EP54 - Home alone - What are you going to do with your business?

It is the season, everyone. Thank you for joining us. I'm the ESOP guy and we are on a journey to an ESOP. This podcast is for those companies selling shareholders or owners of businesses that are thinking they might want to use an employee stock ownership plan in their planning. If you haven't joined us before, please, and if you have an interest in this type of podcast, which is really to educate the world. Or at least the United States, on employee stock ownership plans and how they're used. If you have an interest in that, there's a whole bunch of other episodes on our website at journey to an ESOP.com. So with that, the big question today. Is when should you plan for the succession and exit of your business? You know, no one wants to plan something as important as this in a crisis. I find it difficult sometimes for me personally to do the things that I should be doing and planning the things that I should sometimes like packing my clothes for a trip, um, even Christmas shopping, you know, I, I find myself a lot of times on Christmas Eve, being the guy who's running around from store to store buying whatever, because he's more and less, more or less in a panic. So check this out for a second. It was just like, no, you just made it. They forgot one small thing. I have a feeling. Did you lock up? Do we set the timers on the lights? alone place in the northern suburbs. So no one thinks that that would ever happen. No one was thinking, hey, we'll leave our kid behind. So really, the title of this podcast today is Home Alone. What are you going to do with your business? So think about this for a second as we get started, but I wanted to stop and just say thank you again for, for listening to our podcast this year. If you like what you hear and you're new, um, and you haven't subscribed, subscribe to the podcast. And if you think it might be helpful for somebody, please share it with a friend. Now, eventually, I was going to get to this movie because honestly, it is one of my favorites of our Christmas season. And I, I know that some people have the movies that they like to watch. This is for us and our family, um, one of our favorites, and we usually watch Home Alone 1, 1st night, and then Home Alone 2 the second night, just because that's our family tradition. The first time I saw this movie, and I can't remember when it was because it was so long ago. I think like everybody, I was like, what? They left their kid behind? How do you do that? Um, everybody in the entire house in the storyline is sleeping, and in a comedy of errors, the power goes out, the alarm clocks don't work. The entire two families oversleep and then they literally rush out of the house to catch their flights to Paris. Now, this would never have been able to be possible if we were in the current day. This is obviously before the 9/11 attacks because you can't just walk into the airport and get on your airplane. So, but either way, either way, that's just too practical for, for a second. But so I really like this movie and it makes this kind of like, as we go through it as a family, makes us start thinking about what we really appreciate, which is really good in terms of, of what's really important during the holiday season. What is interesting about this movie, and if you really evaluate it and analyze it, is this contrast that exists. And I mean, it's like art, right? When you're really thinking about this movie, it's not just a plot and some music and, you know, different characters, but The contrast that exists in the characters with this, you know, beautiful backdrop of Snowy White Christmas. And so you have, you have the robbers, who are like played by Joe Pesci and this other guy, um, who I can't remember his name, and you have Kevin, who is, you know, the the main actor. And the contrast Kevin first off with his parents, like who do not plan very well. And you can understand why they have such a big family, but either way, they didn't plan very well. Um, and they have a lot of kids and all that, but they, they really end up scrambling around. Now you have the, the contrast that with Kevin, who's very serious at planning. Um, and I think that's kind of an interesting dynamic. And then you also have the robbers who, even though they're goofballs, They still have a plan and they thought so far ahead of the game, hey, here's Joe Pesci disguised as a cop, running through the neighbors, the neighborhood, visiting houses to determine who's going to be home during Christmas. So he plans to rob their house. So I think it's an interesting contrast between planning and not planning. And ultimately, the the dots that we're connecting here, hopefully, are that, You, if you don't plan, you know, you're going to have issues as you go through things. And as an advisor for succession planning, I can tell you that I'm, I love the conversations that I have with all these different potential clients and existing clients about, hey, what my question is, is, what are you going to do with your business? With a stare, and sometimes a good answer is, hey, I, I have kind of everything laid out and everything's, you know, this is kind of the rarity, by the way. I've everything laid out and I know exactly, I've already worked out who's doing