Exit Planning--Structured Financial Partners: Building value for your company's tomorrow ℠

CEOs Must Work Hard to Retain Key People

We've said it here many times, but it can't be reiterated often enough. Whether a $10 billion business or a $10 million business, your Key Employees are critical to your value and your profitability.

In an interview with business guru Ram Charan in the December 27, 2010 issue of the Wall Street Journal, Charan drives the point home. He says less than 10% of CEOs are focused closely on profitable growth and suggests quarterly reviews of people the way the CEOs do quarterly reviews of numbers. He also believes that in addition, to financial rewards for profitability, key people should be rewarded for how many other leaders they produce.

Here is a list of Ram Charan's biggest talent-management mistakes:

• Leaders not held accountable for developing talent
• Performance assessments without candor or focus on developmental needs
• Failure to drill deep enough to know best staffers well and put them into "stretch" jobs
• Top management's serious lack of time commitment and energy
• Placement of loners in leadership jobs

So, why all this in a blog about Exit and Succession planning? Charan's work is with Fortune 500 companies and our work is with companies under $150 million in revenue, most of them between $10 and $30 million. What can we learn from Ram's teachings? Owners of these small Middle-Market companies want to get the best price when they sell their companies. Sometime before they sell they either have made or will need to make the transition from and entrepreneur–led to a management- led company. The development of their Key employees and their ability to develop leaders within the organization will add tremendous value down the road.

 

 

Like in Football, the Time Clock Matters in Exit Planning

Now that we are nearing the end of football season, a lot is still up in the air, but certain things have been decided. Those teams that got off to lousy starts and lost too many games early have been mathematically eliminated from making the playoffs. When the announcers talked about "do or die" games for those teams, they didn't.

When you look at the teams that are leading their divisions, they are great at the "two-minute drill." When the clock runs down, they have a plan to move the ball toward the goal line. They spend a huge amount of their practice time on perfecting execution of what they will do when the game hangs in the balance.

Business isn't always like football, but sometimes, we see parallels in our exit planning practice. In a perfect world, clients would come to us in their early 60s or earlier when they assume they have two to five years left to work with full vigor. But in reality, most wait until later, they wait until the two-minute warning.

Fortunately, in the transitioning out of one's business, it's not about winning or losing a game, but in preparing for the exit event, time gives one options.

We have recently taken on two client companies where the owners are 88 years old. For each of them their age causes similar problems:

• They want more for their companies than they are worth in today's market environment
• They are set in their ways and don't want to do anything differently to improve profitability and value
• They don't have time to ride out the market cycle and wait for sales and profits to improve and multiples to (potentially) improve
• One has recently had a heart attack. The other is in good health and his younger (80 year old) brother runs the day-to-day operations and is in good health, but come on…

Many business owners want to work as long as they can. With Exit Planning, that can be worked into the plan. But one can't go into Sunday without a game plan. Even Brett Favre  gets knocked out of a game one day.

For most business owners, a prudent game plan dictates beginning this process earlier so they can reap the fruits of their labor from a easy chair before they are to beaten up to enjoy it.

“I just got an unsolicited offer for my business. Should I sell?”

Many owners face this scenario during their business lives. The conversation is sparked by a fax from a stranger or a letter from a competitor. The owner enters into a conversation with the buyers representative and before long his lawyer is negotiating a deal with them for an amount of money more than the owner ever dreamed of.

GREAT, RIGHT?

Not necessarily.

My investment banker friends tell me that after the business is properly packaged for sale and other prospective buyers are asked to bid on the business, the final sale price could be 2 or3 times in the initial unsolicited offer (if not more.)

Remember these few tips if you get a solicitation to buy that you are curious to explore:

• Don't make the call yourself. Have an attorney, investment banker, consultant or other trusted advisor make the call on your behalf.
• Don't talk price. Whoever mentions price first loses.
• DO NOT send any financial information. They might say the worst that can happen is you get a free valuation. Not so. You have just put your financial data in the hands of a competitor or someone who will be buying a competitor.

If you are getting to a point in your business life where one of these unsolicited offers to sell might be welcome, there are things you should be doing to the business today to make it more valuable in the eyes of the buyer.  This exit planning process will add value and improve efficiency when the M&A firm takes over.

You never know when that call might come.

The unsolicited offer

Many business owners have told us that they get offers to buy their business all the time. Even in this down market for business sales, those letters keep coming.

Are those offers ever real? Not usually. Are they ever? Sometimes.

