John Anderson - Make Your Business Attractive Well Ahead of a Sale

This podcast is sponsored by TalkSpace. May is Mental Health Awareness Month. In TalkSpace, the leading virtual therapy provider is telling everyone, let's face it, in therapy, by talking or texting with a supportive licensed therapist at TalkSpace, you can face whatever is holding you back, whether it's mental health symptoms, relationship drama, past trauma, bad habits, or another challenge that you need support to work through. It's easy to sign up. Just go to Talkspace.com and you'll be paired with a provider typically within 48 hours. And because you'll Meet your therapist online. You don't have to take time off work or arrange childcare. You'll meet on your schedule. Plus, TalkSpace is in-network with most major insurers, and most insured members have a $0 co-pay. Make your mental health a priority and start today. If you're not covered by insurance, get $80 off your first month with TalkSpace when you go to Talkspace.com and enter promo code 80. That's SPA CE 80. To match with a licensed therapist today, go to Talkspace.com and enter promo code. 80. Hi everyone, it's Bill Black, the exit coach from the Exit Coach Radio show. You know, one of the biggest questions I get on the show is what exactly goes into a business exit plan and when should I start creating mine? Well, I always tell people that the best time to start was 5 years ago, but the next best time is now because you never know when you might need it. So we put together a free report that describes what an exit plan is and what you should know. You can get it free by texting exit plan with no spaces to 442-22. That's exit plan to 44222. Again, text exit plan to 44222. 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 exit coachradio.com. And now here's your host, the exit coach Bill Black. Well, hello once again. Thank you very much for joining me. It's always a pleasure to have you with me and you know, we talk about a wide variety of topics. Um, with advisors, authors, others that basically have been down the road that you're getting ready to go down if you're a business owner and contemplating the transfer, exit, succession, whatever you want to call it, of your business, the next stage of your business life. And today I'm very fortunate to have a repeat guest who's been with us and got great remarks regarding our last our last interview, and his name is John Anderson, and the Glow and Consulting Group is his organization. And what John does with his firm is they work with owners of privately owned businesses to increase the value of their business prior to putting it up for sale. And today we're going to talk about some of those steps that John helps people go through in order to get ready for sale. So John, welcome to the show once again. Thanks so much for joining me again. Well, nice to be with you, Bill. Thanks for having me. My pleasure, John. So John, I know you've been with me before and again, like I said, I got a lot of great comments about the last interview, so I'm looking forward to this one. But before we get into that, would you please, for our listeners who might not have heard the other interview, just give us a little bit about your background and the glowing group and what what you all do. Uh, I actually started life business life up in Silicon Valley. I was in high tech manufacturing for 20 years up there. I was fortunate enough to be president and CEO of three different businesses up there, and after we sold those, I just took a different direction and I formed the Glow and Consulting Group. It will be 26 years ago this May, and we started in business and still do a variety of things. A from leadership development to executive coaching and those sorts of things, but in Southern California here, particularly in the inland empire, what we focus on is what you said at the top, which is, is helping business owners get their businesses ready for sale so they can get the maximum benefit from the transaction. Very good. Well, 26 years. Where does the time go, right? That's, uh, and that was your that was your encore career. So, so I'm wondering if there's a 3rd. I think you're going to be pretty busy at this one for at least the next 10 or 15 years. It's projected that, you know, huge numbers of business owners are reaching that age, and they're going to be facing economic challenges down the road that they're probably going to want to think about getting ready for exit. But one of the, one of the problems is just that the competition. There seems to be so many business owners starting to say. You know, I think, I think just like a lot of the baby boomer trends, I think I'm going to do something in the next few years. How soon in advance should people start this type of planning for getting ready for whatever's next, if they're especially if they're going to sell their business? Well, I think a minimum number is about 5 years. I'd like them to see, I'd like to have my clients start the day they open the business thinking about how they're going to get out, but realistically about 5 years to really start getting serious about what an exit might look like. I think a lot of people hear that and they, they're, they're like, well, what would I do to, you know, I'm so busy getting my business up and running. What would I do? What would that look like if someone started planning for their exit the day they started their business? Well, they would have some goals in mind. Some people start businesses for for family reasons. Some people start them for financial reasons. Some people just