016 | How to Transition Out of Your Business: Exit Strategies with Derek Ripp

Welcome to the Vital Strategies Podcast, your go to resource for expert insights in the ever evolving world of tax, finance, and wealth building. Today on the podcast, we’re talking about exit planning and how you can transition out of your business well. The data says that business owners transition poorly out of their businesses.
We don’t want that to happen to you. Even if you’re not considering leaving your business anytime soon, make sure you listen to the end to hear how you can create safeguards for your business and take care of your family. Joining us for this discussion is Derek Ripp. Derek is a financial advisor that specializes in helping entrepreneurs navigate all the financial, technical, and emotional challenges of exiting a business.
I’m your host, Patrick Lonergan, and I’m thrilled to share today’s conversation with you. Let’s dive in.
All right, Derek, I am excited about our conversation today. We’re going to get into exit planning. Business owners, they have this really valuable asset and a lot of times they fail to put a plan in place. And so I’m excited to talk through all of the pieces that go into that and really figure out what a good exit plan looks like.
So thanks for joining us.
Yeah, well, thanks for having me. I’m looking forward to the discussion. There’s a lot of moving pieces with exit planning and it can be confusing to the average business owner, but it doesn’t have to be that way. So, uh, looking forward to get to talk more about what that topic would entail.
Yeah. So I’m going to call it the five, four, three, two, one, there’s some key components. It really creates a framework of what planning looks like. Can you walk us through what those numbers stand for? Basically
what it stands for is the five are the five stages of value maturity. So every business goes through different phases.
There are four capitals. These are really more intangible. So most people are familiar with. The financials, you know, more of the accounting measures. Those are more of the tangibles. We’re going to talk about the four C’s are the intangibles, which can also have a pretty dramatic impact on a business. The three are the three gaps that can exist in an exit plan.
And just to touch on those briefly, wealth gap, business value gap and profit gap. The two are the two concurrent paths. So exit planning is multifaceted. And if done successfully, it’s going to include not only the business improvement, but it’s also going to include the personal and the financial. And then the one stands for really the one overriding goal, which is to build value, build enterprise value, maximize the value of the company.
Again, this is an asset for most business owners that represents up to 80 percent or more of their total net worth. So it’s really important to help an owner understand how to monetize that asset and how to get value out of it, because we know that they’ve spent a lot of time, energy and effort growing it over the years to get it to where it is.
So that’s the five, four, three, two, one.
Can we get into those five stages of value maturity? Like, I assume we started startup, but then where does that go? Where does that take us? Again, it
comes back to this idea that. For most business owners, their business represents a very high percentage of their overall net worth.
And the irony of that is that a lot of business owners really don’t know what that business is worth. There may be a country club value, which is, you know, kind of buddy sitting around throwing numbers around, or there may be an emotional value that they’re attached to where they’re not going to sell for less than 10 million or 20 million or whatever that number is.
But really when we’re talking about identifying value, we want to understand more specifically, what would a third party realistically pay you and what are the different options? Because depending on the strategy that you have, the business may be worth more or less. So you know, sometimes business owners, it’s not about the money.
It’s about maybe providing jobs in their local economy and making sure that their people are taken care of. And so it isn’t about just maximizing the value. But again, those are just some of the different strategies we can talk about as well. So the important thing is. Identifying a value sets the baseline.
So you know what you’re working with. There’s a couple different ways to do that. You can have an informal valuation, which for a lot of business owners is probably fine. There’s different software out there that will do that. There are professionals that will do it for a reasonable cost. But if you are closer to an exit, if you’re looking for a value that you can depend on either for legal reasons, IRS.
And you’re going to want a formal valuation. The formal valuations are typically done by licensed professionals. And that may cost substantially more. It could be anywhere from 10 to 25, 000 or higher. So because that is not inexpensive, it’s one of those things that just depends on where you are in the life cycle of your business that would make it more relevant to have one versus the other.
Yeah,
that makes a lot of sense. And we’ve seen some of those valuations done, like you mentioned for estate planning purposes, like, okay, if we’re going to be using some discounting methods, that type of thing for moving assets into a trust, like having that valuation matters, but at the end of the day, when we think about the value of a business, the reality is it’s worth what somebody is willing to pay for it.
