April 2024
Here are some key takeaways from their conversation:
• Selling a business without a structured plan can lead to serious financial and personal repercussions.
• It is extremely important to ensure the business is valued correctly, and a professional transition team is hired, so the owner’s needs are met post-exit.
• Proper exit planning can help the business become more attractive to the right buyers, so the business’ legacy is maintained, and long-standing employees are cared for.
• Owners should reflect on what will drive them and fill their time after the business is sold, as many people tie their identities to their business and do not properly prepare for life post-exit.
Learn more about our Strategist offering and how we can help with the transition of your business here.
Watch previous episodes here:
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Ep. 79 Homeowner's Insurance: Are You Covered from Fire & Flood Risks?
Hello, everyone, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor Mike Rudow. Mike, thanks for doing this. I was inspired by a white paper that you recently wrote on the pitfalls of selling a business without a plan, and initially, I thought about it like, okay, who's going to sell a business without a plan?
But then I remembered I worked at Fidelity for seven years, and the number of people that would just come walking into the branch saying, oh, I recently retired and I need to deposit this check into my retirement account. And I'd like to talk to somebody about retiring- I just sold this business. I need to open an account and deposit this check.
It happens. There are another number of people who go through major life decisions without structuring it or planning it out completely, and then they deal with it after the fact. So I was inspired by your article. Thank you for coming here today to talk about it.
Oh, no. My pleasure. And I'm glad you had the opportunity to read it.
And you could identify with it because you've experienced that, right? Most business owners start their business from scratch. And these guys, they're hardworking, they're dedicated. and every decision that they make is based on the lifestyle that they want to create for themselves. And because of that, they're so entrenched in the business that they're not thinking about a necessary exit.
They're relying on the income, they're relying on this business to support their life. So when you get to that point, you look back and you're like, okay, either they're burnt out or a life event happens, and now they're forced to sell the business, and the business isn't prepared for sale. And so they end up leaving a lot of money on the table.
So the paper was to really identify one, that the most important thing is that you need to have a personal, a financial plan and a business plan that aligns with each other. All three legs of the stool, right? They have to be working in tandem. And any good exit plan should have three main characteristics. One, you want to be able to maximize the transferable value of the business.
Two, you need to understand what you need to sell the business for from a net after-tax basis to replace the income from the business and continue to live the lifestyle that you want. Because if that comes back and your business valuation is less than what you need, well then you need to grow the business and develop a plan for how to grow and have the right, professionals around you for that.
And if the business is at a point where you can sell it, then great. And how you build a transition team. And what does that look like? It looks very different than a growth team. And the third one that's mostly overlooked is the personal identity part of it? It's okay, well, my identity is tied to this business. The business is no longer there.
Who am I? What am I going to do to fill my time? Am I going to buy another business? There's a lot of discussions and a lot of decisions that need to be made that for, for the most part, people don't think about till after they transition their business and then they regret selling the business because they feel lost.
Yeah. I mean, there's a famous quote that says something along the lines of a goal without a plan is just a wish. Right? And you see it a lot in life when somebody goes through a big transition. They sell a business, they retire, they move on to something else, and they say, oh, I'm going to I'm going to deal with my life or figure it out after the fact.
And they might think that they're going to enjoy sitting on the beach reading a book. And a few months in, they're depressed, they're bored, they're not inspired, and they find out that they enjoyed some part of the work that they were doing, and they didn't have that plan for how they were going to spend their time. Right.
But then also on the flip side of that, when you run and operate a business, you need to know first and foremost whether or not there's value in that business or if it's a lifestyle business, because that's a wake up call for many business owners. And it could be, a several-year transition plan to prepare your company for a sale.
Absolutely. It takes time to build a significant business. There's a difference between a significant business and a successful business. A successful business could have a really healthy income, right? It provides a great lifestyle for the employees. The employees could be happy. That could be a good company culture, but a successful business could be owner-dependent. If the owner is central to the business, they're the main decision maker.
There's a lot of tribal knowledge there. Maybe they only understand, the different, you know, variables of the business, or they're the ones that are driving the relationships with the manufacturers, the distributors. If something happens to that owner, you know, that business is no longer that thriving business and that is a hard business to transfer. There's not a lot of transferable value there.