start them because there's a good idea and they have no, no thought about getting out. I always like to have a plan. I want to have some goals. I want some measurable goals, particularly financial goals, and I want the business owner to be in charge of their life. What happens, Bill, very frequently is someone will spend 25, 30 years in a business. wake up one morning and say I'm tired, I need to get rid of this thing, and they haven't thought at all about how to go about that. And that's if they're lucky. I mean, many times as you and I have seen, someone has a health issue and they're they're unable to be around to help the, you know, to really work hard on the last 5 years or if they pass away, all of a sudden it becomes their family's problem. So so having a company that's ready for sale, as I hear you say, is imperative at all times, and that just means you. What keeping good books and records and as you say, have a plan that you're you're shooting for. Maybe it's knowing what your value is and needs to be, those types of things. Sure, it's really the foundational things for running a successful business. It's having clean financials and managing your inventory well if you're in the manufacturing or distribution business. It's a, it's having a, you know, a really healthy culture and Good human resources compliance and just all of those things that business owners tend to overlook because they spend 100% of their time working in the business and basically 0% working on it. So if we're involved early or if I just talk, and I do talk to a lot of. Younger people who are starting out in business, I'd say pour the foundation solidly from the beginning. Start with good management practice. Attract the best people you can, develop those folks, build a healthy culture, and it will be much easier for you to to craft an exit strategy and to actually cash out of the business someday if you do the fundamentals right from the from the very beginning. Makes a lot of sense and you know I think one of the things that a lot of these transactions hinge on is trust, and that is the buyer's trust. A in the, in what they're looking at that, you know, it's not sloppy. There's not a lot of things hidden in the financials. Everything's clear and concise and think about how that makes that would make you feel as a buyer to find that everything's in order, you know, one interesting sidebar before we get into it, John, is you think about 26 years ago when you started and basically when I started in this, in this world of planning. There weren't very many franchises out there, but now there are a ton of franchises, and, and I'm not saying a franchise is your competition, but a franchise is kind of a benchmark for what buyers are used to looking at now. It's a well or it's a big, you know, it's a binder full of operations, uh, job descriptions. contingency plans. It's a well organized book of the business that if you handed it off to somebody, they would go, if I take this book, I should be able to run this thing, right? And you say, yeah, that's, that's the idea. That's going to make your business more attractive to a potential buyer. Did I get that right? Yeah, franchises are very good for that. They are cookie cutter, but that's one of the things that makes them successful, and it does make that transition much smoother because at least there's something. Of a guideline for most entrepreneurs that start, say, a non-retail business like a manufacturing business, there's nothing. Right, there's no book. There's no road map. There's no plan, and it's incumbent upon them to create that. Yeah, great points. So let's talk about, uh, you know, now, uh, I'm a business owner and I'm thinking, you know, in the next 3 to 5 years or whatever, I want, I want to put my business up for sale. What are some of the steps I need to go through that you would help me with? Well, the very first thing I do after someone expresses a desire to look in that direction is we do some hard research and we find out, particularly we're focused in the Inland Empire, but we find out how businesses like this get bought and sold in this market. So we want to position the business for the most common transaction, and the exit can be anything from a generational change of control to an ESOP to an IPO and everything in between. Every business is a little bit different, but we start out with, you know, what is going to be the most likely way that this business can get sold in this market. So that's the first thing we do. And then we talk about the the planning horizons and how long people want to be in the business. And there's one thing that I do additionally with all of my business owners is I help them plan what's next. Someone years ago gave me a great piece of advice. He said, Always retire to something, not from something. And so you know you don't want to just push somebody out of their life's work and say, well, go play golf. So we start with a more holistic approach where we involve the family and we get everybody on the same page with for the owner and or owners, and then we start going through the various steps. And one of the first things I look at, Bill, is the financials. And although my background is not, I'm not a financial guy necessarily, having run businesses, you learn to be one. Uh, but we want to get it clean, and as you well know that most privately held businesses exist for tax avoidance. I mean, we run everything through the business. Let's be clear, right? So I have to take them through some very difficult times somehow, you know, we have to have those conversations