I could have this valuation, but if I can’t find any buyers that are willing to pay that number, it’s not really that real. So that’s good. But the nice thing about the people that are putting those together, they spend a lot of time in the industry. They understand what buyers are willing to pay. They’re looking at it from a buyer’s perspective going, okay, we’ve understood your business fully.
We see these things that are going well. We see these things that might have an impact on the value. You know, if you’ve got a key contract or a key person that is a linchpin for the whole operation that can have impact.
Yes. So that’s really just step one, identifying the value. And then step two is really protecting that value.
This is all about risk management and making sure that you address the common things that can have potentially a catastrophic impact on the overall business. And it could be things like premature death, disability, divorce, disagreement. Sometimes business partners don’t get along and they need to go their separate ways.
So. Or distress and that could be due to economic reasons or otherwise the business is just struggling and so I think having a plan in place in addressing those is going to help protect that value that a business owner has built over the years.
Absolutely. We see this way too often, unfortunately, like.
The time to plan for all of those things is when you’re setting the business up, not when you’re in the middle of them, because the problem is when you, every single one of those things you just described is a stressful situation. You add stress to a negotiation, a conversation. It can be problematic and it’s hard to get good outcomes versus setting up in a low stress environment when you’re going.
And I can also just speak personally. You talked about disability, disagreements, distress. My dad was an attorney growing up. He had two business partners in that firm. The first one was a distress situation. Ended up in trouble with the legal system, was collecting his mom’s social security after she had passed away, which is not good.
Got disbarred. So there’s distress. Like, okay, this guy owns a third of this business, but he can no longer be a practicing attorney. What are we going to do about that? Then his other business partner had a stroke. So now we’ve got disability. He can no longer work. He can’t practice law anymore. And none of those things were planned for.
It was like the plumber with the leaky faucet, right? Like these are attorneys that set up by cells all the time. Like we should have these things funded and it didn’t happen. So it was a good example for me just thinking about our client situations, my personal situation. How are we going to handle these things moving forward?
Like let’s be proactive versus reactive. It just wasn’t good for anybody in those scenarios when it wasn’t clearly defined. I think about my dad, who was the last man standing. He was taking on all the overhead of the firm. Hadn’t was basically the sole producer left. And it was like, you know, he’s at the point in his career where he wants to be dialing down and instead he’s ramping up.
And so I just hate to see some of those things. So having all of those like contingencies in place. Is very important. I don’t mean to get us too off track, but to preserve the value of the organization. That’s important.
So, yeah, that is important. And a lot of that should be in the operating agreement of the company.
So sometimes people start up companies and they just open up an LLC and they’re kind of off and running with that business. And there really isn’t much detail. in their operating agreement. So if it’s been a few years, it’s probably worthwhile for these owners to go back, make sure they understand how the operating agreement is written and make adjustments if needed.
But that’s one thing is having the language in the operating agreement. And then part B to that is if there are buyout contingencies and things of that nature, what are the funding mechanisms? And so there’s different ways to prepare and have pools of income that you’re going to go to, to fund those buyouts.
So a lot of times if business owners have been diligent enough to have the language in there, they still may miss that last piece of bow. Where’s this liquidity going to come from for me to be able to buy out the business partner without draining the company’s cashflow. You’re right. So those are important, important areas to map out.
So your story is very, very relevant.
Yeah. Thank you. Anything else on the stages of value maturity that we need to be
talking about? Yeah, so we’ve kind of hit on the first two and the build step is really focused much more on business and prove it again. There’s different areas of expertise. A lot of different professionals touch the space of exit planning.
This would be more of your true business consultants. Possibly M and a advisor, things of that nature that they’re going to come in. And it’s all about improving the value. What are those value drivers for the particular company? Again, to break those down, just high level, you have more of your financials, think profit and basically multiples, and then there are intangibles and the intangibles are really important as well, because.