what, and this is the type, type of sale we're gonna have, and this is who's gonna take it over. And, and for the most part, I don't get that answer a lot. I get mostly, hey, we're really, really not sure or we've thought about different things, but we're not really wanting to even, you know, go there and talk about it because of other things. So then when you ask the next question, um, which is just really to prompt more discussion, it's how long do you want to keep working, or you know, in fact, running the business and what it requires to run the business. In that, you get all sorts of answers and they really do cover the spectrum like I just literally honestly don't know to I really never want to give this up. Sometimes the answer is, I'm so tired of this business, it's running me into the ground, and I don't know what to do about it. Some folks feel trapped in the business, like, hey, how could we ever do anything? Because, you know, I'm the guarantor on the bank, I'm the guarantee on the bank loan, uh, on the bonding line. Um, I, I don't have a company, I don't have an employee in my company that has the same skill set that I have to take over. So they might feel trapped, um, only and some people might feel trapped only because they really don't have um anything else to retire to. And so there's like this, you know, maybe invisible. issue that they haven't really dealt with in their life that, that is compelling them. And meanwhile, they're really getting more and more tired every year, more and more burned out. So one point I want to make early on in this episode is that planning It doesn't mean doing. And I think the fear of planning is that you're going to have to do something about it. It's your plan. So don't be afraid of it. Do, do, but do the planning so that you can have something to work on to make sure that you're, you're in the right place. So for instance, it may be that when you do your planning, you're not really not ready to, to leave the business and that's OK. And one of the, one of the greatest things about ESOP consulting is It's such a flexible way to go with tranches of sales, you don't have to sell the whole thing right away. Um, you can do non-leverage DSOs just to get things started. There's just so many different things you can do because of the flexibility. Um, it does really, really well to plan and work out, you know, the best options that you have early on in the process. So some of the things we're gonna do in the, in the outset of this podcast is just cover some of that, the ideas or the, or the, the areas of planning that we get into that I think are going to be important to build in terms of your mindset when you start thinking about your succession and exit planning. And the first is, I think an obvious one is, what is your business worth right now? I think that's a key question that everybody needs to ask and have answered. What, and then the second question really is from there, what do you want it to be? If you don't, if you're not happy with the business valuation and where it sits, um, then where do you think it should be? Now, this is confusing sometimes too, because There's a lot of different approaches to what people think business valuation is, and I want to just stop and say a business valuation from what I'm talking about in your business planning is a financial valuation primarily based on the income approach method of value, which is cash flow divided by risk of the business. So there's a lot more to that and there's a lot of episodes that we've done to talk about that, but I just want to make sure I point that out. That's not the same as I think my friend who has the same kind of business, sold their business for, you know, 10 to 20 times multiples, and I think I can get the same thing. That's not, that's really not addressing it. And the reason that is true is because the, the potential to sell your business is not always going to be the same as everybody else. Most of the time, it's not going to be. And so we just need to identify that and talk about it and make sure that you feel that there's a very Um, good overview or you feel that there is a very thorough plan there in terms of addressing that question. What are your goals and objectives in the short and long term? Very important question. Um, what do you want to accomplish over the next year or so? What do you, what does this look like for not just you in the long term, but also for your employees and for your customers and all of those, uh those aspects of both short and long-term planning, those need to be really heavily addressed and they're conceptual in some cases. In other cases, there, there are things that they can be modeled out. With your advisors in terms of how much money do you need to retire or, you know, anything specific like that, that you can really put up um a number to really does help you to determine what your specific goals are when you really start thinking about what's your real next step. How do you feel about your employees and their future really plays back to the long term, but when you start planning this out, this is really critical for those that are thinking about an ESOP because You know, as an ESOP, as, as a potential option to sell your business to an ESOP, the, the other side of it is, hey, I could sell this to a third