about, OK, the cabinet Big Bear is really not your executive retreat, get it off the books. You know that the garage full of vintage Corvettes, not company cars, that comes off the books. Grandma's really not the CFO, get her off the payroll, you know, all of those, and those are difficult conversations because these people have paid themselves well over a period of decades sometimes, and they're saying, wait a minute, you're, you know, you're challenging my livelihood here. But to a potential buyer, and you hit on it a moment ago, every time a buyer runs across something that isn't right, a red flag goes up. And what that usually translates to for my owner is your price just went down. And you're if there's enough of them, people will back away. So we start with the financials and then behind that there's a plethora of operational issues and I mentioned earlier, human resources compliance issues, other compliance issues. If there's real estate involved, there's the environmental, there's just a whole list of things, and what I do over a period of years is I help my clients build a solid executive and management team. Because so many of them, uh, you know, they've got some people, people have done with lots of, you know, for lots of years, and they're good employees, but they're not good managers and, and certainly not good executives. So we really get the company to look like a professionally and operate like a professional organization with top talent. And that's so key. And 11 issue I think a lot of people come up against is that, well, show me, show me what you do for the business, Mr. Business owner or Ms. Business owner, and the list is long and almost endless, and it's like, well, how are, how is the business going to survive if you walk away? But the other thing to consider there, as you just said with your your key talent and key management is has anybody talked to them about how they would uh view if, you know, why they should stick around if, if the business is sold. They may have come in at the same time as the owner and think they're going to go out at the same time, and that could be very dangerous to a business sale. Oh, it absolutely can be. And those are conversations that I think are healthy amongst the management team. You have to be careful because if the the rumor mill gets out there. You know, if there's only partial information, for some reason, human beings will fill that void with the worst case scenario every time, right? So you have to watch the rumor mill, but you have to be candid with your employees and say, here are my long range plans. Now let's talk about things like ESOPs. Let's talk about various employee ownership plans. Is anybody interested in that? And You know, you, they have to talk through that, and a lot of people will say, no, not interested in being an owner and be happy to stay on with the new owner, but that's that. So you just have to be candid about uh the business owner has to be candid about what their long-term goals are. Yeah, and here's a wake up call for a lot of business owners. Your employees see you getting older. It's, it's, you're not hiding it as well as you think, and a lot of employees are more concerned about what's the plan if, if the owner passes away suddenly or gets sick? Is my job secure if that were to happen? you know, I'd like to know more about this. A lot of key people are certainly in a good position right now with a tight job market. They're experienced. A lot of times they've had, they've gained a lot of knowledge and they're very valuable to a competitor. So are there, are there ideas and strategies that you talk about with people about, hey, maybe you should talk to them about sticking around and getting some kind of a benefit if they do? Oh, certainly, yeah, that's part of the whole package because the buyer, uh, in most cases, they're not going to fire everybody and, you know, and move the business. They want to operate for some period of years until they figure out, you know, longer term strategy for it. So yeah, we talked quite a bit about that and. At the owner level, Keyman Insurance is an absolute must. So if the owner or owners pass away that their shares are bought back by the company or their shares go, one of the one things happens is their shares go to their spouse. And that's not always a good thing because the spouse doesn't know the business and he or she doesn't want to be involved in it. So having a really solid insurance portfolio that protects the business and therefore the employees is part of what we do. We, we bring in CPA firms and insurance executives and, and lawyers when we need them, and we really put together a solid team when we're actually actively working in a transition period to make sure that they get the best advice they possibly can. Good to know because, ah, I had a friend of mine that was growing his business and thinking about the future and, you know, growing the value and all of a sudden he passed away and it was a nightmare for his spouse. So at the time you're thinking about all of this, things that can go right, you've got to think about things that can go wrong. Now what about do many business owners understand their current value and, and more importantly, what they need to do to drive that value to an amount that will sustain them if they sell it. Uh, the short answer is no. Most don't. In my experience is that most business owners think their business is worth a lot more than it actually is. And, and one of the reasons for that is something I mentioned a little bit earlier is they've been paying themselves, you