Tim Kinane

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Thursday, June 21st, 2018

Four Tips on How to Thank Employees When You Exit

Most business owners care about more than just money at exit. In addition to achieving their personal financial goals at exit, most owners have other objectives they seek to achieve, one of which is thanking those employees who contributed to the company’s success. While the desire to say thank you is common, most owners struggle with determining the right way to do it. Questions like “Who do I thank?” and “What’s appropriate?” may lack easy answers, especially when rushing to get everything else done shortly before exit. Plus, this issue contains potential landmines; overlook somebody, create perceptions of favoritism, or thank anybody in a manner he or she believes fails to recognize his or her contribution fully, and your best intentions can do more harm than good, adding fuel to the fire during an already sensitive transition. If you intend to thank at least some of your employees when you exit, here are four tips on how to do it the right way.

 

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Tip #1: Start Planning Now

Start formulating your plans now on how to say thank you. If you intend to exit within the next year, you need to get going. You’re about to have two full-time jobs (running your company and executing an exit plan), and you likely will be hard pressed to address this issue adequately. If you intend to exit several years from now, you will be glad that you started now. Coming up with whom you need to thank, and how you mean to do it, is not a decision you’ll want to rush. Plus, the next tip is only available to those owners who plan ahead.

Tip #2: Use Incentive Compensation Plans to Help Say Thank You

If you have several years before you intend to exit, design and implement an incentive compensation plan that will pay employees bonuses when you exit the company—if the employees and company hit specific performance goals. (There are many types of such programs. Watch this short webinar on Golden Handcuffsplans to learn about our preferred approach.) This accomplishes several good things all at once:

  • Create incentives for individuals and teams to help grow the company and maximize the value
  • Flip the normal “I-Win-You-Lose” reality about how your exit impacts the employees (who typically don’t have any ownership) into “I-Win-and-You-Win” by creating financial payouts for them if and when you sell the company
  • Create a retention strategy so that your top people stay with the company up to and beyond your exit, thereby decreasing risk for your buyer and likely increasing company value

On top of these advantages, payments that employees may earn under a well-designed incentive compensation plan will also serve as some or perhaps all of your thank-you gestures to these same people. Whatever amount the employees earn under the plan constitutes your thank-you when you exit. Some owners react to this idea by saying, “It’s not a thank-you if they’ve earned it.” But it is. Any gratitude you display toward your employees when you exit will be tied to their individual and team performance. The people who perform well and earn incentive compensation payouts at your exit are likely to be the very same people whom you wish to thank. This arrangement removes the concern that amounts paid at your exit are arbitrary or unfair. Plus, payouts under the incentive plan should be sufficiently large enough that they won’t be expecting additional dollars from you at exit beyond what they earn through the plan.

Tip #3: Add a Personal Touch

Most owners turn to cash for the lion’s share of any thank-you’s they express at exit. Cash has obvious attractions, whether the payments are arbitrarily determined by you or are generated under an incentive compensation plan. You are not limited to cash, however, and should consider non-cash thank-you’s. Just as with gifts to family and friends, cash can be seen as impersonal and require little effort on the part of the giver. In lieu of cash, or on top of a cash payment, a personalized non-cash thank-you can create deeper, tailored, and more lasting expression of appreciation.

For example, a former business owner client had a dedicated CFO who was a passionate chef in his spare time. Upon the successful sale of the company, our client gave the CFO a large cash bonus payment. The owner also sent his CFO to Italy for a ten-day world-class cooking school. The Italian cooking school trip cost only a fraction of the cash bonus, yet years later, the CFO was still talking about how grateful he was to have worked for that owner, and how much he enjoyed the cooking school. The cash bonus was barely mentioned.

Many owners do not use non-cash gifts because 1) it can take time to generate gift ideas, and if exit is near, you may be pressed for time, and 2) owners fear that, unlike cash, not everybody will equally like and appreciate the non-cash items they receive. Take the time to research your employees’ interests, passions, and aspirations outside of work to identify an item or experience that makes your thank-you personal for the employee.

Tip #4: Know Your People

To make personal, memorable, non-cash thank-you’s, you must know your people. Specifically, you need to know their interests, passions, hobbies, dreams, bucket-lists, and relationships outside of work. That might sound like a lot of personal information, but you likely know some of it already. For any information you don’t have, here’s how you can get it without tipping your hand.

First, there are four questions that you ideally can answer about those employees you intend to thank:

 

What are their major hobbies outside of work?

With what civic, charitable, social, or religious groups they are highly involved?

What’s at least one trip or experience they’ve always wanted to do but never have?

What do they wish they had more of in life?

If you know the answers to these four questions, ideas for a personalized non-cash thank-you will likely present themselves. The challenge becomes how do you gather this information without revealing your intentions? Don’t ask all of these questions of one person at one sitting. Instead, take a little time and be creative. One client asked his top employees one question each month, over four months, subtlety weaving the inquiry into other conversations, over a bite to eat, or while traveling together. Another client used these questions as an ice-breaking exercise during a corporate retreat. While employees were sharing their answers and getting to know each other, our client was secretly taking notes.

At NAVIX, our clients are not only organized for exit but also know how they intend to thank valued employees when the exit date arrives. To learn more about how to approach the human side of exit planning, contact us to schedule a complimentary, confidential consultation.

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Navix LogoTo discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Monday, June 18th, 2018

How to Avoid Getting Burned by Earn-Outs When Selling Your Company

Burning Money

At NAVIX, we know that the term “earn-out” sends a shiver down the spine of business owners. And for good reason. Business owners seeking to sell their business at exit overwhelmingly prefer all-cash deals. Owners know that any portion of the purchase price held back at closing is at risk—you might never see those dollars. Despite owners’ overwhelming preference, most deals are not 100% cash transactions, but instead include any number of mechanisms that pay additional dollars to the seller after closing only upon achieving certain results. One of the most common mechanisms is an earn-out. Here’s why owners seek to avoid earn-outs, and how to avoid getting burned by them if part of your deal.