There are things that will make your business more valuable by having in place. And that was also part of the four C’s I referenced earlier. So if you think about having the different types of human capital is one of those. So your people, structural capital being your systems. I know we tell it a kind of an internal rule at our company is if you have a process that you’ve done, that’s more than three steps and you’ve done it more than three times.
It should be documented and built into our database, right? So I think a business is more valuable if it has structure, if it has systems and processes. You don’t want, obviously, all this information just kind of floating in the head of the owner. That obviously will take away some value. To an outside person looking at from the outside in.
Then also there’s kind of the customer capital in terms of how indispensable are you to your customers and social capital be the last one, which is really more about your reputation in the marketplace and your view of the community and things of that nature. So all of those items can help to drive value and do drive value.
So even though sometimes people overlook that because it’s not just about the financials. It can be a very big multiplier can help to the multiplier of the value of the company.
Yeah,
that’s fantastic. And we’ve seen that we’ve taken on some clients that have been on this tremendous trajectory. They’ve financially we’re making a ton of money, but underneath the surface, they were a disaster.
The systems and processes were bad. The culture was bad. Their social impact was non existent. It was like, Oh my goodness, there’s so much work that needs to be done on the cleanup side. You referenced consultants like M& A advisors and that type of thing. And I even think back to like, we subscribe to the entrepreneur operating system from the book traction.
And there’s like EOS implementers out there in the world that can help you develop, I’ll say both a culture and some systems and processes to help you run your company well. And I’m sure all of that, like you just mentioned, brings value up. So that’s wonderful. I appreciate that. Now we’ve walked through the build category.
What’s next in the
value? Yeah. So the next step is harvest. And that’s all about what strategy or maybe strategies that can be more than one. It can change over time, but what’s available. Most owners are not even aware of what their exit options are. And so if we just kind of break it down at a high level, you could say there’s two main categories or two different main options, which would be.
Internal sales, and that could be a multi generational family business that’s just going to transition to the next generation. It could be sale to other business partners. It could be sale to management team, or it could be something like an employee stock option plan where the employees buy out the ownership.
So that’s an internal sale. And then there’s external. And. There are different options within the external, like selling to a strategic third party buyer or to another financial operator or investor recapitalization. And those are some of the main ones, you know, under the surface, there’s different variations of those, but sure.
For a conversation, they can keep a little bit higher level, but just having an idea of what an owner is thinking of, because As an example, a strategic acquirer may provide the best multiple and you may be able to maximize the value of your company. If you can find one, if your business is valuable enough to kind of fall under that definition of being a strategic acquisition, but if your objective is to take care of your people and make sure that their jobs are secure after you’re gone and that that culture stays in place, then that’s probably not going to be the best option.
So being able to reconcile between really what are you trying to accomplish as the owner. And there’s a different price level, different multiple potentially for those different options. So yeah, again, just building that into the discussion. I think it’s really important for owners.
Absolutely. And we’ve had some podcast episodes.
We did one with Brad Etheridge on the ESOP and the value of doing that and the reasons why that can make sense. And then we also talked with David Barnett on what it looks like to sell your business to an outside buyer that has nothing to do with your business. And you’re absolutely right. I think your value system and what your culture looks like and what your Lasting legacy is with that company can direct which way you want that strategy to go.
Do we sell it internally? Do we sell it externally? And I love what you’re talking about on the strategic buyer side of things. Like sometimes we can see scenarios where one plus one does not equal two, it equals five or six or 12. Because we bring these two businesses together that can create some fantastic multiples, just because they’re feeding each other well.
So that’s wonderful. Thank you. The
other thing just to keep in mind is that basically every industry and different types of businesses have their own multiples and that’s set by the free markets. So you may not have a lot of discretion in terms of where the free market places multiples on your industry or your business, but you absolutely have control over.
Where do you fall on that spectrum? So you may be at a two time multiple today and your industry could be a six to eight times. So if you up to the higher multiple and taking those steps, that definitely is within the control of the owner. Yeah. There’s one more. The last step is manage. So if you’re on the front end or going through this process, manage could mean managing your enterprise value.
And that should really, again, be a main focus. A lot of business owners focus on sales and revenue, which are very important, but we would argue that managing value, focusing on the value is a better approach because you can have both higher value and higher income as well. If you have not sold, then managing.