party, a competitor, a private equity group. If I really do want my employees to have a job down the road and have a future. Then I'm probably going to lean more towards the ESAP when I, if I don't really think about that, that that's important to me. And there's really, that's your choice because it's your business, um, then that helps you to figure out where you should be aiming your planning. How do you feel about the future economy? This is a big one in business cycles, especially as we got through or getting through this 2020 year. You know, anticipating a future economy where things are going to be much more uncertain, might be different if I have anticipating a future that has a lot more predictability to it, that may really play a role in terms of of what I want to do with my business. Um, we go through every, every business is going to go through some types of cycles and so really understanding. Where you are in that cycle and even in the, the whole beginning emerging business model up to a mature business to a declining business, even that whole life cycle of a business is important to consider you, your business in terms of where it is at in its timeline. And I think part of that is to, um, as you start to think about the future, what is your, what are the growth possibilities of your business and how do those, how do those get funded and are they're going to require a ton more capital. And so those are just thoughts and questions around that. If you go through an ESOP, um, you know, really what is the best approach, I would say it's much easier to phase into an ESOP over time. Doing a 100% leverage transaction is, you know, happens and it's very popular, but as you start thinking about having a, a larger span of time to plan, it's sometimes better to walk, you know, to, to just do it a smaller tranche, 30, 40%. And then that way you're not creating all of this leverage for the balance sheet. It's, it's sometimes easier to finance, and there's just a lot of other options there. So that's very helpful in thinking about, you know, your future plan. Another just obvious question that happens and it happens a lot with companies because they just start to create other companies. So what, what other entities entities do you have? Um, will you anticipate merging those entities down the road, um, to have one entity that you would transact an ESOP into, or would you, what have you done with the real estate that you might own? All those questions might be really important as well as you start thinking about the planning. So I, I literally did that just so everybody could have an idea of things to be thinking about what, what would go into some of the questions that we would have for succession and exit planning. As I said before, it's planning is not doing. I have many clients that were in year 4 or even 5 of working through their planning. And as, as I say that, I do, I do think that this is some of the best um work that we're doing because it's, it, it has been a process that we've gone through to really help them fulfill certain objectives that they had that were much more longer term. And so it's, it's enjoyable from every side because there's not a, a, a crunch time. And I, and I kind of go back to the whole theme of this is that You know, we plan as as people in this world, we plan a lot of things in our life. We plan our college out, we plan our weddings, um, sometimes we plan to have children, other times we don't. Um, we plan our businesses, of course, we plan vacations, etc. Um, so why do some folks put off planning of their succession and exit of their business for so long sometimes. Uh, so I want to talk about the, you know, the why behind it, but I want to talk about what the, the problem with that I see in that. And what we don't want to happen. Is that there's something like a crisis that propels us to make a decision. So maybe it's a health issue, maybe that there's something, and that's the thing that's really catapulting us now where we're going to make a decision now because we, we no longer have much choice. And I wanna, I wanna hit this idea of the uh The truthful saying of haste makes waste. This is a rhyming warning. It was first recorded in its form in 1575 by John Ray's in John Ray's Proverb collection. And the full text was this Haste makes waste and waste makes want, and what makes strife between the Goodman and his wife. Now, I don't know who Goodman is, but I get strife and and the whole idea behind this is that Haste does make waste. And I went through this a little bit deeper cause I was really curious, you know, when you start reading these types of um axioms or, or idioms about, you know, the truth, the truths of life, we all say these things, we don't really even know, you know, are they even true? So, And so the idea behind this as we go through it is, you know, rushing through a decision to sell your business does not seem to be a good decision, but haste makes waste. Is this true or is this something just people say? So do our brains make more mistakes when we act quickly is, is really the main question. The McAllister family, in our good example of our Christmas movie that we talked about, found that out to be true. And as they started to uh oversleep or wake up oversleep, and they knew they had to get to the plane, so