So the goal with exit planning is to pull the owner out of the business. Right. The owner is now the visionary of the business, but you're creating structure, you're creating processes, and you're implementing the right technologies. You have job descriptions. You have a vision for the business so that when the owner steps away, any buyer that's out there that's coming in to buy the business isn't taking on a lot of risk because they know, okay, oh, we have a process.
There's, you know, a job description to fill that position. There's a a training manual that we can, put any new hire in and we'll get caught up to speed. So this business doesn't, lose momentum. So, so those are the types of things that we want to work on with business owners to make sure that any buyer that's coming in isn't taking on risk.
And if they are taking on too much risk, they're going to discount that price and the owner is going to end up with less than they intended.
Yeah, those are those are two great points about the article. The owner centralization and then having a plan, or some sort of process and procedures documented. So that way it's not as reliant upon the, the owner of the business. You even have some friends that have benefited from this owner centralization in the fact that they've built a business, they've got the right processes and procedures in place to where they were able to sell it or transition it to somebody else, and then they, those new owners couldn't properly run it. And your friends got to step back in and buy back their business.
Yes. And that's not that uncommon. it's not ideal, though. It's not something that you want to set up that way. But if there is tribal knowledge involved and you're the one that really knows what the secret sauce of the business is, and you sell that business and then eventually, if that business takes, you can buy it back for pennies on the dollar you sold it for.
I mean, then you could essentially revive the business, but, the intention for all business owners should be building the business with the exit in mind. And if that's the case, if you're thinking about the exit when you're starting the business, you're setting a path forward so that if there are any unforeseen events, death, distress, disability, whatever it is, you know that you have enterprise value building that business and that you can get, you know, the money that you deserve, that you know that blood and sweat and tears that you put into that business, you're going to get paid for it.
And so you help with this, sort of offering through Morton called the Strategist where you and your network of professionals outside of these walls can go in and help a business owner first identify where they're at in the life cycle of their business, where they're trying to go and put together the right team in order to maximize that value.
And it could be as little as, do we have the right company structure for potential exit? If you are a C corp, what are some options that you have? Do you qualify for, you know, qualified small business stock, all of those different teams and team members to outline the different areas that they need to work on to maximize that growth.
But then most importantly, you help them understand, what do we need to sell this to replace the income that I need to live the lifestyle that my family and myself are accustomed to?
Yeah. So, I mean, I take the role as an exit planning advisor... My main job is one, to do an assessment on the business and get a valuation done. We don't do the valuation right. We have valuation specialists who we get that valuation. But once we've got a pulse on the business and we understand where the red flags are and we've got that valuation, then we take them through through cash flow planning. We want to identify that wealth gap. So we'll look at their income and expenses and we'll look at their outside assets and their liabilities.
And then we'll understand you need to sell your business for $5 million on a net after-tax basis for you to continue the lifestyle that you have now. But your business is only valued at 4 million. How can we get it from 4 to 5 million? Well, now we go back and look at that assessment. And, you know, you don't have, really the structure in place that's necessary, right?
You don't have, you know, a second in command, you know, a strong management team. So these are things that we could bring in other professionals, we could bring in business coaches, we could bring in a CFO for hire. There are a lot of other professionals that we have on our network that we can bring in to support the owner so that we can get them to that valuation so that they can sell the business and live the retirement that they want.
What we do best is we manage money, right? So we're doing the cash flow planning, and then we're taking that lump sum and we're investing it to replace the income. We don't do a lot of the other things, but we spend a lot of time developing relationships with people who are great at what they do, whether it's an M&A attorney, whether it's a business broker, whether it's an investment banker, those are the guys that we're building relationships with so that when we need to bring them into the team, the business owner can stay focused on the business.
They don't have to go and find this professional out in the wild. We have it available. They focus on the business, we build the team around them and take them through that exit.
Now, for the people that don't know Mike, you love being a coach. You love helping people execute on the business plan or the life plan that they have, whether it's personal fitness or business related or sales or just networking and connecting with other people. Why are you so passionate about being coach Mike and helping business owners?
Well, I mean, it's easy to have ambitions and to have a goal. And we all have these dreams that we want to accomplish. The hard part is creating a path to get us there. Right. And I want to empower people to be able to see the vision come to life, to create that path and then give them a sense of, I'm holding you accountable, like you told me, you want to accomplish this because you know, you want to, you know, sell the business to your kids.