Would refer more to that enterprise value if you have sold, the managing is basically how do you take this business asset and convert it into sustainable retirement income. And that’s where firms like ours work on more of the financial planning, the ongoing management of those assets post distribution.
Yeah, that’s wonderful. One thing we see about entrepreneurs is they have a hard time sitting still. It seems like progress is part of their contentment, happiness, that type of thing. So oftentimes you see business owners sell and they’re not making progress. They’re sitting around. They’ve had their time on the beach and now they’re like, okay, we’ve got to go start the next adventure.
I could see that management piece being like, okay, let’s start something new, but let’s manage that. Like we’ve secured your financial freedom. We’ve sort of done all the hard work. We’ve capitalized this business into the real dollars. Now let’s carve off a piece of that to start something new. Let’s not push all the chips back in again.
So, yeah,
that’s well said. And I think along those lines. Having an investment policy statement, understanding what percentage of the total portfolio is going to be dedicated for private equity or other business ventures or things where that business owner wants to stay involved. And having that documented is just going to make it more likely that there’s going to be follow through on it.
Wonderful.
All right. So moving on to the four C’s of capital, we touched on those, but can I see if I can recall them? We’ve got financial capital, we’ve got systems capital, I’m going to call it human capital and then social capital. Is that in the ballpark of the four
C’s? I think you’re right in the ballpark.
So the human capital is all about how do you attract, retain, manage people? How do you get the most out of your people so that they buy in and support the company vision? So we all know that people are really important. I think one of the most important things is your people. So all the talk about AI, that’s still a ways out as far as being able to actually replace people and having that commitment from people to do well and to strive to grow the business.
So human capital is really important. The customer capital is really important as well. If you think about what is your business worth, if a highly concentrated segment, if you know, 60 or 80 percent is one customer, your business is probably not worth that much because if that one customer decides to leave, then there’s really not much left.
And so making sure you understand the customer, what’s driving the revenue. Are those relationships transferable as a part of it, how strong are your relationships with those clients, all that’s going to help to improve that segment, improve the value of your business, the structural capital we touched on, which is really all about systems and documenting.
And this even goes back to the people part of it. Most people want to really do a good job. And if there’s breakdowns, usually it’s due to poor systems. It’s because the systems don’t exist. Therefore, people are not able to deliver to the level that they would want. So I always emphasize the systems because I think people generally and genuinely want to do what’s in the best interest of the company and work hard.
So documentation, having training programs, the technology, all that would fall under the structural systems. Capital side of it. And then the social, which is about your brand and your culture and the day to day work that you do and how you interact with customers, all that would fall under the more kind of that social part of it.
Reputation, culture, all those things that you are important to the firm. Yeah. So those are intangibles that often get overlooked, but really do have significance in terms of the overall value
of a company. Yeah, I know that’s fantastic. And I think I missed customer capital in there. And that’s a great point.
There’s a huge concentration of revenue tied to one customer that can cause problems and you know, it can make a business not that valuable, or it can make a buyer awfully nervous about spending a lot of money on that business. Cause if that one relationship falls apart, it’s definitely an issue.
Yeah.
It’s also true on the other side as well. So if the sales are almost solely dependent on the owner, then that business is not worth as much as what it could be. I actually had an owner that I was talking with and they were kind of jokingly saying. I’m the most replaceable person in my company. And I responded back and that’s what makes your business valuable because the day to day did not require to be operated by them.
They set the vision and you know, more of the strategy for the company. But from an outside buyer’s perspective, that’s what you want. You don’t want it all solely dependent on that person that’s exiting the company.
A hundred percent. That’s fantastic. All right. Moving on to the three gaps. Can you tell us what the three gaps are?
Absolutely. So the three gaps are the wealth gap, the business value gap, and the profit gap. And to drill down a little bit deeper, one of the things that we would look at if we’re doing a financial forecast for a client and we want to understand what is that number that they need. To make everything work so that they can live the lifestyle they want their assets lasting throughout life expectancy.
