit strategy.

1. He had to set his objectives. Steve decided that he was willing to remain with VECI for two to three years and he wanted $2 million (after-taxes) from the sale.
2. Steve hired an investment banker as his valuation expert to perform a preliminary valuation, the purpose of which was to determine if Steve’s financial objective ($2 million after-tax) could be met.
3. Steve had to develop a key employee incentive plan that would keep the key employees on board before and after Steve’s departure.
4. Steve’s attorney drafted the ESOP document to comply with the many ERISA requirements regarding vesting, participation, and fiduciary duties. Attorneys also drafted the necessary documents to ensure the continuity of the company (should Steve die before the ESOP transaction could take place) and to provide for Steve’s family (in the event of his death). The ESOP was then funded with cash contributions for three years, after which it was able to obtain bank financing sufficient to pay Steve the entire purchase price.
5. The final result? After 3 years, Steve sold his interest to the ESOP for $2.5 million. The bank required that he pledge half as collateral, to be released as the loan was paid down. Because Steve acquired blue chip stock and bonds, he was able to avoid the capital gains tax on the sale of his stock to the ESOP.

1. Leadership
2. Financial Acumen
3. Sales/Marketing, and
4. Operations.

Leadership, a critical management skill, is the ability to motivate a group of people toward a common goal.  Leadership boils down to having vision (of the end result desired), integrity (keeping your word), ability to plan, creating a positive working environment, and the ability to communicate to help the team “catch the vision.”

The Financial side of running a business is very complex.  It should start with the development of a strategic plan.  What products or services should we produce?  How should we produce them?  What is the most efficient way to bring them to market?  How should we price them?  I believe every company should develop a strategic plan, and most owners don’t know how to go about it.  If they don’t know how to do it themselves, there are many business consultants that can help them develop that plan.  The good consultants will get everyone on the leadership team of the company involved in the development of the strategic plan because then everyone on the company’s leadership team “owns the plan.”  My suggestion is to develop at least a 3 year and at most a 5 year strategic plan.  Will you execute every aspect of that plan?  Probably not – because market conditions can sometimes change dramatically, as they did so recently in 2008 with the “economic meltdown.”  The key is not so much the plan itself, but the planning process, especially with everyone on the company’s leadership team involved in that process.

The Financial side also involves understanding completely the major aspects of your financial picture that contribute the most to your company’s profitability.  For example, if inventory is higher than what is needed to operate efficiently, then you have too much capital tied into the inventory, which restricts using that capital elsewhere, such as in more employees or machines or equipment that will allow you to produce more products or more services more efficiently.  When you correct each item of your financial picture that is “out of balance,” it can have a multiplier effect on your earnings, which means for every $1 of “savings” in one area can mean $2 to $3 to $4 of increased profitability.  It can be that dramatic!

Sales/Marketing is how you bring your products to market.  Marketing involves 4 aspects:

1. Generating demand – direct mail, e-mailing, website, trade shows
2. Sales tools – brochures, catalog, advertising pieces
3. Branding and communication to the customers
4. Product development and launch.

Selling involves asking the customer for the order!  That can be accomplished by inside sales reps, outside sales reps, distributors or any combination thereof.  It is important to teach sales reps that they are the face of the company with the customer.

Operations means how efficiently does your company produce and price the product or service?  Industry metrics can be used to assist the owner in determining the efficiency of your own operation.  In the manufacturing sector that can mean anything from ISO qualification to LEAN to 6 Sigma to Just in Time, using ERP and other industry measurements.

It has been my professional experience that most companies do 1, maybe 2 of the 4 ingredients successfully.  That is where adding a “professional management team” can really add a multiplier effect on a company’s profitability.

