Exit Planning – The Key to a Successful Business Owner Transition

in today's webinar exit planning the key to a successful business owner transition my name is Patrick Crosby and I'm a senior tax accountant at GRS CPAs and advisors formerly Gelman Rosenberg and Friedman and I will be today's moderator I'd like to start off today with some quick housekeeping items and explain what you will need to do to earn CPD credit participants seeking CP credit today must complete and submit a short evaluation survey that will appear automatically immediately following the webinar you will be asked to recall these words in order to receive credit please write down the CPE words when they are given and keep them until you receive your certificate they will not be provided again if you have any technical questions or issues during the webinar please use the questions function to speak with our webinar administrator for assistance the slide deck and recording from today's webinar will be available for download at the link shown here you will also receive a follow-up email with direct links technical support and CPD questions may be addressed to dominic Acosta at de Acosta at GRF CPA comm today's learning objective is to provide attendees with the better understanding of the six critical elements to successfully selling or transferring a business and to come away with the knowledge to begin their own exit 1cp credit is available for this webinar I would like to introduce your presenters for today's webinar Walter dial is a partner in the director of gr F's tax and exit planning consulting division Walter addresses particularly complex tax issues with clients concerning investments estate and gift taxes with a specific concentration in helping business owners transition their businesses Pat Ennis is the founder and president of NS legacy partners with decades of experience in financial services for-profit and nonprofit leadership and management along with the founding of ELP in 2010 pat has extensive knowledge and understanding of the many challenges faced by business owners I will now turn over the presentation to Pat Thank You Patrick and welcome listeners thank you for joining us today on the on the webinar our goals for today today's presentation include raising awareness around decisions problems planning challenges most every business owner will face pertaining to their eventual exit and then recommend a solution which we are going to refer to as exit planning and and then describe in detail the critical elements of a successful exit plan and we'd like to begin this presentation highlighting what we have found to be common characteristics of our business owner clients first like the the owners that I met with this morning first thing this morning built a business over now three generations and they've had significant impact and serving many people and the impact you know begins at home with their own family but then extends quickly to employees and their families customers vendors suppliers the community local and national economies the impact of a successful owner is significant broad indeed and because they've had such impact perhaps for decades like this gentleman I wouldn't met with this morning their personal identity can be very closely tied to the business and this can result in uncertainty about what life would look like after the business and then procrastination in planning for life after the business can also resolve their business is typically expected to play a key role in retirement planning is it is often their largest asset and because the business is typically the largest asset business owners can often be neglected by the wealth management community in regard financial planning which can result in a back-of-the-envelope financial plan and it's not unusual or small business owners too and that's more time working in the business than they do working all in the business which results again in some deficient strategic planning if you will for business growth in exit so it can be quite common to find a business owner is put off thinking what they should do after the business or life after the business common to see a back-of-the-envelope personal financial plan deficient strategic planning about business growth and and then also that most impactful event in the future their eventual exit from the business and then a characteristic we absolutely know this to be a shared characteristic with all business owners 100% of them are going to stop being business owners at some point so now Walters going to describe some of the challenges or problems that owners are facing in planning for this most significant event their eventual exit thanks Pat and the problem that we're talking about is that most business owners will not be able to exit their businesses on their own terms and conditions and what we mean by this is that most owners are not going to get the amount of money that they expect need or want and they also may not be able to transfer the business to the party who may had hoped to when that happens you not only are they not reaching their financial goals but there could also be other value-based and legacy goals that are not going to be realized so we would term we would term that to be a bad exit one where the owner is not exiting on in his own terms and conditions and we generally see for specific reasons for this so we're gonna go through all these separately but let me just give you an overview so the first is lack of planning and as Pat mentioned most of our clients or owners of small businesses and we see how hard they work and like Pat mentioned it's you know they're generally working in their business not on their business and it's not much different for me and Pat you know you come to the office before you know it there's an email and all of a sudden you're plan to sit back and actually do some strategic planning for the day has gone up in smoke and you're satisfying your your clients so we certainly certainly understand that the second one is what we call the misperception spell and we're going to go ahead and discuss that more in detail but basically it's just owners have some misunderstandings about what they're going to get out of their business and how much they really need to retire successfully and then lack of experience selling a business we're going