So we look at what they have done already, and that might be a lot of the traditional things like 401ks and IRAs and things of that nature. A lot of times initially we’ll exclude the business just so that we can separate that out and see maybe a client wants to live on 250, 000 a year. I’m just going to make up some numbers, but that might equate to a number like 6 million nest egg.
So if we were to do the analysis and had a million dollars in traditional assets, like 401ks and IRAs, there would be a gap and that gap would be 5 million in that example. So the next thing we would go and look at is, well, what is your business worth? And this is where the business value gap can potentially come into play.
The business might be worth 2 million, but maybe it could be worth five if they took the right steps and are approved in certain areas. So the business value, it’s kind of like, what’s the value that you’re sacrificing by not being best in class. So getting a benchmark against. Other companies in your industry, similar size, so that it’s apples to apples.
And what’s the value of that company and how do you compare to that? And again, the goal there is to close that gap versus the best in class. So that’s the business value gap. And the last gap is the profit gap, which is. Related, but can be separate again, that’s one of those financial metrics, those tangibles.
And it’s similar to the last one, but it’s basically what’s the money that you’re leaving on the table, but not operating as best in class from a profitability standpoint.
That’s great. Derek, when we’re looking at how to close that business gap. Is there business consultants, that type of thing that you’re familiar with that can come into an organization and help businesses sort of look at that and go, okay, cool.
We need to clean up our operations or our financials or some piece of this business that will allow us to make progress towards closing that versus just, we’re just going to go try to sell more stuff.
Yeah, absolutely. And when it gets into the specifics of the business operations and closing that gap, we would actually pull in another professional.
So there are a lot of people that play in that space. Business consultants, coaches, you mentioned a great firm earlier, EOS. I’m familiar work with some people from that organization. And again, the data is out there, the software is out there. So it’s just a matter of, you know, take the time, have somebody to work with that can build out a roadmap, if you will.
And I think for business owners, it’s really helping them to identify what are the key areas. And usually there’s two or three that they know. That need to be improved. And that’s where the focus should really start on. And then you’re just checking off the list and working down to improve the value. But obviously having a plan is really important.
I would argue that successful exit planning is really the overlap of three separate areas, but all important areas and the business improvement is one of those. So that’s where those business consultants and coaches can come into play. But the personal financial readiness. So think personal financial planning, and then also thinking about life after the business sale.
So in the Venn diagram, it’s really where those three overlap is where the master plan should be built. So the master plan is all those three pieces. I think a lot of times business owners, they’re very good at what they do. And as far as operating their companies. They probably don’t need as much advice from third parties like us, but they need advice on the big picture planning because again, exit planning is very vague concept.
That’s going to, you know, in their mind take place at some point in the future, it can be confusing. And then when that happens, owners just say, you know what, I’ll deal with it later, which is not. What we want them to do, but unfortunately that’s often what happens. So I think having somebody that can help coordinate those pieces is really important.
That’s one reason why I went and got the certified exit planning advising designation is to help serve in that function where we know, okay, I’m not an expert in a buy in any of these, there are all these areas by any means, but I do know people that I could bring in from EOS or other business consultants.
M& A advisors to address key areas and bringing in other professionals when it comes to attorneys, there’s all kinds of different types of attorneys, transaction attorneys, business attorneys, estate planning attorney. So, again, all can be really confusing to the average owner and having a 3rd party. They can say now is the time we need to talk to that estate planning attorney or now is the time that we need to really make sure we have the transaction attorney lined up.
I think it’s helpful as well.
Absolutely. I think there’s a few things that I want to sort of pull out of there. The first is I love that when we think about how we serve our clients, we try to be this hub that can sort of manage all of those pieces you’re talking about. Like, Oh, Hey, here’s an estate planning attorney that we can bring into this discussion.
Here’s EOS strategic coach. Some of these business consulting firms that we can bring in. It just takes the pressure off of the business owner to manage all of that. Like they have enough on their plate, the way it is running a business is hard. They don’t need another thing on the list. And part of the reason why business owners don’t take action on these things is like, it’s overwhelming.