ABC Manufacturing Company’s two owners, John Galt and Ann Rand, had been running their company together for 30 years.  However, they were still working 65 hours per week.  One day, John reached his “tipping point,” and he decided that it was not longer worth working this hard, so he decided he wanted to sell.  Fortunately, before he sold the business, he hired an Exit Planning consultant.  The consultant met with John and Ann several times and determined the following:

1. John and Ann were operating a successful company, however, by the “seat of their pants.”
2. Revenues were growing and EBITDA was in line with industry metrics.
3. Even though people had titles, there was really no effective management team in place.
4. As a result, John and Ann were spending too much of their time doing things they didn’t like to do and spending too little time doing things they liked to do.
5. The operation of their company was in line with industry metrics and quite efficient.
6. John and Ann had no real understanding of their financial statements, nor had they ever completed a strategic plan.
7. They ranked their own sales operation “inefficient,” and they admitted they had no real marketing plan.

The Exit Planning advisor suggested they consider hiring a CEO with special expertise in both the Financial area as well as the Sales/Marketing area.  Hiring such a person would allow John to focus his time on designing and developing proprietary products, which was his passion and expertise anyway.  Ann could now focus her energy on taking projects from start to finish, instead of dealing with the minutia that seemed to crop up daily.

The future is yet to be written, but here’s is what John and Ann expect to happen.  Today, company revenue is $10 million.  With the quality of their products, John’s ability to develop additional proprietary products, and the new CEO’s expertise in both the Financial area as well as Sales/Marketing, John and Ann expect their revenue to grow to $30 million in five years.  Today, the company’s realistic value is probably close to $3 million due to their lack of an effective management team, although EBITDA is $1 million.  As the company’s revenue triples, the new CEO expects EBITDA to increase by 5 times today’s value to $5 million.  In 5 years, if the economy has rebounded, and if the new CEO has further developed the management team to include a Head of Marketing and a CFO, it is likely that the EBITDA multiple will be 5 times the $5 million for a total company value of $25 million.

In summary, John and Ann reached a “tipping point” due to working too hard and not having in place an effective management team.  They decided to hire a CEO with Financial and Sales/Marketing experience, and he grows the company from $10M of revenue to $30M, which grows the company value from $3M to $25M in 5 years.  There are certainly many “if’s” in this scenario, but there is also a lot of upside opportunity, even if all of the financial goals are not met.

Shouldn’t every entrepreneur who reaches his or her own “tipping point” consider hiring a “professional management team?”

Sound familiar? In our experience, the primary reasons owners hesitate to begin the planning process are:

1.    You may be so busy fighting alligators that you don’t have time to drain the swamp. Daily demands mean all of your time and energy are spent working in the business. You have little left to work on the business of leaving your business.

A solution: spend a few hours learning what you need to know by reading “The Completely Revised How to Run Your Business So You Can Leave It In Style” and the provider of this blog can offer you additional material discussing Exit Planning.

2.    Owners may be unaware that there is a defined Exit Planning process that provides a template showing them the steps they can take in order to help them “leave their businesses in style.”

3.    Some lawyers, CPAs, insurance professionals and investment advisors – your professional advisors — may not know how to effectively work together to help you leave your business in style.

4.    Finally, (and this wasn’t a problem for Franklin) many owners have a fear of the unknown – what will they do after they exit their businesses?

At the risk of sounding like the dentist you feared as a child, “Trust me, it won’t hurt.” As a successful, smart business owner, you can both discover and create a new and fulfilling life apart from your business.

These are the benefits to owners of planning ahead of time:

• Financial security for spouse and children – this is the most important reason for planning.

• Treat children equitably, not equally – some of the greatest disasters I’ve seen have been those situations where parents pass stock equally to all their children, even though only one is active in the business.  From that point on, children are at cross purposes with each other.  The active child wants to plow profits back into the company, and the inactive children want cash flow today.  The solution is to use non-business assets and/or life insurance for the non active children and stock in the business for the active child.

• Address estate taxes – are they “voluntary?”  Of course they’re not voluntary, but it is possible to plan around the significant adverse impact they can have on a large estate, especially one that is not liquid.

• Complete new estate plan to go with exit plan – we encourage owners to allow us to give them a second opinion on their existing estate plan so they can revise and update their plan in conjunction with their Exit Plan.

• Consider charitable bequests – remember, the object of your bounty can only go to 3 places: your heirs, your favorite charities, or the I.R.S through estate and inheritance taxes.  Most of the people we work with prefer their heirs and favorite charities.