to talk about that one it's kind of obvious you know most business owners have one business and they don't have experience selling your business so that can be an issue and then finally just the timing of the sale itself it could be that when it comes time to sell the business it's a buyers market not a seller's market so we'll take a look at that also and we're going to be discussing some solutions to these problems one thing to keep in mind is that you know it could be that there's only one of these problems that exist or it could be all for once if it's all for once you're probably going to go from a bad exit to a really bad exit if it's just one or two it may be a bad exit but the good news is there are there are solutions there are ways to avoid these problems so let's go ahead and take a look at those specifically so the first one we mentioned was lack of planning and the Business Enterprise Institute did a serve what they call an owner survey back in 2016 and these are the results they found 38% of business owners haven't taken any steps in planning their exit only 27% had calculated how much money they needed to get out of their transfer only 24% had hired and trained employees to successfully take over the business only 22% had a current business valuation and only 17% had a written plan and these statistics although they were nationwide they pretty much mirror with Pat and I see when we when we work with clients the good news is there's an obvious solution to this and that is making planning a priority and actually getting started to do something and we'll talk about how to do that more in detail later so the second area we talked about was what we call the misperception spell and this comes from john brown's book called the exit planning the definitive guide and he highlights five different misperceptions that business owners often have and again Pat and I can certainly concur that we see this a lot with our clients so the first one is that business owners often underestimate the amount of income that they're going to need after their exit so what we see is you know there's some popular kind of planning tools out there like I think I read one that says well you think 75% of your current spending and that should be good for retirement well what we actually see is that you know these rules of thumb really really don't apply very well so for instance in especially in a case of a business owner so for instance many business owners are surprised that within the first couple years after their exit their expenses actually increase rather than decrease and this could be explained by a couple of factors one is oftentimes expenses have been paid by the business that are now having to be paid personally so for instance there may be autos in the books or on the books and the auto expenses are running through the company there's gonna be some travel entertainment cell phones other types of benefits maybe health and life insurance premiums that type of thing so all of a sudden you know fair a fair amount of expenses that the business owner really never thought of as part of his budget are now going to become part of his budget travel with family or around the country to see family is a is another popular expense that seems to pop up and increase in those first few years after retirement so that the so again that first one is just that business owners tend to underestimate the amount of income that they're gonna need in retirement the second one which kind of goes along with that is oftentimes business owners incorrectly assess the rate of return they're going to be able to earn on their investments so you know a lot people will say well the stock market you know historically returns 6% or 8% or whatever it is well as you head into retirement chances are you're going to reduce the risk factor of your portfolio that's going to mean transferring assets out of that quit ease and into fixed income as soon as you do that your expected rate of return is going to go down so oftentimes business owners don't take that into consideration they tend to have a more optimistic view of what their returns are going to be so that's something that needs to be adjusted another area is just the value that owners a sign of their company so I would say if not a hundred percent I would say 95 percent of the business owners the Pat and I work with when we first meet them they definitely think their business is worth more than it is and it's kind of an easy explanation for this yo they tend to look at their business as the amount of money that they can take out of it as salary well when they go to sell their business the buyer is looking at it more as an investment so what he's looking at is how much cash flow is the business going to generate what is his return on the investment going to be and that's going to be less than the salary that someone is taking the other thing is business owners will often just kind of estimate the value of their business based on maybe what a friend sold their business for and you really can't do that because industries are completely different when it comes to multiples and values and every business has its own specific characteristics that either make it more or less valuable so really the only way for Business Center to really fully understand the value of their business is to have a an official business valuation performed another area is the the growth rate the business owners predict for their business value in cash flow you need to keep in mind businesses cannot grow at five or ten percent forever if your little business was able to do that it would be bigger than Apple in like 20 years so you know business owners just need to be a little bit more realistic that yeah you can grow pretty fast in the beginning but at some point you're going to start to plateau out and just reach kind of a lower butt stainable level of growth and then the final area and this is one again we see all the time and I think it really surprises business owners but that's the the net proceeds that they can expect from the sale of their company so oftentimes a business owner may say yeah my business is worth three million dollars and that's kind of in their mind that's what they're figuring they're gonna take home well you know right off the bat they're probably going to lose close to a third