Lee Goldberg - Preparing for Your Business Exit Strategy

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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 now here's your host, the exit coach Bill Black. All right, a real pleasure. Thanks so much for joining us today. It's always a pleasure to have you with us listening. My next guest is Lee Goldberg, and Lee is joining us from Irvine, California, actually Costa Mesa, the law office of Lee R. Goldberg. Now Lee Goldberg is a transaction transactional legal counsel. With over 33 years of experience, spending most of his practice acting as outside general counsel for numerous companies across a broad spectrum of industries, today we're going to talk about preparing for your business exit strategy. Lee, it's a real pleasure to have you on. Thanks for joining me today. Thank you, Bill. It's a pleasure to be here. Thank you. 33 years of experience. I bet you have a few good stories for us, just a few. I really look forward to hearing them. And before we get into that, tell us a little bit more about you and your background and, you know, how you came to start your, your law office. Sure, absolutely. Well, Bill, I just, I, I was born actually on the East Coast, um, I was born in the Bronx, um, came out here, uh, as a young kid, uh, with the family and moved to San Diego, have been in Orange County for over 33 years, and, and, and frankly, I bring that East Coast kind of mentality or attitude, at least that's what I'm told, uh, into doing what I'm doing and, and. The way I got started is, is I went to law school like, like all the other lawyers went to law school, started with the big firms, and, uh, frankly was inspired by that through my family which has a lot of um business professionals in it uh but no lawyers, so that's what I decided to do. Well, that that gave you a good background to work from. I'm sure you heard a lot about some of the issues and difficulties they were going through, you know, and so the topic of today is preparing for an exit strategy. Now that's right on target for what our listeners are thinking about. Lee. Why is it important for a business to have an exit strategy even if they don't presently intend to leave their business? Oh my goodness, Bill, uh, that is a really great question. Listen, if you don't have an exit strategy for your business, it is like having a rudderless ship. Uh, you're just going with the flow and the mood of the time. You'll have no strategic planning and you're not aiming for what your ultimate prize may well be. The bottom line is business exit exit strategy planning. Um, is the best way to add value to your business at the end of the day and at the end of the day it's for your family. It's not for you day to day, it's for taking care of generations to come. That's what this is all about. Now Lee, you've been around for practicing for a long time, working with a lot of business owners. I've also done this for a long time and I've talked to a lot of people who've been doing this for a long time, and I'd I'd like to ask you to validate this statement. Most businesses don't, most exit plans are not of the planned variety. They are the unplanned variety. Uh, I will not only validate that, I have watched millions of dollars being left on the table because of it. Um, that's absolutely true statement though. Now obviously it could be a health issue. It could be somebody comes along and makes you an offer you can't refuse. It could be something else, you know, it could be COVID-19, but in any event, having some kind of a strategy written down in place just like what I tell people is, Hey, didn't you have a strategy to get into your business? Well then, why don't you have one to get out of your business? Now what, what? Businesses do now to prepare for their company exit strategy. What should they be doing first? Well, and you said the very most important thing that's very intuitive, what should they be doing now? Too many people think that, oh, I'll think about my exit strategy when it comes closer to selling my business. Well, sometimes. Sometimes it's too late to restructure your business the best way to get the most value out of it. So there are 8 things, 8 categories of action items, uh, that I like to call it that I think your business will do very, very well if you address these 8 items right now as you go through your business life and revisit it year to year. Uh, and these are the 8 things. Number 1, get your financial house in order, all right? You are going to have to have, whether you're passing your business on to your children or the next generation or you are selling your business, you will have to have all of your financial set up so it is at least in a reviewable condition. If not in an auditable condition. Anybody that's going to look to buy your company is going to want to see at least 3 years of audited financials, including all accountant accountant notes, and that takes some time. Item number 2. Um, you'll want to get all your corporate documents together, and when I say all your corporate documents, I mean everything. I mean all the the little agreements you had back and forth with other your shareholders, all of your annual meeting, statements, all of those types of things. You would be shocked, Bill. If I told you how many business owners that have been operating their business entity for like say more than 568, 10 years that have never looked at their corporate documents since the day they formed the company. Oh that's really a shame that is, yeah, that is, and these are, these are very two very important and kind of mundane types of things for business owners to think about because they're not as exciting as growing a business, but when they go to sell that business, these are a couple of things that will, will derail a sale quickly if they're not in order. So you're, you're on track so far. What's number 3? Let me, let me give you two others that are related to each other that you