Jeffrey Appleman - What You Should do Prior to Your Decision to Exit (G2217)

Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow-ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. Welcome to the Exit Coach Radio show, the show for baby boomer business owners who are looking for cutting edge information as they plan their 3 to 10 year business succession and exit. Every week we interview top professional advisors for their best tips, strategies, and precautions so you can be well planned. And don't miss our one minute exit coach tip of the day on Exitcoachradio.com. And now here's your host, the exit coach, Bill. Black, thanks very much for joining us today. I'm very excited about my next guest, and my next guest is with a firm called B2B, Business to Business, CFO. It's a great group and we're going to learn more about that, but we're also going to talk with Jeffrey Appelman about how to get ready to exit your business. So some of the things that you should do before you even decide that you want to exit your business. So Jeffrey, welcome to the show and thanks very much for joining us today. Well, good afternoon Bill. Thank you for having me. Really appreciate it. My pleasure. Thanks for joining us. Uh, before we get started, tell us a little bit about your background and, uh, B2B CFO and and what B2B CFO does. Sure, yeah, uh, B2B is an organization of CFOs that have at least 30 years' experience that are sat behind. On the desk for privately held or publicly held companies. Many of us are CPAs in our former lives, but many of us are also corporate finance chiefs and and have done a variety of roles. As far as I'm concerned, I, I started my career and I graduated from college and then I went on to public accounting and I spent some time there, became a CPA, then went on to corporate the corporate arena. I spent about 20 years in various. Privately held family owned businesses. My most recent W-2 job as a CFO, I was, I worked for a food manufacturer for 5 years, and I helped turn that business around. And so B2B is an opportunity for you to work with a wide variety of businesses, maybe even some smaller businesses that don't maybe have the resources to hire a full-time CFO, but they want the experience, and that's why a lot of people come to B2B CFO, isn't it? Correct. Most of the business owners that come to us, they, they generally find that they're stuck, generally don't know their numbers, don't are not getting the information they need to really run the business successfully and to really grow the business beyond a certain point. They're they're generally serviced by a bookkeeper or a controller in place, and then, and some of them also have CPAs that come in periodically to help them provide some information. But, but the most common theme out of all of them. Is that they generally are not getting any key metrics, any KPIs, uh, to help them run their business successfully, and I find that really across the board and generally the size of the business that we focus on is up to $75 million in sales. So you know, you, you would define them as family owned closely held businesses. Many of them have started in the garage or started many years ago and they might be in the first or second generation, but most of them generally have not elevated to the next level. They want to, but they're frustrated. And then, and then many of them also want to exit, but they're not ready yet. As many of your callers and listeners know is that you just can't wake up one day and say I want to sell a business. There's a planning process that has to go on. And if I, if I may just for a minute, we've, we've recently written a book called The Exit Strategy Handbook, and there are 17 different checklists you have to go. Through that we help a business owner go through as being part of their team or we like to refer ourselves as a quarterback because we help bring together the tax advisors, the CPAs, uh, the valuation experts, the wealth managers and whatnot, and we have go through that we have plan to make sure every item on the checklist has been gone through and like I said there are 17 different checklists. And uh each of them really have to be gone through because any buyer that is gonna look at your business wants to make sure you have gone through the due diligence and you have a data room set up with all the appropriate documents. So, so therefore you don't fall into a trap that that I see many business owners falling into is that one day they wake up and say, you know I don't wanna sell my business. I'm gonna call my competitor up he's gonna give me top dollar and what the business owner doesn't know is that's all that's only one facet of the universe that they can go out to. And even though the business owner might know their competitor, the competitor's still going to want to go through due diligence. He wants to make sure he's not finding any hidden problems or any hidden issues that might come back and bite him in the future. So we always try to advise our business owners, no, you really need to go to a to a emerges and acquisition expert, and we have a whole slate of people that we deal with that we can make recommendations to. And we know when we go to these folks that, uh, and they know it as well is that we've already prepared the company ready for sale. We have a whole data room set up. We have all the checklists done and we've kind of ferreted out some of the things that the family business has gone through over the years and make sure they're focused entirely on the bottom line and that they've grown their business successfully over the year and then they don't have a lot of these ad backs that some of your listeners might or might not be familiar with and if you want I can talk about that for a moment. Yeah, I would love to. I'd also, you know, I want to emphasize that I have, I have read the book. I've looked at it, all the checklists involved. It's very valuable information, and again, I want to reemphasize the point that you, you don't just, you don't go through all 17 of these checklists in a week, you know, it takes, it could take a month for one checklist or longer to to satisfy the needs of just one checklist depending on what you find, right? Absolutely, absolutely, that, that's why, you know, I'm sure most of your listeners know this is that and they might, but a lot of the baby boomers