of that to taxes now we can do some planning to mitigate that but you know they're still gonna lose twenty to thirty percent right by off the top to taxes and then of course there's costs of doing a transaction you have legal fees other professional fees maybe a finder's fee that type of stuff so net proceeds or oftentimes you know six sixty percent of what the gross value of the company is one of the other problems we highlight it was just that business owners don't have experience selling a business and that's that's just common sense most business owners they started a business and they've been in it and that's what they do they've got their one business they've never really sold a business if they have maybe they've sold one or two and usually they're you know they've been fairly small if they're gonna sell to a third party chances are that third party is an experienced buyer of businesses and he has a team assembled he knows exactly the strategy to squeeze seller and get the best value on the on the buy side the seller is not going to have those same those same skills now fortunately the easy workaround on this one is that the seller of a company can simply make sure he has a good team in place you can hire a good CPA evaluation person an attorney to do the deal business consultant all this you know all those positions are available out there and there's people willing and and ready to help and then the final problem we talked about was just the timing of the sale it could turn out that when you decide you want to sell your business it's a real buyers market and we don't necessarily mean just in your industry if you just look at the demographics and there on this slide here there's a lot more buyers I'm sorry a lot more sellers of business than there are buyers and some of that has to do with the with the aging of the baby boomers and some other factors but you know 80 percent of businesses will end up not selling so most businesses are not going to be able to sell and their owners are not going to be able to retire on their own terms again there's you know the way around this one is really just through planning if you've got a plan in place it's gonna offer you more flexibility because you'll know you'll you'll know your timeframe and if for some reason it seems like the market is shifted on you it's much easier just to take the existing plan and adapt it for another another two years or something like that until the market changes again but this is a very important one to realize that just because you want to sell your business doesn't mean you're gonna find a buyer who's willing to buy it and definitely not necessarily you're gonna find a buyer who's going to buy it on your terms so what's at stake well there's a lot at stake I started today talking about the impact an owner has on so many people all of that's at stake when and how an owner actually leaves the business and a bad exit from your business can result in there's a we give you a list there it's not exhaustive a financial hardship for an owner and their family an example might be an unexpected death or permanent disability with no plan in place leaving the family and financial trouble or maybe because the owner didn't build a business that's sellable for the amount of money that they're going to need or want they cannot sell the business for what they need or to accomplish rather all their goals an owners post exit financial and value space goals may not be realized perhaps an owner ends up liquidating for asset value when what they really wanted to do was transfer the business to their key employees or children big tax bills of course Walters already referred to that due to a lack of planning not uncommon minimum sale price maybe because the business runs maybe business runs too much through the owner and they don't have a management team in place perhaps the owner experiences a lack of control when selling the business because the buyer has the buyer ends up having all the leverage in the deal maybe the business the way the business is eventually sold or transfer transferred results in an family discord or disharmony and conflicts it's not unusual for a company's culture to be damaged or even destroyed when and how an owner leaves and the culture that the owner built maybe one of those values based goals that they wanted to protect all along key employees might leave during times of transition and uncertainty if they haven't been incented to remain or if there isn't a clear plan forward this can devastate an owners exit plan and at the end of 20 or 30 years an owner may be forced to liquidate for asset value if there hasn't been sufficient planning so you can see there's there's a lot at stake and again this list isn't exhaustive but we have good news and walter said it and we want to continue to say it there is good news there's a solution and we're going to talk about that but before we do that Patrick Patrick has our first polling question so we've compared excuse me we've come to our first polling question the question reads do you have a written exit plan a yes B no but I've thought about getting one C no and have not thought about it so please take a moment now to answer while participants are submitting their answers I'll provide the first CPE word the first CPE word is exit if you want to receive CP credit please jot these words down because you will need them for this survey following the webinar again the first CPE word is exit exit4 thanks Patrick so we've gotten our polling results fourteen percent of our attendees actually have a written plan good for you you're well on your way 71 percent no but they've thought about getting one so maybe this webinar will spur you to take that next step and fourteen percent no and have not thought about it so hopefully we can at least get you thinking about it by the end of our webinar today thanks for Tillet taking that poll yes thank you so so we've reviewed the problem and from a few different angles and considered what's at stake when and how an owner leaves now let's look at our proposed solution exit planning in his book walter mentioned john brown earlier he's written a few books on the subject of exit planning in him and his book how to run your business so you can leave it in style he offers this description for for explaining it's a process