It’s too complex. I’ll just worry about it later. And then later it becomes a problem. So just a couple of things, statistics that I think. Matter 80 to 90 percent of the owner’s wealth is trapped in their company. I think this really matters. And I think this gets to the heart of what you were talking about.
So that 80 to 90 percent can help close the gap. Like we’ve got this wealth gap, but all of my wealth’s tied into this business. Like, how do we unlock that? You know, and it’s through a sale in some capacity. Then the next statistic that is shocking, but not, and this gets back to a point we made earlier about progress being sort of a key factor in an entrepreneur’s life.
Seventy five percent of owners profoundly regret selling their business just a year after selling it because it sort of takes them out of that progress mode, like I have nothing that I can make progress on anymore. So can you talk a little bit more about what good planning looks like for the business owner to sort of move into this next phase of
life?
Yeah, absolutely. Unfortunately, there’s some dismal statistics that again, it doesn’t have to be that way. But when you talk, especially when you say the statistic about 75 percent of owners profoundly regret selling their business a year after what that tells me is that there wasn’t probably enough planning done in other areas.
Maybe they did a lot of planning in their business and work to increase the value and did all those things that we were talking about earlier. But maybe they didn’t do enough planning on what is life after the business sale look like. Let’s face it. A lot of our business summer clients are type A.
They’re very highly motivated people. They like to work harder. They don’t want to be sitting on the rocking chair on the front porch during retirement. So this is part of maybe what I would call the identity crisis because they have had identified with the business. It was almost indistinguishable.
They were the business for a long period of time and now that’s gone. So what’s that next phase in life look like? And so being able to talk through that and plan and making sure that that is realistic. If you think that you might like to do something. But you haven’t really done a lot of it before that.
You might want to try it out before you go, I’m going to retire. And then I’m just going to go fishing or go golfing. You may not want to do that every day, or that may not be for you. So it may not be fulfilling. So that’s, I think, the important thing for some people that is volunteering other people. It is maybe starting another business or helping out in other ways, but.
Doing something again, I think that’s the key is that business owners, they’re driven people for the most part, and they need to identify what that is that is going to help them look forward to getting up every day. So that is definitely one of the things that I think gets overlooked. I also would say that some of this is just how maybe the financial service industry has been trained to talk more about traditional financial assets like stocks and bonds and ETFs and mutual funds.
And there haven’t been as trained in terms of how to incorporate the non security asset being the business, which is again, a very high percentage of a person’s net worth another statistic that’s unfortunate, but statistically over 70 percent of businesses that list to be sold on the market do not sell.
And that’s discouraging. But again, all these things that we’ve talking about, that it’s important to make sure that you can monetize and get value out of the company. Because if you’re viewed as really just a lifestyle business, a lifestyle company, then you may not monetize that value. Again, how do you unlock that and be able to transition that into your long term financial
plan?
Yeah. And on that last statistic about 70 percent of businesses that list don’t sell, I think there’s a problem. I’m not going to say in every case, and I understand this, but sometimes business owners have a maybe unrealistic value or thought of what their value is on their business because they know what’s gone into it personally.
All of the blood, sweat, tears, heartache, stress. So they’re like, no, I’m not selling my business for any less than X number of dollars. And then either buyers look at that number and are like, I’m not interested in that. It doesn’t make any sense. Or they make an offer and the owner’s insulted. And I think that’s where having professional advisors that aren’t afraid to speak the truth and maybe even getting some of those initial valuations done.
I know you mentioned Quist is an opportunity to like have a valuation done that can help start some of these conversations where the owner can go, okay, I’ve got an understanding now where my business is at from a value perspective, and I can decide to either move forward selling it or. For most small businesses, sometimes it’s like buying a job.
Like I’m working for myself. I’m making an income. This is solely dependent on me as the small business owner to run and sort of generate income on this thing. And I’m just going to someday walk out, hang up the close sign and call it a day. But I think to your point too, about like the financial assets, you need to understand that that’s the exit, right?
So it means we’ve got to put dollars away in a way that allow us to have the freedom and flexibility to do that.
You touched on a couple really important parts that I just wanted to comment on briefly, the emotional value that is when business owners, there’s a number in their head, wherever they came up with it.