Well, an internal transition is tough. How are we going to structure that transition? What's that going to look like? How are we going to replace the income? But to educate owners on optionality on what their exit paths, different exit paths could look like and what their options are, it'll allow them to, to be able to make the decision to accomplish their goals.
Yeah, right. The goal is for me to educate and then allow the owners to make the decision. Right. I'm not trying to take away control. I'm not trying to make decisions for them. And it's the same in fitness. And I want to understand what people's goals are. I want to show them the path, the different paths that they can take to get to that goal and what the, you know, different variables and potential outcomes for those paths are, and then have them choose, say what path is best for you, right?
Right. And that's what I love about it, because there's no one answer to any of these things working with business owners, working with people in fitness, there are so many different paths that you can take and still come out to, to accomplish a goal. And it's just, enlightening people to look at those different paths that they've never even thought of.
I'm glad that you brought that up because it really has to do with the individual path that people are trying to take. I mean, it's maybe easier to identify, oh, you have a business you want to potentially find, an exit or sell it. Let's go get a business broker and M&A attorney and go and mark it out there in and try to see what we can sell this business.
Yeah. But you still haven't outlined some of the key risks or you still haven't accomplished some of the key risks that you identify in this article. Are we getting the right value for this? What value or financial plan or projections have you run for you personally? And then when you do sell this business or transition it to the next generation, how are you going to spend your time? How are you going to feel fulfilled?
With, exit planning, what's really interesting is you when people think of selling their business, they think, oh, I'm just going to put my business to the market. Someone's going to want to buy it, they're going to buy it. And then I'm going to ride off into the sunset with a big check.
But the more you dig into it, majority of owners don't want to sell their business to a third party. Majority of owners are thinking about legacy. They want to transition it to their employees. They want to transition it to other family members. Well, there's a lot more complexity that goes along with that, with emotions. If there's different family members who are taking on ownership with just the financial part of that, can the other family members afford to buy the business so that the owner can step away and get that lump sum or that income that they need so it's not just as simple as taking a business and selling it, because for the majority of the times, that's not what happens. And what we end up seeing a lot, which is interesting. It's not that people get a business broker and get an M&A attorney and take their business for sale. It's that a big strategic buyer that's backed by private equity or some other strategic buyer will come in and make an offer unexpectedly to a business owner. And the business owner is like, wow, you are giving me $10 million for my business? I haven't even thought about selling and that seemed attractive to them. And then they're like, okay, well, now they're not in a position of power. The buyers coming in, they're in a position of power. Because now what happens is they start going down through that process and that buyer comes in and they're discounting the business for all of the red flags that we identify in assessment.
Right. And then at the end of the day, the now that $10 million just became 7 million. Well, it's hard to back out once you've gone so far down that path. Right. So what we're trying to do is get in front of owners before someone comes in with an unsolicited offer so that if that offer comes in one day, they've already prepared the business for a sale. Right? And they don't come in and say, here's $10 million for your business. And like, actually, we just did a valuation and you know, we think we deserve 12 and here's why. And so we're putting the power back in in the business owners' hands as opposed to letting a strategic buyer or someone else with an unsolicited offer come in and take that.
I love so many things of what you said there. In fact, I had a client who recently sold their franchise and he chose this new this person to sell the franchise to because they were going to keep one of his employees who had been managing that store for 37 years now. And he said, I felt like I had the right person because they were willing to keep my team in place, you know? It was important to me that that I didn't disrupt their lives. Yeah.
And that's that goes back to the whole mindset of a business owner. Right. Legacy. Like these people want to see their business thrive after they're gone. They built that business from scratch for from the most part, and they don't want to see that business fall apart. They don't want to see those employees unhappy or leave the business because they've grown in that business with these employees. So most business owners are passionate about what's next for their employees. So having the right match when making a sale is also important. And most owners do look out for their employees in that sense.
Thank you so much, Mike.
Disclosures: Information presented herein is for discussion and illustrative purposesonly. The views and opinions expressed by the speakers are as of the date ofthe recording and are subject to change. These views are not intended as arecommendation to buy or sell any securities, and should not be relied on asfinancial, tax or legal advice. You should consult with your attorney, financeprofessional or accountant before implementing any transactions and/orstrategies concerning your finances