that results in the creation and execution of a strategy allowing business owners to exit their businesses on their own terms and condition it is an established process that creates a written roadmap or exit plan often involving efforts of several professionals facilitated and led by an exit planning advisor who ensures that not only a plan is created in the right way but of its timely execution so so that's what exit planning is generally general concept now let's take a little bit deeper dive and look at some of the elements that are critical for a plan to be successful when it comes to strategic planning of any sort be it personal financial planning estate planning planning for growth of your business there's nothing more foundational or critical than establishing clear goals and objectives and so that's also true for exit planning critical is all about clarifying and establishing owner based goals it's all about what you the owner want financially value space goals legacy goals and we begin with we typically begin with what we call the universal goal questions and these are questions that every owner is going to need to answer at some point and they are this when do you want to exit how much money are you going to need when you leave in order to do everything you want to do after you leave and then to whom would you like to sell or transfer the business to do you want to is it going to make the most sense for you to sell to a third party establish an esop sell to insiders the key employees or children who are you thinking you want to transfer the business to so those are the universal goals and then as important and to a lot of owners even more so are the values based and legacy goals for example we had one client Walter and I held together who had a values-based goal of selling his business to a son and his key employee and that goal was as it was as important to him as his financial goals another client very much values personal reputation family name legacy as a business owner in the community and for those reasons wants to consider those values base goals as much as any financial goals that she has and that that's going to impact how they exit the business owners goals drive everything including which exit route they choose for example they may begin with us an assumption that they will pass the business to children working in the business only to learn during a planning process that their children really don't even want to own the business or their children are capable employees even key employees but they don't have what it takes after a third-party evaluation what it takes to be an owner a lot different being a key employee and an owner now as important and critical as ELINT this element is establishing clear goals and objective it often does not get near the attention needed well ahead of the time an owner says quote I'm ready to exit in too many cases the owner doesn't end up clarifying what they really want until after they leave and experience regrets then it can be an all-consuming and not in a good way so don't do that get the help you need now start now and establishing those clarifying and establishing those goals for life after the business how you want to exit what you want to happen and the sooner you can establish a baseline set of goals to work toward the better off you're going to be and and and by the way those goals may change throughout the process as the the gentleman I just mentioned who sold to his key employee and kids whose goals changed throughout the process and it happens possibly many times during a planning process over years so get the help you need sooner rather than later if you need and want help with this contact either Walter myself we can help you with it Walters now going to describe critical element number two and the importance of exposing financial reality with an accurate financial gap analysis thanks Pat and what you just said really was really good I mean I you know I think it was Price Waterhouse or PwC that did a a survey of business owners who had sold their business in the previous 24 months or something and like over 70 percent were dissatisfied and interestingly enough it wasn't due to financial reasons it was just due to basically their life after selling wasn't what they had planned so I think that really comes back to identifying your goals and objectives early on and and not just the financial ones but four critical element number two we are discussing the financial aspects so a GAAP analysis is really pretty simple the idea here is I'll give you an example let's say that you go to your wealth manager or financial planner and you ask him to help you figure out what the level of assets that you need to retire successfully and he comes back and he says okay you need four million dollars in assets to retire successfully and he also tells you that he's managing 1 million dollars of assets you then go and you have your business value by evaluation professional who comes back and says your business is worth 2 million so now you've got a business that's worth 2 million and let's say that's net o of taxes and everything else you don't have to two million dollars there you have a million dollars being managed by your wealth manager but you need four million so you have a million dollar gap so the worst thing you can do at this point is look for the nearest window and jump out or panic in some other way because if you look at it you know the way I look at it is knowing that you have a million dollar gap even though that you know may not be the ideal situation you're ahead of about 90% of the business owners out there who probably have some type of financial gap themselves but they have no idea that they have it they're gonna find that out when they go to sell their business at that point it's too late to do much about it so if you're ahead of the game and you're doing an exit plan and you finally find out you have a gap that's fine knowledge is power all that does is it helps you to put a plan in place to alleviate the gap so there's a few ways to do that and it kind of goes back to Pat and his three universal questions of of exit planning but the first one is was money so maybe you go back to your financial planner and you say hey you know what I'm probably not gonna get to 4 million so what can we do on the expense side