Maybe they had a friend that sold a business. It might not even been the same industry, but that’s a value or it’s a big number. And I think this is also directly related to why a lot of business sales fail when they’re right up at the 11th hour at the finish line is because. There’s this emotional attachment.
I have to get X dollars out of the company or I’m not selling. And one of the big reasons I think for that is that they haven’t done the personal, the financial and the life after business sale planning, but particularly around the personal financial planning, they don’t know what that number is. They know the number they want to get out of their company, but they don’t really know what is the financial plan require.
I mean, maybe the financial plan only requires 6 million and, and this business owner wants 10 million. And because they don’t know that. It’s just like, I don’t know what I’m going to really need. So I’m just going to ask for a really big number and if they don’t pay it, then so be it. Yeah. What we want to do is we want to get away from the emotional value and put a practical value on the business based on real data.
Yeah. I think that’s a really important step in the process and we’ll make it more likely for that transaction to go through when they get up to the finish line. I don’t think any business deal is going to go perfectly smooth. There’s always going to be things that come up that don’t go your way and you negotiate, try to work through those and compromise.
But at the end of the day, if you know your number from what the financial plan says you need to get out of it, that makes it a lot easier to take maybe a number slightly below what you really
wanted. Yeah, no, that’s fantastic. And another resource that we’ve utilized, this is just a book, but it’s called Designing Your Life by Bill Burnett and Dave Evans.
And the reason we like that resource is it’s just got practical, like, gets you thinking about what this next phase of life looks like, what the encore career is, or what we’ll call it retirement looks like. Because we just feel like if you don’t have a plan. Most people will sit around for about a week watching Jeopardy, playing golf with their friends, and then, you know, two weeks, three weeks, they’re like, okay, this was fun for the first week, but now I’m sort of bored with this and I need something else going on.
And unfortunately, this is statistics for professionals, but CPAs and attorneys, like the mortality rate inside the first two years, the likelihood of them dying is really, really high. because they sort of lose their purpose and they’re like, I don’t know what to do with myself. And then all of a sudden they’re passing away of heart attack, stroke, that type of thing.
So I think having some intention around what not only your financial life is going to look like after the fact, but what you’re going to do with your time and energy is an important piece of all of this. So I appreciate you sort of bringing that into the discussion on this side. So. Anything else on the gaps that we should be talking about before we move on to the concurrent paths?
Just in conclusion on the gaps, just understanding what they are, is there a gap currently? And if so, what is it and what do we need to do to try to bridge the gap? Obviously, if you know that and you have some runway, then you have the ability to impact that, change that value and close those gaps. And that’s the goal.
Yeah. And that’s why exit planning is a little bit of irony from the standpoint that most people think of it as some event far off in the future, but really exit planning done right is brought back to the present day to where a business owner could be in a position where they could exit tomorrow.
That’s the perfect position to be in. Right. Even if you love what you do, you have no intention of starting for the next decade, being in that position of, you know,
you can go if you want to. Right. And I think another statistic out there that matters and underlines the point you just made, 50 percent of.
Transitions are involuntary. They’re forced exits, whether that’s divorce, disagreement, disability, like death, you know, like all of those things can show up. Yeah. But having a plan, even if it’s not perfect, I think that’s part of the problem too. People are like, well, I don’t know what decisions to make in these arenas, so I’m just not going to make a decision and it’s like, well, something’s better than nothing.
Let’s just have a game plan for worst case scenario, like the people you care about both in the business and outside of the business are going to be taken care of. So moving on to the two concurrent paths.
Yeah. So essentially that is the business improvement path is one of them, right? So it’s these things that we’ve been talking about, the value drivers, it’s working in the business itself.
And then the other part of it is going to be the personal and the financial planning. So ideally an exit planning, you’re working on both of those paths at the same time, right? And not excluding the other ones. So under the personal umbrella, it is the life after business sale and having purpose and understanding what’s going to drive you.
It is the financial forecasting and understanding what that nest egg needs to look like, and what kind of growth you need off your assets after retirement, the businesses, all the things that we’ve been talking about in terms of value drivers and process improvement and things of that
nature. Very good.