they went through all these decisions really quick, and guess what, they left their kid behind. So one of the things I looked at to, to dig deeper in this is a study that was conducted by researchers at Vanderbilt University, and they concluded this, so I won't read the entire study, but they, they concluded this, that the brain uses the same basic method to make both deliberate and rapid decisions in order to shorten the decision making time. The brain simply reduces the cumulative amount of neuronal, neuronal uh neuronal activity. I'm sorry, I, I'm not a scientist. Activity, it requires before making a decision. So the neurons, OK, in the brain are um basically using the, the activity, but what's happening is the brain, when it's making a snap decision, has to base the decision on less information. Because if it was making a decision on a slower basis, it's going to be able to include all. So the brain kind of knows that it needs to make a decision quickly. And so what it's doing is it's eliminating information from the equation, so that it can move on and make a quick decision. And that's just how we are created. So, what this means, guys, is that the likelihood that we're going to make a decision in a crisis or we in haste makes waste is that we're going to make mistakes and mistakes are going to increase. And, and really where I want to get to this is, is, is that when you have built for, for many people that build a business over 30 years or, or plus or, or whatever, they've put their, their, their pretty much almost their whole life into it. It's the most valuable in many cases, the most valuable asset that they're going to have. And when they go to retire, it's going to be one of the most valuable parts of their retirement. This is the most important decision that you can possibly make in the sense of all the decisions. It's not the most important, but it is pretty well, I think, well up there. So, so I'm really stressing this idea because It is true that haste makes waste and we don't want to be rushing through it. So, so as we go through that, I'm going to go into now, what kind of mistakes happen if you work through this process too quickly. And so the first we're going to talk about is, is just not being prepared enough. So just like you would go through your house, if you're gonna sell your house and you're gonna like, hey, I want to have people walk through my house and see if they like it, they're gonna, you're gonna go through and prepare the house for sale. And you're gonna do a face lift on the house. You're gonna repair things so that people walk through the same thing in your business is true. We're gonna go through and look at your business and try to make sure that we've um looked at anything possible that might be an issue. Now, one of those is that, that is, we find sometimes in the businesses that their tax reporting may not be where it needs to be. Maybe they have, you know, some tax liability that they haven't really accounted for. Um, maybe there's uh areas where they've um pushed too far on personal expenses. And so, It may be that we're cleaning up, not just the financials, but also the taxes and that, that obviously is going to take a year or so to make sure that we work through that, um, as part of a possible transaction. Now, if you're selling your business to a third party, I'm going to say that this is extremely important. If you're selling it to an ESOP, I think there there's a little more um latitude there to look at those uh potential tax issues. And do some ad backs and just figure out how, how that all fits together, but it definitely needs to be thought through in terms of cleaning up the, your books and your books and records from a tax perspective. The second thing is any potential pending or threatening litigation, things that might need to be resolved that you don't want to be doing anything in the middle of. So if you have anything that's coming down the pike or you're in the middle of, that needs to be thought, thought about and make sure that that is put to bed, um, so that that can be dealt with. Now, on an ESOP valuation, if it's litigation that's been dealt with, um, and the costs were, were incurred, we can look at that as possibly an ad back. Um, but if it's existing and and it's going to create risk to a potential buyer, that's gonna, that's gonna definitely impair and affect the, the business evaluation in a way that You don't want to. The third thing I would, I would mention in terms of preparing and being prepared for the ESOP transaction is. is looking at, you know, the overall organization of the books and records. So as we get into, you know, step one, step two, all the way through all the different steps of going through an ESOP, one of the, one of the aspects of this is we're going to get into a due diligence phase with a trustee and their financial advisor, their evaluation firm. The last thing we want to do is be pulling records, and none of it makes, makes any sense or it's just all over the place. So they're going to be asking for, say, for instance, monthly financial information, we want to make sure that that ties directly with last year's monthly financial information. They're going to be looking for your articles of incorporation, they're going to be looking to make sure that you, all of your