to maybe scale things back and maybe there's some easy stuff maybe you were hoping to completely fund college education for your grandkids well now maybe you can't do quite that much or maybe you were gonna buy a vacation home so maybe now you have to rent instead of buying a house stuff like that another area would be just the timing so let's say that you were hoping to retire in two years well if you switch that two maybe four years that's going to give you two more years to save money outside the business and increase the value of the business so that could make a huge difference financially and then finally it could also change who you're going to transfer the business to if it turns out finances are gonna be tight that means you probably can't gift the company to your children it means you may not be able to do a sale to insiders because that's usually resulting in the lowest amount of sales price you may end up being in a situation where you're gonna have to sell to a third party in that situation you'll probably get the highest price and you'll probably get the most money up front so the good news is even if there's a gap as long as you've planned ahead so you have time to make the appropriate changes it's not the end of the world everything can work out just fine critical element number three is building sellable value or building a business that someone else is going to want to buy and buy for the amount of money that you need or want sellable value is essential if you want to maximize your options for exit an owner who has a sellable business has more options for exit so and let me just say this here too we're of course we're talking to folks here business owners here who who want to get value out of their business at some point some of you may have lifestyle businesses where you're not expecting to do that so we're talking to people here business owners here who who want to get value from their business at some point for retirement or whatever they want to do next so again if you want to maximize your options for exit you're gonna have a sellable business let me explain what I mean by that if you have a strong sellable business you may decide to keep it yourself as an absentee owner because if your business is built the right way you're going to experience much more personal freedom today control financial benefit and when that happens it's not uncommon for an owner to look around who is thinking of leaving and actually say you know I thanks I think I'm gonna keep it it's kind of like you know when you go to sell your house and you start fixed you put a new kitchen in you put a new this and I knew that and and then you look around you think oh my gosh I don't know if I want to leave here it's kind of like that it can work that way but so so again strong sellable business you may decide to sell it to your key employees because the business is strong enough to support an internal buyout without you potentially having to come back into the business perhaps you're motivated by the tax benefits and in in wanting to preserve the culture of the your company so you sell to an esop or an employee stock ownership but you could do that you could only do that because your business is financially strong you've got a strong management team in place you've got a sellable business or of course you may just say I'm done I'm gonna cash out and move on to the next thing in any of those scenarios and others like them your business still needs to be sellable for you to have all these these options the business would should be strong and values drivers listed here on this page buyers want to buy businesses that have strong financial performance and management revenues that's recurring proven growth strategy strong operating systems financial controls competitive advantage that differentiation and scalability that's what buyers want to buy and so that's how you can know if your business is sellable if you're strong and those value drivers there that we've got listed let's consider a quick example of increasing your potential sale price and sell ability let's say you you currently have net cash flow of 250,000 and in a multiple of two which would be based on current strengths or weaknesses of the value drivers you listed and not not on current market conditions the value your business would be around five hundred thousand multiple two times two hundred fifty thousand and again not taking into consideration any market conditions now if you're able to increase that net profit or if it up to 300-thousand just fifty grand a year at the same time those strengthen those dye drivers we have listed there to the point where you can realize a multiple three point five versus the two your business is now worth a million and fifty thousand dollars you've doubled the value of the business in this example but but keep in mind it's taken investments of both time and money to do that it takes time and money you know this if your business owner - to build a strong management team and to execute a growth strategy and scale with improving operating systems it takes time and budget finances to do that when Walter and I are working with clients to build value this is what we help make happen strengthening both the net cash flow and those other value drivers so that the multiple increases as well as the cash flow so critical element number three remember these things about this this element it's central and foundational to maximizing your options for exit if you want to have maximum options you're going to make sure your business is sellable and it requires investments of both time and money so now element number four then you're going to want to make sure you've got a team of experienced advisors you'll list you'll see a less their potential advisors you might need you may or may not need all of them for your particular situation the advisors you end up with meaning will depend very much on what exit route and plan you create and design and implement but the key takeaways here in this critical element would be make sure that whatever advisors you have on your team they're experienced in this kind of work you'll want advisors with experience and expertise in business succession transition and transitions and transactions and then also you'll need someone to manage the team in the project you're building an