today are retiring or they're getting ready to sell the business. What they don't realize is that as a result of the downturn that occurred in 2008, every baby boomer now is, is looking to exit their business so you don't have to compete with all these other baby boomers that are selling and decrease the value of business what you. want to be doing is you want to be looking at everything possible today. How are you going to grow the business over the next 3 years so you can get top dollar. You can't just go and sell. You have to go through a process. You've got to prepare and you got to make sure that any issues you have in your particular business have been dealt with and you've appropriately diversified. And one of the things I often look at is when a business owner comes to me to be selling. Oh, what's your concentration? Are you, do you have a, do you have excessive concentration with one particular customer? because that's one of the first things that a buyer is going to look at. You lose that customer, that could affect your, your purchase price. Time is precious and so are our pets, so time with our pets is extra precious. That's why we started Dutch. Dutch provides 24/7 access to licensed vets with unlimited virtual visits and follow ups for up to 5 pets. You can message a vet at any time and schedule a video visit the same day. Our vets can even prescribe medication for many ailments, and shipping is always free. With Dutch, you'll get more time with your pets and year-round peace of mind when it comes to their vet care. And that's just one of many, many questions. And the other thing that before I move on to the ad backs that I want to emphasize is that many business owners have a plan, but they sell because of an unplanned event. It could be the sickness of an individual. It could be the death of an individual. It could be they just got tired and burned out and they decided to accelerate, or they could have a buyer that comes in off schedule, and it's never a bad idea to be ready for sale. Would you agree with that? Perhaps, 100%. I, I, we've, we've written numerous books on, on the danger zone, avoiding the danger zone, and that's, that's one of the things that a seller doesn't even realize that they can lose a customer tomorrow and if they don't continually plan for that loss of a customer or a key employee or even a key partner. Um, I just had that with a recent customer client of mine is that uh one of their owners had an unexpected death and they didn't have a buy sell agreement. They didn't have keyman life insurance, so they really were caught in a really precarious situation. So you know those are some of the things that that you should be doing what you're buying or selling, uh you should be looking at all these things and that that's what we help our clients with is we bring that awareness to them of some of the things that they don't really pay attention to, you know, whether it be getting corporate resolution book together, making sure the stock was issued, uh, and, and making sure that if there's a death in the family or death in in your ownership structure. That you're not dealing with the owner's husband or wife who you might not particularly want to deal with. Good points, very good points, and it gets brought home unfortunately to us when we have a A business owner pass away unexpectedly. It's never a bad idea to be planned. So let's talk about some of these ad backs that could either influence the business positively or negatively value-wise. What do you want to cover? One of the most common ad backs that I see in family owned businesses is the liberties that they take in their business that a buyer might not be willing to deal with. Example, one example would be country club dues. Another example might be other family members that are on the books that are not productive and that will not be retained. Another one might be um a second home they might have on there and, and really one of the other ones that they might have is Uh, not having, uh, contracts with some of their key employees, those can be an issue, and those will be, uh, either positive or negative added backs that have to be looked at and, and of course a lot of business owners, uh, take those liberties with entertainment and meal expenses and maybe sports tickets, their car, their insurance, their cell phone. And they get into a situation where you ask a business owner, well, what do you need to live on after you sell your business? They tell you a number and they go, wait a minute. Oh hold on, my cell phone, my car, my auto insurance, my my vacations, all these things that have been paid for by the business, so it works both ways. They may get, they may be able to add it back and get more value, but they also need to plan for that when they're planning what they're. Personal expenses are going to be, right? Absolutely, absolutely, but I would want to say one more thing if I may, on this, is that one of the things that that buyers, whether it be private equity or a financial buyer or even a strategic buyer, they don't want to really see a lot of a backs because that kind of makes them question what other ad backs might or might not be and, and the few ad backs you have, the better off you are as a An owner looking to sell your business, you make it as uncomplicated and easy. Uh, in your business as possible and that way the transparency is evident. So running a tight ship now, a lot of business owners, of course Jeffrey, are saying, well, if I do that I'm going to have to pay a lot more in taxes. But the, you know, there's an upside for that. Tell them about the upside for paying more taxes now. Yeah, I mean, the, you know, for typically and when you sell a business for every dollar of what we refer to as ebita, which is earnings. Or interest taxes and depreciation and amortization, you generally will get a return of $6. So if you're going to be paying a little more taxes and you're going to be more the business can be more transparent as far as what the net income is, you will get a bigger yield in the future when you do sell your business and uh you know, the more transparent it is, the easier it is for a buyer to understand. OK, so if someone says, OK, I get that. So I need to clean up my P&L. I need to show more profit, but how soon in advance of a transition or a sales should I be doing that? 2 to 3 