records and meetings and minutes are are put together. Those are things that even, even with a really pretty succinct strategic plan or a business plan, all that fit together is going to present itself much better to a trustee and a financial advisor, and it's going to help us to present well in negotiation to try to get the valuation that we're wanting to get in the best terms of the deal. The fourth thing I would mention is the staffing considerations of the employees itself. And, and one of the, the, the things that we look at in terms of, of evaluating that is do you have the right people in the right seats, which is just from a business planning standpoint, just makes sense anyways, right? But as you go into an ESO transaction, what we don't want to do is as we start looking at those potential interviews with your key people, I know, hey, you know what, we don't really have the right person, you know, in, in the BDC that's doing business development and when we talk about it, it doesn't make a lot of sense, doesn't really fit together. Or there might be other things that, you know, you may be needing to hire some people or you, you may need to to Um, have a different employee plan, um, as it presents an organizational chart to present our forecast and all that, all that should fit together in terms of, of how your company fits together. The key part of that too is if you're selling your, your business and you're exiting the company, you definitely want to have a good sense for who's taking over the roles that you, um, that you have in the business so that there, there's a consistency to that and it looks very, very, um, uh. Succinct in terms of who's doing what. Now, if it's not gonna, if you don't have anybody in that role, it doesn't mean you can't go through the ESOP transaction. But as I said, planning really helps you to determine where your, your holes are. And so that when you get into these presentations, we know that we're at least going to try to fill those areas of the company. So as we think about that, I think there's, there's many other things that we'll get into with planning, but I wanted to hit on some things that, you know, if you're not prepared, I want to now talk a little bit about what are some reasons that actually do spark a selling shareholder to begin the transition of their business. And I'm mentioning these because I do think that, first off, you, you, you're going to find that you're not alone as a business owner, that there's a lot of, a lot of business owners are in the same place. And I also want to illustrate that there's some things that you, you know, you may have not really thought about or ignored, and I want, I want to bring those to light to help you just to determine whether or not, hey, this might be a really good time in 2020 or 2021, which we're running out of time in 2020, but In 2021 to really make this an initiative um to, to look at further. So the first is this concept of, you know, I've been doing this for so long, and I used to be really enjoyable, but now I don't enjoy it as much as I used to. And I'm, I'm just kind of running out of steam. So I wouldn't say this is absolute burnout, but you know, everybody knows when they're approaching, you know, the sense of like, I just don't like what I was, what I, I used to like about this, and I've been doing it for so long. People that, if you're running the business, people that work with you will know, it'll be evident. It'll come out in the way your, your leadership style changes or how you focus. So I definitely think that the, the idea behind the first is just addressing whether or not you're in a closer to burnout or you're fully burnout type of stage. That's gonna be uh definitely a catalyst for you to start thinking about, you know, it's time for me to really put my plan together. So, um, other, other ones are going to be, you know, your company is going through and this may have contributed to the burnout, but you might be going through a major cycle. Um, and this is delicate and difficult sometimes because if I'm, if I'm experiencing as a business declining revenues, then that might be my catalyst to move out, but at the same time, that really might affect my, my valuation too. And, and I say that because I'm, I'm saying this specifically one because it's really important. Before the declining revenues come to have a plan. Because literally, once you have a plan, and you start seeing some changes in your, in your, the competitive force is changing, um, you could probably get there quicker and make a better decision. And I always use this in my business. It's what in 2020 could I do? That I wanted to do in 2021 or 2022. So basically, in other words, is, if I could make the decision now, knowing if I could see kind of looking at the way the trends are going in the future, should I not make that decision now? So if in really in the in in To button this up a little bit, if I know that I, I'm going to be facing some more severe competition down the road, doesn't it make sense for me to really jump in and plan this. So this could be definitely a spark to help a selling shareholder think about, you know, I really do need to, to capture what my valuation is and really think about the impact of declining revenues in my business. Another thing that happens and it