exit plan is a lot like building mercial building that you're going to need plumbers electricians architects carpenters all their specialists in the case of exit planning this specialists are accountants attorneys wealth managers etc someone's going to need to coordinate the team and designing and implementing the plan the same way a general contractor might in building a commercial building it can be you the owner typically not wise unless you have adequate sufficient knowledge and all these specialized areas and know how all of these different professionals need to collaborate and communicate with one another it could be one of your current advisors also in most cases not wise it's probably best that you you have your CPA focused on the taxes and your estate planning attorneys focus on that so on and so forth rather than having them do something that they they really don't want to do which is manage the whole process or hurt the cat's if you will or it can be a trained and certified exit planner like Walter myself this choice here will increase as you increase the chances of a successful exit your peace of mind and knowing that team is operating the way it needs to if you're not intentional about this about having an expensive experienced team of advisers and having them coordinated you could end up with a an exit you regret so begin to evaluate take a step begin to evaluate your current advisors and their level experience and expertise and transition and exit and build a team that you have confidence in so now Walter is going to take a look at the importance of a future cash flow estimates thanks Pat yeah so critical element number five is future cash flow estimate and it's critical for a number of reasons number one your cash flow is the key value driver for maximizing your business value Pat and I generally work with businesses that you know somewhere between two and twenty million dollars of revenue and businesses in that size almost always sell for a multiple of some definition of cash flow whether it's bid or sellers discretionary or any of the other ones always pretty much always comes down to a multiple of cash flow that's what buyers are looking for so it's a foundational element of business value they care the dependability of your cash flow is also going to help determine what is your best acts your best exit route so for instance if you want to do a sale to insiders you really have to be confident that the cash flow that that business is generating is going to be sufficient for the insiders to buy the company from you because normally a sale to insiders you know generally the issue is they don't have a lot of money so these owner is going to be taking back a note so you want to be confident that your note is gonna get paid back and the way that they're gonna pay it back is through company cash flow so if the company cash flow you know maybe isn't that great you're a little concerned about down the road then maybe a sale to insiders is not going to be the way to go also if you were considering an esop Aesop's one of the characteristics of a good ESOP candidate is that they have very strong and very consistent cash flows so you know that so again the estimate of cash flow can help determine what is your optimum exit route and then when you look at your own financial plan the cash flow really establishes the foundation for that all of your personal financial planning is going to be based on your ability to generate the cash flow to satisfy your your expenses and your other goals in retirement and then finally you know things can go wrong with your exit plan even if you've planned it out in your mind perfectly just you know life happens things things that things happen that could potentially derail the plan however if you if the company has really strong cash flow that can help you overcome a lot of other problems so strong cash flow I really can't overemphasize how important it is in this entire process and then time is the the last critical element we'll highlight today excuse me but it certainly isn't the least evidenced by how many times we've already mentioned today in this presentation the importance of getting started sooner rather than later because the most time the more time you invest in planning the more options you'll have and the greater chances you'll have for success no matter no matter which of these routes that you choose for exit reverencing that survey again Walter mentioned earlier the the BEI business owner surveying seventy six percent of business owners want to accent the next ten years however only two out of ten will be able to that number could that could be much greater than two if owners would start planning sooner rather than later so if you don't remember anything else presented today in this i'm sure you'll remember this because we've mentioned it so often remember to get started sooner rather than later and planning that way you're going to have many more options in much greater chance chance for success so so there is a solution at exit planning just get started on it sooner rather than later and patrick i think you have our next polling question so we've come to our second polling question the question reads do you have a current business valuation and financial gap analysis a I have neither B I have a business valuation only C I have both please take a moment now to answer while participants are submitting their answers I'll provide the second CPE worth the second CPE word is gap if you want to receive CPD credit please jot these words down because you will need them for the survey following the webinar again the second CPE word is gap GAAP so we have our results 63% I have neither 25% I have a business valuation only 13% I have both congratulations to 13% and a 25% as well these these stats again yeah they aligned with what we experienced probably any much right okay so thank you for that and let's see okay so all right so you you're thinking okay goodbye now okay I get it I know I need a plan you convinced me and you you absolutely made the point clearly that I should get started now so how do I do it well here's a process we've given to you that you can again you can either start to try to do this yourself or get one of your other advisers or you can engage it's someone like Walter myself to help you lead it first discover