know, a handsome living for a lot of years, but they haven't reinvested those dollars back in the business to build value. So so you're paying yourself a half a million plus a year and you've got all of the perks and everything, but the business isn't all that sophisticated and you haven't put together a solid management team and all that other stuff. So your value sometimes is shocking and you bring in a business appraiser or an investment banker, and they come up with a number and the business owner is shocked. Well, I want to avoid that shock for my business owners. I want to say, you know, let's get ready. Here's why. Here's the investments we have to make, because getting ready to sell doesn't happen for free. There are some things that we've got to spend some money here, but if we get this position properly, you'll get it on the back end, you know, at whatever multiple you're able to get. Yeah, and it's ironic for a lot of people when you talk about recasting those financials that they've been avoiding taxes, but they're they're shortchanging themselves at the time, at the point of a sale and to actually to actually get a higher price for their business, they may have to pay taxes over the next few years and get to get things right because they're going to show more. Profits which a buyer would be interested in, right? Oh, no question. And there's two very difficult conversations I have with my clients, not the real small ones, but the larger ones that we're dealing with where it's likely going to be a strategic buy by a large corporation or about 3 years out from going on the market, I sit down with my owner and say, OK, this year we start getting your financials audited. And of course they grab their chest and wheeze and say, you know how much that's going to cost and You know, you have to walk them through that and uh you know, get, get them off the cliff and say, you know, so it's, you know, 60 grand a year or whatever it is, you'll get that back in your sale price in spades. So that's the first step. And then once I get him over that hurdle, the second thing is, you just mentioned it, I need you to start paying income taxes and you know that's another thing to get over, right? But uh what we endeavor to do is get that business. For 3 years to operate the best it can. We have growth strategies, we have expense control. We have all of that. So when a potential suitor walks in the door, we hand them 3 years of audited statements, 3 years of tax returns, and we can make an honest case that says this is the way this business operates today. We don't have to recast the financials. We don't have to do a backs. We don't have to do any of that. Here's the reality, and here's our price and it's firm. These are all wonderful, great points, and it kind of goes back to what I said at the top of the show was that You know, we're entering into an age where there's going to be a lot of competition for your business. Think of a beauty contest. If there's 4 contestants, that's one thing. But when there's 30 contestants, that's a, that's quite a different thing. And we're entering into a situation now where 10,000 people are turning age 65 a day. A lot of them are business owners, and a lot of them are saying, you know, when I, when I want to sell my business, uh, I want it to go. I don't, but, but John, what's the What's the percentage of businesses that try to go to market that actually sell today, do you think? Well, uh, on the smaller end, the business brokers tell me about 15% of the business that they list actually sell. That's a frightening and they do a vetting, they do a vetting process to get to that, right? Yes, they do so they not people that walk in the door, right? And so that just makes our case for, you know, you have to get ready. You have to be the best buy on the block. You have to be the the best investment for that acquiring entity that they can imagine. And if you don't. Uh, it's kind of like selling a house, right? They come in, they stage it, they clean it up, they, you know, your curb appeal for your business is vital, uh, particularly in this market, as you well point out. But it also points out to to another um another fact, and that is that if 1 out of 15 sell, what do the other 14 do? I mean they hopefully they don't all wind down, but this process of getting your business ready for sale is also like going through and And with your house and painting everything and cleaning it up and then looking at it and go, Wow, this is a nicer house than I remember. I'm just going to stay here in a business situation that means that you can be moving towards having a business that would sustain itself and and a lot of owners tell, tell me, I don't know what you hear, but after, after they go through all this, they go. I'm happier than I've ever been. I'm working, I'm working less, but on things that I enjoy that are important to the business. I think I'll just hang on to it for a while. You still need that contingency plan, but that's one of the byproducts of this planning, isn't it? It absolutely is, and that happens more often than some people might think is when you get it all cleaned up. And part of that cleanup takes a lot of stress off the owners. They're saying, yeah, I'm, I'm getting in a round of golf once a week and I'm still paying myself. Well, that's a pretty good deal. So that does happen. A lot of businesses get sold through other, other ways, and they don't get the kind of value for them that they could, and many of them just close. And you know, that's not a bad strategy for certain businesses. You know