A few years ago we were working with a client on a consulting project—not a comprehensive exit plan—but more of a modular approach. The client showed us a letter he had received in the mail. After we reviewed it and discussed it with him we developed a plan. First, we would have someone other than him call in response. In this case, we introduced the client to one of our investment banking contacts. After the initial contact was made and it was determined that the solicitation was not a ruse, the client engaged the investment banker. THIS WAS CRITICAL. IF THERE WAS ONE BUYER INTERESTED, HOW MANY OTHERS MIGHT THERE BE??? The investment banker in this case did a tremendous amount of work where we left off. Getting multiple buyers to create a bidding war…Keeping the deal together every time it fell apart. And ultimately closing the deal for an amount that would make a major league all-star proud…

So for business owners who get an unsolicited offer and are inclined to answer it HERE ARE A FEW TIPS:

• DON'T make the call yourself. Have an investment banker, business broker or attorney make the call for you
• DON'T fall for the line about sending over your financials for review. "The worst that will happen is you'll get a free valuation, " they will tell you. NO! the worst that will happen is your competitor will have all your financial information.
• If you want to able to act on that call when it comes, start planning for it today. Exit Planning is a value enhancement process. If you do it your value goes up. If you don't do it your value will be discounted by your prospective buyer.

Exit planning when the heir apparent bails

I was visiting with the 62 year old owner of a building supply company last week when the subject exit planning arose. It had always been his plan to turn the company over to his son, but the son has other plans. "He wants to coach his kids little league teams and be home by five o'clock. With what the economy has done to the business, if he's going to be here, I need him to think like and entrepreneur, not a nine-to-fiver. I told him if he can find a nine-to-five job, he should probably take it,"  Tom said.

This is more common than you might think. Business owners often have an exit strategy in mind, but the players they are counting on have other plans. Consider these scenarios we have seen:

• An 80 year old father is finally ready to let go and sell the business to his 55 year old son who he has paid well, but to whom he has never ceded an ounce of control. The son turns around and tells dad, "Thanks, but I'm ready to retire myself…."
• A 68 year old business owner plans to sell his company to his key employee on the installment plan when he turns 70, but the key employee doesn't want to take any of the financial risk, that comes with ownership.
• A 70 year old father in setting up his estate plan, has a daughter who runs the business and a son who is not involved in the business and not enough cash to equalize their inheritance. He decides to leave the business to the daughter and the building the business resides in to the son, so he can be her landlord…

I can go on telling stories like this, but the point is simple. The moral to the story is the same whether it is your goal to keep the company in your family, to sell it to your co-owner or management team, or to sell it to third parties in an M & A transaction. To avoid being blindsided by roadblocks an owner must plan plan plan.  Planning must begin well in advance of your target exit date. This planning is best accomplished working with a team of trusted advisors, including a quarterback is experienced a systematic the exit planning process.

When should a business owner ask for help?

I'd like to introduce today's guest blogger, my partner Susan Laine, MBA

While the economy appears to be picking up somewhat, we still aren't out of the woods. Is there another shoe that will drop?

Everyone I talk to is concerned about the value of their 401(k) and other investments in the stock and bond markets. They are asking wealth managers to help them stop the hemorrhaging in their portfolios and be prepared for the market turn.

But shouldn't business owners also be concerned about what is often their largest asset—their business? Without planning today, the future is uncertain. Shouldn't you have the same expertise helping you to stem the losses and manage the business for growth?

The answer is simple. Entrepreneurs are hesitant to ask for help. They are mavericks. They have built their businesses on guts and sweat. But even the most successful need help.

I am reminded of the story of a young college dropout who started a business in his garage. He built it using his instincts and technical skills. He grew his business phenomenally, but even he realized that he needed professional management to help him grow his business to the next level. He brought in Steve Ballmer to run the business while he focused on his strength—being a technology wizard. Today, Bill Gates is the richest man in the world and Microsoft touches almost every life on the planet.

Business owners should take this story to heart and realize that everyone needs help to plan for the future.

Do you have a “lifestyle company” without knowing it?

We and other professional advisors we work with come across two distinctly different types of entrepreneurs. Type 1 is the classic "nose to the grindstone" type. He takes a nice salary and bonus, but plows most of the corporate earnings back into the company to fuel growth. He's generally conservative in his investments and expenditures. But his best investment, he feels, is in his company. His revenues and profits are rising steadily and sustainably.

Type 2 worked just as hard as type 1 to build his business, but when it became profitable, he started milking the cash cow for all it was worth. Instead of reinvesting, he took a larger salary and bonused himself almost everything that was left at the end of the year. He earns $3 million a year and works 30 hours a week. What's not to like?

We'll call Type 2 "Mr. Big." Big has built himself a lifestyle company that suits his current needs incredibly well, but may fall short when it comes time to retire.

In the next post, I will explore some of Mr. Big's issues and how you can avoid them if this is your entrepreneurial type.