or clarify your goals and objectives critical element number one complete that financial gap analysis to include a current estimate of value element number two the says expose reality a lot of what we do is all about exposing reality where you're at currently helping you to establish where you want to go with clear goals and objectives and then exposing reality as to where you are right now so that you you know what you're really going to have to do in order to get to where you want to go so assess those business value drivers and critical element number three and begin to establish your your advisor team then in step two with your team decide on the exit ramp that's going to be make the most sense for you to accomplish your goals then begin to design a plan and both build to build and preserve the value of the business make sure you do that proper tax planning and have a plan for the unexpected or what we call business continuity and begin to coordinate it all with your wealth and state plans and I only of course implement the plan with your team and and so that that gives you a simple process if you get going on that everything else will be it revealed along the way as to what you're actually going to need Walter you're gonna talk about benefits yeah so there are many benefits to exit planning just like any other type of planning I mean there are always benefits to planning but specifically for exit planning there's a few that I can highlight so one would be it helps to minimize the risk associated with the sale or the transfer of your business so if you've got clear goals you've got a plan in place you kind of know what to expect as you go through the process it's gonna be a lot less risky process the other thing we mean by minimizing risk is you know let's go back to anime just think of an example where for instance the business owner needs to get his he needs to get two million dollars out of his business and that's how you know all the planning is done geared towards that but the business is currently only worth a million and it's gonna take three to four years in order to get up to two million well during that time there's a lot of risk because what happens if the business owner passes away or there's some other tragedy so there's risk in that in and of itself during that time period not only with the transaction itself but just during during that period when the values building so that needs to be addressed as well and it can be with insurance and some other planning tools that would that we use as we've talked about exit planning is going to help you to maximize the value of your company it's gonna help you maximize your net proceeds and it's going to increase your exit options you know I don't want to keep repeating it but the more planning you've done the more options you have as to who you're gonna sell it to and when you're gonna be able to sell it and all that is going to end up resulting in you staying in control and achieving your goals which is really what exit planning is all about Patrick so we've come to our final third and final polling question the question is which of the following value drivers do you need to strengthen a financial performance B management team C competitive advantage D proven growth strategy please take a moment now to answer while participants are submitting their answers I'll provide the final CPE word the final CPT word is team if you want to receive CPD credit please jot these words down because you will need them for the survey following the webinar again the final CPE word is team te a em and the results are let's see 50% financial performance interesting 50% management team 17% competitive advantage 33% proven growth strategy so they selected more than one yeah right that's right yeah ok thank you ok very good yes thank you folks and then so in summary on page 24 we just you know we listed out there the critical elements for you to again to consider is action steps you can take and then on page 25 you'll find contact information for both Walter and myself if you if you need help with any of this or just want to have a conversation we're both committed to providing a complimentary no-obligation 60 to 90 min a conversation if anyone's interested and following up on this or anything else related just give us a call and then I think we're gonna have some QA time right do we have time for that we did so before you wrap up today we we do want to answer if you the questions that have been submitted by our online participants and any others from the room if you have any further questions we have a few here the first I'll direct to you Walter what is involved with and what is the cost for a business valuation okay so there's a couple different levels of business valuations so you have what we would call a comprehensive business valuation and that's one where usually where the IRS is involved and so it might be a situation where they're going to require that that would be a situation where for instance a business owner is gifting part of the business to his children or maybe even making a charitable gift of a portion of the company those are gonna require a full comprehensive business valuation and those are generally gonna range in price from a minimum of $7,500 up to maybe twelve to fifteen and they're like you know like the name says they are very comprehensive we would look at five years of company history we have an extensive interview accompanying company management we'd be doing an industry study we'd be looking at what other companies have sold for in that industry and in the geographic location and you know similar size that type of thing so it really is a very comprehensive evaluation however when we were talking about the gap analysis we talked about doing a business valuation and you know if you've got the money and the time to do the comprehensive valuation that would be best but for a lot of our clients at that stage for the gap analysis they don't really need that involved of evaluation so instead we can do what we call an estimate of value and what that's going to normally entail is again we're gonna meet with management because we need to have an understanding of how well run the company is what the value builders look like that type of thing and then we'll compare that to what other companies have sold in the industry