And then we’ve got one goal. What is our goal that we’re trying to accomplish here? Yeah,
I think the one goal is to drive enterprise value for the business that is from an exit planning standpoint. We know that most business owners, they love talking about their businesses, working in their businesses.
That’s what drives them. So, you know, when we talked about gaps earlier. It’s usually easier to close gaps through the business than it is personal. If you think about saving up 3 million or 5 million versus just driving business value, it’s easier to do that through the business than the personal saving side.
So again, I think that one goal is really focusing on the value. And if you do that, then the income will follow. It’s just a natural by product. You’d be a better run company. It’s going to be a more profitable company. Your income will go up as a result of it. So again, A little bit counterintuitive to some people, some business owners that they’re focused on the sales and the personal revenue, which again are important.
But if you focus on the enterprise value, you’ll naturally get those others as a
byproduct. So Derek, I think about this exit planning process and I’m stealing this from strategic coach, but we’re firm believers in who, not how, like our business owners are so busy. Not that they can’t figure out how to do it.
They just don’t have the time and energy to execute on it with excellence. So bringing a who into their lives that can help them execute on all of the complexity that comes into an exit plan. To keep it very simple, financial planning is very simple if you have five dollars in the bank. The plan is go get a job and start earning more money.
If I’ve got 50 million dollars in the bank, the complexity is dramatically different. Right. I’ve got everything from estate planning, tax planning. I’ve got this whole set of complexities that have shown up around my wealth. And so the business owner needs people in their lives that can help with this process of navigating the exit plan.
And the exit plan is not just Hey, I’m thinking about selling my business in the next week or so. It is a, probably a multi year process where we’re engaging with you, your team and going, okay, let’s really start thinking about and planning for what this is going to look like to maximize the value leading up to the sale.
And then let’s have a clearly defined strategy for what we’re going to do. Like I need a goal where my life is progressing beyond this business and I’ve got purpose and meaning to pursue. So anything else to add to that? Is that a fair assessment of what exit planning looks like? Yeah.
A couple of things just to expand on briefly that you’re addressing.
Having an accountability partner, I think is really important, really for anyone, business owners and otherwise, but having somebody to help you through the exit planning process, it is complex. It is. multifaceted. There’s a lot of different professionals that interact in this space. We’ve talked about some of them, CPAs, attorneys, growth consultants, family advisors.
So ideally, you can get all of these professionals around the table, so to speak, and on the same page, because individually, they may be very good in their specific skill set. But it could conflict with other areas of the exit plan. So I think it’s really important to have a person that you can work with that can coordinate this team of professionals and again, making sure that you have this master plan with all these different professionals tie into it.
And at the various points of time and having somebody say, now is the time we need to bring in the investment banker, the M and a consultant or not, you know, to saying that’s premature or maybe you don’t need the formal valuation today. Let’s not spend 25, 000. Let’s spend 5, 000, get an informal valuation and save that money put into the business.
So those are the types of things that I think a financial professional can really help with if they can coordinate the individual pieces of the exit plan and these different professionals and how they interact with it.
Wonderful. I appreciate that. And Derek, I appreciate you just being a part of our sort of team and our network that we can plug into when clients have these questions.
So anything else that we should be talking about when it comes to exit planning that we haven’t already
discussed? I think that we’ve really hit on a lot of the key areas again, maybe just to emphasize the point, the earlier you start the better. So I know it’s common that people say, well, you know, three to five years in advance of the sale.
I would argue if you’re even a startup, once the business is up and profitable, this should really come in front and center in terms of all the things that we talked about, because again, you want to be exit ready and to be able to leave on your terms. Everybody’s going to leave their business at some point, whether it’s voluntary, involuntary, we don’t know what the future holds, but you want to be prepared for the worst case scenarios.
And of course, you want to be ideally situated where you can enjoy the fruits of your labor. Yeah. I think that’s what I would conclude with.
Thank you, Derek. I appreciate all of your wisdom and insight on this topic of exit planning.
Yeah. Thanks, Pat. It’s been a pleasure. Have a great day.
Thanks. You too.
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