years before because a financial buyer or strategic buyer wanna look at your financial statements for at least 2 to 3 years. In addition to that, one of the other things that uh that I want to mention here is that a buyer of any kind is generally gonna want to see a certified audit from an independent CPA. In order to have a an audit, you have to really have a what I want to refer to as a clean balance sheet and clean P&L, where the auditor can go in and actually audit the financial books and records in a way that they feel comfortable that they can issue, they can attest to the uh reliability of those financial statements. So that's why I'm saying it does take 2 to 3 years and uh that you know that's something a seller should be aware of and what other, what other things can business owners do in that time period to be cleaning things up? What else should they you you mentioned before the stock certificate's been issued. There are corporate resolutions and a lot of business owners don't do those as efficiently as they should, right? I, yeah, absolutely I'll I'll I'll mention just a few example if they. On a building, you want to make sure that you go through a what we call a phase one and phase two, perhaps environmental study, hire an environmental firm. Make sure there are no issues in the ground that you uh that you're situated on. You want, you want to have your legal labor attorney if you're in a manufacturing and distribution, make sure there are no legal issues out there. You want to have your, uh your corporate attorney review all the contracts. You want to talk to your insurance broker, and make sure you have the adequate amount of insurance and proper amount of insurance. And of course you, you want to then talk to your wealth adviser to make sure that you know how much money you need out of a transaction what you need to live. All these things are just planning tools you're going to use before you go into a sale, uh, and, and all that should be discussed 2 or 3 years ahead of time because I, I. So many times in due diligence I've seen deals fall apart when they either haven't locked up an employee. The corporate resolution book is a disaster. They don't, they don't have contracts in force. They haven't sent out the right notifications to the employees to comply with all the applicable labor lawyers labor laws today. Now you're hitting on a very important point, and that is someday you will be entering into a transition transaction of some type, and you don't want that because you're going to spend a lot of time and effort. That is a stressful time for a lot of business owners, right Jeffrey, and they don't want to find out at that point that the deal's going to fall apart because something you could have prevented earlier on when it was easy. Well, yeah, absolutely, and I will also just want to share one other thing with your listeners. Is that the the most important thing a business owner could do during this process once they decide to sell is they have to stay out of the out of the way. They should be focused like a laser on growing the business as much as they possibly can and leave it up to professionals to deal with the details that are required to get the deal the a a. A potential sale from start to finish. Let someone else do the due diligence. If a, if a business owner is going to get involved in details of trying to sell his business, he will get less in the future than he would if he lets the professionals handle the details. Excellent point because you you you know that this is the problem with it being a small business or a medium sized business, whatever you wanna call yourself, you have a nice business that business needs your care and feeding every single day. You don't, you don't take the eye off the ball at the last minute because that the ball might bounce away. And that's the problem. We hear from a lot of intermediaries that a large percentage of deals don't go through. Great question. We recently been speaking with a bunch of M&A firms, and do you realize that for every 100 deals that they people they talk to, only 2 to 8% of the transactions actually get closed. Very few deals get closed. That's because business owners have not gone through the due diligence that's required and they're really self-analysis before they go and speak to a potential buyer, um, and And that's one of the things that, you know, that that that we try to help our clients. We try to talk them through that. We try to get them through that process. And um the one thing I will also add is that any when a business owner starts a business, not only does he have to have a plan to get into business, but he has to make plans to get out of business at some point in time, whether he sells to a family member, sells to management, or sells to a financial or strategic buyer. Well, Jeffrey, I am glad that you and B2B CFO are out there for our listeners. How do they get in touch with you best and uh tell us a little bit about the website? Sure. This, uh, anybody that wants to reach out to me, I'd be happy to uh, we provide a, uh, you know, complimentary what we call a discovery. Analysis to talk to business owners, uh, it's a uh it's a value of $1600 so they can email me or call me. They can email me at jeffrey Appleman@b2BCO.com or or contact me on my phone number. It's 516-978-6526. And they can feel free to visit the B, the number 2 B CFO website, and we got some really great books that they can purchase and they can take a look at all our partners. We have 200 plus partners throughout the United States. We've been doing this for since 1987, and we are the largest CFO service organization in the country. It's a fantastic resource. It's a good timing for this resource because I think A lot of business owners need this extra level of help in analyzing their financial situations, and I'm glad B2B CFO is there and especially glad to meet you, Jeffrey. Thanks for joining us today and I'd love to go again explore this topic a little deeper with you when you have time down in the future. Um, thanks very much. I look forward to our next conversation. Thank you, Bill. Appreciate it. We're gonna take a short break. We'll be right back after this, so please stay tuned. Just thinking about what will happen to your business if you're gone keep you awake at night? 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