absolutely must focus on every year of your business. Number one, increase IIDA. We all know IIDA is the number one business metric in connection with the valuation of a business for the most part, if you don't own Facebook, for the most part. Um, it is the number one metric and EBA is earnings before taxes, insurance, depreciation, amortization. Some people these days, Bill are calling it EEOC because they're adding in Corona. Right, right, right. But, but essentially you have to make sure that your IBEDA is high, not your profits, not your operating profits, not what you take home at night. Make sure your IBEDA is high. By the way, it will reflect in more money in your pocket. How do you increase IBEDA? There are two ways. All right, more sales. All right. Increasing income as long as your, your, uh, marginal profits are the same as better than your existing margin. All right, so that's number one, but that's the hard way to do it, Bill. The easy way to do it, cut costs. Every time I make a sale, if you're a lucky company, you are increasing IA 35 cents. If you're lucky. You're increasing EIA 35 cents for every $1 increase in sales, but if I cut a dollar out of my costs, I'm increasing EIA by $1. So keep your IBADA high, get your EADA as high as you can get it. Of course, that requires financial analysis to do this. Look at item number one. Um, but, uh, if you do that, buyers will see and look at IIDA and increasing IBIA. They want to see IIDA increasing over the years. YOY EIDA increases or what they're gonna want to see. Number 2, the the other item that goes with IIDA, which is my 4th category, and is a very important category enhance your blue sky. All right. Basically, blue sky are your returns on your EEA. So in other words, if you're gonna sell your pro your, uh, your company and the, the market conditions are, are saying that you're going to have 3 terms on your IEA. Your EBIDA is a million dollars, you have a $3 million company. All right. Well, those turns on IEA is what we call blue sky. And those turns are affected by certain things that you have no control over. I mean, the economy, your market, your market segment, your market saturation, all sorts of things like that. or how important somebody wants to get into this business, how much somebody wants it, but the things you can control to increase your blue sky, we're going to get to an example here when you ask that. But if you handle your assets and your business, especially value adding assets such as intellectual property, real property, specialized machinery, specialized inventory and equipment, the more and more you develop that and build that, the more and more you're going to increase your terms of EBIDA, and you're not even going to focus on it unless you're aware of it and working on it. So that's the 4th item though. Wow, we're only halfway through it. We're only halfway through. It's been tremendously valuable so far, Lee. So, uh, get your financial house in order, get your corporate docs together, increase EIA, enhance Blue sky. What's number 5? Number 5 would be your your contract documents. Anybody coming to buy your company is going to look at your contract documents, and in particular they're going to look at how strong they are. If you, if they want to see that your main contracts, your main clients and customers are long term strong contracts. They're going to going to see that you haven't given indemnities to everybody and their brother. They're gonna want to see that your NDAs are appropriate. They're going to want to see that you have the right to sell your company and sign the contract. All of those types of things absolutely must be reviewed before a buyer looks at it. And in order to get them correctly positioned, you have to be operating with the right contracts for a period of time. So, so that again is something else that is the 5th category that I recommend. That you take a look at when preparing your exit strategy plan. The next one is very, very related to that. And the one that's rela I'm sorry, I talk really fast. Sorry, Bill. Um, that's OK. I got it. The one that's related to that is review your company. Make sure your company is operating legally. I swear when I tell people this, they laugh at me. And then I look at their company and I find all sorts of things where they're not compliant. Are you ERISA compliant? Are you HR compliant? Are you labor co compliant? Are you OSHA compliant? Uh, do you have your export import licenses? Do you need special licenses to do your business like FDA licenses and authorizations or certificates? All of those types of things, if you're not perfectly lined up. Buyer's not is gonna walk away. They're gonna, they're gonna look at you and think, oh my gosh, what else is hiding in the woodwork if this guy can't even operate in compliance, right? So that's, that's, that's the 6th thing. The last two items are fairly ministerial, uh, but I will tell you they are incredibly important. Um, the last two items are, um, number one, your document deposit or document dump or, you know, however you like to call it, um. I will tell you that it, that, that's the first place. That any lawyer certainly um that is representing your buyer is going to look. They're gonna look at your corporate documents. They're going to look at at your operational documents, they're gonna look at your tax documents. They're gonna look at your financial documents. They're gonna look at your intellectual property documents as a matter of fact. I have a 16 page category list of documents that I request when I am reviewing a company for a client to buy. A single single spaced. Single space, yes sir, yes sir. and by the way, I'm happy to provide that to anybody who would like it. I, I, I, I, I claim no particular ownership of these things. These are just normal documents that anybody skilled in this knows what to do and what they're looking for and what they want to see in those documents. So I will also tell you that