and in the area and we can we can get that data from a number of sources that we have access to and that that'll give us an idea be able to sit down with the client say you know what the range the companies are selling for in your industry your size is somewhere between two and a half to five times seller discretionary earnings we think you know based on the characteristics of your company you're probably only add about a three multiple and here's the value builders that are kind of holding you back and then we could talk about moving forward helping you increase those value drivers so that's kind of a long answer but that's the basics of how we look at a business valuation in the context of an exit plan had I'll direct the second question to you in your experience does it really make sense for the owner of a small business to attempt to build a management team how do they even do that with limited resources yeah great question question that we're used to getting the answer is yes indeed it does if they want more freedom today in the business if they're just at the end of their rope so to say and they they want more freedom today they need to do that and and again like we said throughout the presentation if you want to have more options for exit tomorrow if you if you're motivated to get value out of the business eventually you're going to need a sellable business and a management team is important for that an important element now it may be a small management team of course based on the size of your business and if and then grow over time perhaps one or two other folks on the team other than the owner or owners but yes if they want more freedom today more options for tomorrow they're going to prioritize this and build a management team you know what one other thought that comes to mind just came it kind of relates to this a second ago is another misperception if you will about explaining is that it's all about the future where really it's so much about the present in building a team building a business the right way today and this building a management team is right at the is is foundational to that really if you want to build a business that is gonna be sellable you're gonna have this prioritized so Pat you know and I think about what you just said I mean one of the may be wanted it's a paradigm shift or what you would call it but there's certain expenses that businesses have and I think the business owner can look at them just like that it's an expense but I think when you talk about things like management team and exit planning they really need to look at it as an investment because it's something it's money they're going to invest in their company and if done right they're gonna see a great return on that investment well yeah it goes back to that example I gave during the presentation of you know $200,000 of net cash flow and a to multiple versus just an increase of 50 grand in their cash flow and increasing the multiple of three and a half wave increase the multiple to three and a half is you're going to be strengthening things like management teams right and and so boy look at that I mean you double the business the value of the business just by you know with not big huge drastic changes but it does take time right it takes time to focus things of place and and all of this stuff can't most businesses aren't set up financially to be able to do everything at once financially or budget the time for it so it's best to do it over over time right so we have a third question I'll direct to you Walter isn't it usually better to try to transfer the business to employees well it depends on the situation I'm thinking maybe the reason that question was asked because the the person may just be thinking it's easier you know then try to go out and find a buyer and go through all the due diligence and all that stuff and you'll avoid the issue of you know not being experienced at selling your company because if you sell insiders they're not experienced in buying a company but it really depends so I think selling to insiders you have to realize that that may satisfy some legacy goals which may be the most critic to the business owner and if that's the case yeah transferring it to employees is great but you have to realize if you transfer your business to employees chances are you're gonna get less money and you're going to get paid out over time so there are some you're gonna give up some financial some put some potential fight to financial resources to achieve the goal of transferring it to employees so you know again everybody's different it all depends on the goals and that's why it's so important to have your goals in place but you know I guess so the answer is it really isn't usually better but in certain circumstances it is definitely the best way to go it does it does solve the problem of if there's no one out in the market to buy your business maybe you can get employees to do it and but if so you're going to take a financial hit which makes sense if it's not a business that other people want to buy it's you know probably not that valuable yeah let me just add to that that's well said a serious consideration needs to be whether or not the employees are qualified the owners good point because if if the deal is like an installment loan over ten years or something right well they're in it and the employees were phenomenal employees but they turn out to be not so much as regard to owners because it's a different thing owning is different to being a key employee the owner could potentially have to come back into the business right so you can't be too careful Kenya about evaluating those key employees as to whether or not they have the potential of the owners before you actually sign all the docs that's that's definitely right yeah for sure great if you have any additional questions after today's program please reach out to us our contact information appears here and with that we would like to thank everyone for attending today's webinar we encourage you to follow us on social media at GRF CPAs and at nslp also please visit our websites at WWDC pa is calm and wwa and SLP comm for upcoming events and alerts please remember to complete the pop-up survey that follows if you would like to earn CPD credit for attending today's webinar thank you again for attending and have a great day