could affect your, your actual declining revenue concept, but in general, you just have negative industry trends and, you know, nobody could have predicted like you go through some of the classic examples and in business that are recent, you know, um, so for instance, the hotel industry dealing with the Airbnb. You know, phenomenon with how the internet has taken over, the taxicab companies dealing with the Uber phenomenon. I mean, these things, nobody could have predicted these industry changes, so they were so abrupt. But there are industry changes that you can be thinking about. And one of the things that I love to do as a evaluator is really contemplate what's happening in that industry, what's happening in that that that company is going to be subject to down the road. So when we had the 0809 crisis, you know, the home builders went through a huge, huge problem, and it happened again. It was very abrupt. And, you know, it does help to start thinking about like what possibly could change in your business now. If technology moves in, every company is going to be subject to changes in technology. As we have uh a new administration in the White House, what's going to happen in in from a political environment and changes to potentially my industry that way. Very important. And I think as you start thinking about the industry changes, um, you you could definitely start thinking, you know what, I don't have a succession and exit plan to address these changes. And so, definitely, that's one of the things I think is, is very important to think about. Um, one of the, one of the things that happens too, and this is just a reality, and I, and I pointed out only because it may be you, or it may be somebody that you know, is the businesses really struggle through sometimes a partner, partner issues. And so a partner or shareholder issues. So if you have, you know, any kind of potential disputes, things change over time where, you know, somebody's maybe goes through a divorce, they're not the same person they were, they were before. Um, that definitely can, you know, prompt a discussion on succession and exit. And how does that really look for some, some people in terms of their, you know, wanting to work with this person anymore. And, and so definitely as that, if that's you, then. It may be time to really say, you know what, let's talk to our advisors and let's really get something on the map because we're not really happy, um, in doing this, and sometimes those things don't get any better, you know, and I'm not saying immediately try to exit, um, always try to work through those issues, but there's sometimes you just know that you know this is not a good situation and we need to move on and do different things. So the one thing I found in another one is just, is once the company wakes up to the possibility, this is much more on the positive side, not, not necessarily on the partner dispute side, but the possibility of using an ESOP for the growth of the company. And I think this is, this is powerful and I, and I, and I say that can prompt them to think about succession and exit, but it can prompt them to think about how do I actually, you know, take And leverage an ESOP for an improvement in my, the employee morale, the, the improvement in retaining key people. Um, how do I use an ESOP to take the advantage of the tax benefits of an ESOP and leverage all of that. In a, in a longer term plan that includes the succession exit, but also includes a possibility of growing the company. And so I think that's, that's definitely one that I'd say, um, I like the most out of all of them just because it's like it's very positive and it's, and it's, I love to, you know, sit with the client and think about the future and the vision and how we could use this to really help them achieve and accomplish their, their larger goals from a business standpoint. Um, there, you know, other things that could, could really come up or things that, you know, would happen if the changes in, in the business structure and the lifestyle and, and just kind of things that, that just happened. Um, in a business that you never know, you know, I might have lost a key person or, you know, just there's a, there's a lot of things. So I don't want to like to say these are the only things, but I do wanna, I did want to go through kind of a, a good over overall list, um, so that you could be thinking about those things as we go into the new year and possibly, you know, start looking at, hey, I really do need to make 2021. This, this is, this is really an important initiative for us. So with all of this being said, my main message here um is don't be a victim of haste makes waste, and take the time to plan with your trusted advisors and ultimately don't leave your kids at home alone when you go on vacation. So if you like this, subscribe to this podcast, rate and review the podcast if you have an Apple iPhone. Um, if you need to, um, you know, help, have your kids help you do the review, but it's really helpful because this resource is something that people, they look at those reviews and it's, it is a resource that we hope that will help a lot of people look at an ESOP as a possibility. So with that, I want to wish you a merry Christmas and a happy holidays. Um, we'll see you on our next step in this journey.