any company that's working, I just finished a company's uh document of we started late. Um, in doing it, um, and it held us up going out to market because it's highly my recommendation that, um, that you have your document depository substantially completed before you go out to market. Um, however, uh, it took 300 person hours to put that together. Uh, um, uh, it's just if you, if you're not on it, if you're not reviewing it, if you're not ready for it, uh, it could overwhelm you at a time where you're looking at a million other things. That's a really good point, really good point. You know that that's the thing. I think a lot of owners think, well, once the seller comes, I'll get all that stuff together or buyer comes, I'll get all that stuff together, but the problem is they're usually, you know, hopefully you're selling at a point when you're really, really busy so that you're going to get your top sale price. This is an extracurricular activity that you're going to have to pay someone to do or, you know, or, or delegate to advisors, but it's going to have to be done or else you're just going to be kidding yourself that a buyer will take you seriously, right? That is absolutely true. And as a matter of fact, there are specific ways to do it. All of my clients have their document depositories on standalone computers, not hooked up to the internet because it has their most sensitive documents on it. And it's all of their documents and um I, I, I, I actually uh two of my clients as a matter of fact, have someone dedicated to put in 4 hours a month, every single month to uploading documents. So we have it under control on an ongoing basis. Um, there is a last item, um, and that is your business structure review. It's one of the most important items, um, I will tell you that you can be operating and think everything's going wonderful. Uh, yet the buyers that really want to buy you at the price you want to sell for are not going to buy you in the structure that you're in. Maybe they don't want an LLC. Maybe they're a public company and need a Corp and need you operating as a Corp for 3 or 4 years before they'll even look at you that way. Um, perhaps, uh, you, you are in a tax situation where you want to sell your company as an asset sale and not a stock sale. Your structure is going to, to, to dictate what your tax consequences are going to be. You should look at that long before you're even thinking about selling your company. Another place that I live that I live by, that I absolutely live by for every one of my clients, separate your generational assets from your operational assets. Operational assets are those assets that make you money, but they will also cause you potential liability. You get that separate apartment segregated from those generational assets that are going to take care of your children and your children's children, things like intellectual property, which you could put in a different company, lease and license back to your company. Or real property which you put in a different company or put in your trust and lease back to your property. In this manner, if the buying company wants those assets, they realize and it's very clear there's an additional price and cost to that, OK? There's a value to that or you can keep them from your family forever. Those are the types of 8 things that you should be focusing on now and revisiting every year and putting them into operation. That's what you can. In order to get the most. This is about maximizing the value of your most important asset, probably, and that's your business. That's fantastic. What a great list. I took a full page of notes, Lee, as you were talking. These are things that we don't always hear when people start thinking about exit planning. A lot of people say it's more touchy-feely, you know, translating, transferring a balance sheet intact for top dollar requires a lot of work. It's the biggest sale that you as a business owner will ever make. You think it's hard to sell a big customer, try to sell all your customers to somebody else down the road. So Lee, these are, these are great tips, and we've got about a minute left for today, so I'm going to have to have you come back and we're going to get into some of the stories and other details. We've just scratched the surface today. How do our listeners best get in touch with you and when should they do so? Well, I, I, I, I work Monday through Friday like everyone else. Um, I do give all of my clients my cell phone contact for contacting me any time. They can get me via email at L Goldberg at Fordullio. That's F O R D D I U L I O com. I am of counsel with that uh uh firm. Uh, it's a business firm and I run their transactional department for them. OK, give us that one more time for our listeners who might have not not gotten that. Sure, and I'll even give your listeners my cell. How's that? I'll give your cell as 949-395-4911 and email is l Goldberg G O L D B E R G at Fordulo. That's F O R D as in the car, Dio D I U L I O.com. Ford Delio F O R D D I U L I O.com, right? L Goldberg at Ford. OK, great. That's great information. I'm sure our listeners would love to contact you. Can they, can they call you up, Lee, and just say, hey, I don't know if I'm the right fit for you or you're the right fit for me. Can we just have a conversation and and see if we could work well together? Absolutely, Bill, any time. And the reality is, like I said, I've been around in this county for 30 years in Southern California for 30 years, 33. If I don't, if I can't help you with something, I most likely will know someone who can, so I'm happy to do that. Absolutely, and what a pleasure to talk with you and what a great information you shared with our listeners today. I really appreciate it and I look forward to the next time we get a chance to speak. Lee, thank you so much. Thank you for listening to Exit Coach Radio. This podcast is sponsored by TalkSpace. 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