certain professional service businesses, they're not very sellable. So what you want to do is build your personal network outside the corporate umbrella. So when you're ready to turn off the lights and walk away, you know, your future is assured. Build your own buyout plan. Yeah, that's, you know, that's great advice. And now you talked a little bit earlier about employee stock ownership plans or ESOPs as they referred to. Are those becoming more and more popular these days, and do you, do you foresee those being, um, you know, people, I think there's a lot of misnomers about ESOPs. People think, well, I don't want to sell everything to my employees, but that's not the way that works at all. But, and, um, uh, but do you see those as an emerging trend? I do, and I use a particular CPA firm that is really expert in that area, and ESO's got a bad name for a while and deservedly so. I think a lot of people went out, a lot of people in the insurance business went out and sold them to companies that it wasn't really the right approach for them, and then they end up upside down and ESOP there's a lot of compliance issues and a lot of people lost a lot of money. We've learned from that, and I do see a resurgence of ESOPs, and it's a, it's a fine way, particularly if you've had a core group of people working in your company for a long time and you want to reward them, let them buy in the business. Let them, you know, create that that Class B stock, the non-voting stock. Let them, let them buy into that. And then when it's time to buy the owner out, that converts to Class A shares, and they own the place. You know it's there's a lot of ways to skin that cat, and ESOP is a good one. Well, I think, and I think that's the the theme of today is that there, there are a lot of side roads on the way to an exit, but owners need to start with their goals in mind, as you mentioned. What are some, some tips you would tell our listeners to start getting ready and plan out those goals? What are some of the key things that they should know? Well, I think the first thing is they need to be realistic with themselves about what their business might be worth, and you just, that's some simple research that's not difficult to find out. And so that would be the first thing. OK, what if we did our best, what could this thing be worth and does that meet my my financial goals? And if it's not, then It's probably time to get a, you know, a financial planner on board so that the owner through a variety of investment opportunities plus the business ends up where they want to be when they retire. That's really the first step. And again, I mentioned earlier that involves the family. If we do this just with the business owner, we're not talking to the spouse or some siblings that may work in the business, we're shooting ourselves in the foot. So that's a very important step is is be realistic about that. And if you don't think your business is going to meet all your needs, you got to start with a plan to grow, to grow your, uh, your personal portfolio. So it all starts with a conversation, John, and what's the best way for our listeners to find out more about you and get in touch? Well, they're, they can reach us through our website which is gloan G O W A N.com, and they could just email me at info@lo.com. They can reach us at our offices at area code 909. 476-719-6 or they could email me directly and it's uh jay Anderson, initial ja Anderson at glowing.com and we'd be happy to have a conversation with anybody. Uh, it doesn't cost anything to have a conversation with us. I, I just love going out and meeting with business owners and and finding out all the various things that that I don't know about all these unique businesses, so you can reach us any way you can, be happy to come talk with you. I love talking with you, John, because your passion comes through that that you're doing exactly what you should be doing and, and you enjoy it and you're helping uh uh people in a very confusing time to to get clarity. And develop their strategy for what will probably be the biggest financial transaction of their life most likely. So I really appreciate you coming on and sharing these tips with my listeners, and I hope they'll they'll in turn get in touch with you and and share, share their story with you so you can help them along the way. Well, Bill, I appreciate the opportunity and as always, uh, thank you for having me, and I look forward to another chat one of these days. Thank you for listening to Exit Coach Radio. This podcast is sponsored by TalkSpace. May is Mental Health Awareness Month. In TalkSpace, the leading virtual therapy provider is telling everyone, let's face it, in therapy by talking or texting with a supportive licensed therapist at TalkSpace, you can face whatever is holding you back, whether it's mental health symptoms, relationship drama, past trauma, bad habits, or another challenge that you need support to work through. It's easy to sign up. Just go to Talkspace.com and you'll be paired with a provider typically within 48 hours. And because you'll meet. Your therapist online, you don't have to take time off work or arrange childcare. You'll meet on your schedule. Plus, TalkSpace is in-network with most major insurers, and most insured members have a $0 co-pay. Make your mental health a priority and start today. If you're not covered by insurance, get $80 off your first month with TalkSpace when you go to Talkspace.com and enter promo code S space 80. That's SPA CE 80. To match with a licensed therapist today, go to Talkspace.com and enter promo code S80.