First, a quick explanation of earn-outs. An earn-out is a provision defining how a selling owner may receive additional payments after closing, contingent upon certain results such as stipulated financial performance or milestones. Earn-outs are used to bridge valuation gaps between the seller and buyer. In essence, with an earn-out the buyer is saying to the seller, “We will pay you more for your company later, if you actually go out and achieve ____________ .”

Here’s an example: You believe your company is worth $15 million, in part because you believe the company will continue to grow 25% per year like it has the last few years. Your buyer is not convinced that the growth rate is sustainable and is only willing to pay $10 million at closing. To bridge the gap, your buyer agrees to an earn-out that may pay you up to an additional $5 million after closing if the company sustains the 25% (or better) growth rate over the next several years.

Earn-outs can be useful in bridging value gaps, and some deals might never be closed without incorporating an earn-out into the agreement. However, an earn-out often trades one problem (i.e. the buyer and seller do not agree on price) for another set of problems:

  • You and your buyer have to agree on the specific performance or milestones needed to receive earn-out payments. For obvious reasons, buyers prefer to tie earn-outs to the bottom line. Sellers, however, beware. After you have sold the company (or a portion of it), you probably are in control of very few factors that determine the bottom line. Sellers should seek to tie the earn-out to top line results, as they are easiest to measure and hardest to manipulate.
  • If you have an earn-out tied to financial metrics somewhere below the top line, you and the buyer must agree on key definitions and how those metrics will be calculated. It’s not enough to tie an earn-out to “net profits” without defining what goes into net profits, and what does not. The issue is more complicated than just agreeing on the meaning of certain words and phrases. After purchasing your company, the buyer may allocate some of its overhead and liabilities onto your company’s financial results. This can be a nasty surprise if you and the buyer did not precisely define net profits during the sale negotiation.
  • Regardless of which metrics the earn-out is tied to, as the selling owner, you are still at risk if the buyer mismanages (unintentionally or intentionally) the company’s operations after the sale, undermining or outright killing any chance of hitting the earn-out targets. For example, assume you have an earn-out tied to top line results. Using top line revenue seems simple and clear. But the new owner can take any number of actions that make it hard or impossible to achieve the top line milestones: What if newly hired leaders are not competent? What if the new owner raises prices, ultimately decreasing sales or even losing customers? What if the new owner raids the company and redeploys some of your best salespeople to another department? What if the new owner changes the company name and in doing so disrupts marketing and lead generation? You, the selling owner, bear the risk of any decisions or actions that negatively impact company performance to the point that you do not hit your earn-out targets.
  • You and your buyer have to agree on additional important terms and definitions, such as: How long will the earn-out last? Is there a cap on the potential payments? Can missed earn-out installments be recovered if the company later catches up? Can the buyer offset indemnification claims against earn-out payments? These are only some of the important issues that must be addressed and negotiated.

Owners seeking to one day sell the company at exit should take two steps to avoid getting burned by earn-outs. First, build a company that is so attractive to potential buyers that they will offer all-cash terms. Earn-outs at their core are a mechanism for buyers to limit risk: risk that the company will not perform as desired after sale, risk that existing customers will leave or decrease their volume, risk that top employees will flee, etc. Building a business that sells for all-cash terms involves more than just growing revenues and profits. To avoid earn-outs altogether, you must hire and align a quality leadership team, eliminate your involvement in routine sales and operations, achieve a strong track record of growth, reduce customer concentration, and have effective financial systems and processes. Building a business strong in these areas reduces buyers’ risk to the point that buyers do not see any need for an earn-out.

Earn outs

The second step to avoid getting burned by an earn-out is to hire and work with an experienced exit advisory team. Your accountant, lawyer, investment banker, and exit planner must have extensive experience with situations like yours and be qualified to give you sound advice. Your investment banker and lawyer in particular will be your A-team in negotiating the deal terms, especially any earn-out, and protecting your interests. Do not use general purpose advisors when selling your company. You carry the risk that any fees that you might save will be paid back multiple times over in future costs and losses.

At NAVIX, our clients are prepared to potentially sell their business for all-cash deals and have advisory teams qualified to help avoid the fallout caused by an ill-negotiated earn-out. To learn more about how to prepare your company to sell for 100% cash, contact us to schedule a complimentary, confidential consultation. 

 

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To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.Navix Logo

Tuesday, June 12th, 2018

What’s Your Brand Worth?

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What’s Your Brand Worth? How to Build an IP Portfolio that Maximizes Company Value at Exit

June 26, 2018 @ 2PM – 3PM EST

Register now!

Trey and Jeff Webinar

 

Building and protecting your company’s brand helps create value for your company at exit. Brand building and protection take years. Owners preparing for exit must know the steps to take to ensure their intellectual property portfolio is protected and its value maintained. In this webinar, you’ll learn everything you wanted to know about intellectual property and then some…

What you’ll learn:

  • What are the differences between trademarks, trade secrets, copyrights, and patents?
  • What role do they have for your business?
  • What are the best tips for product development?

Check out our archive of all past NAVIX exit planning webinars:
Click here to view now

Thursday, June 7th, 2018

Adjusted EBITDA: The Second Most Important Number to Know as You Prepare for Exit

At NAVIX, we know that most business owners’ top goal at exit is to reach financial freedom, which means having enough money so that work is a choice and not an economic necessity. If reaching financial freedom is the number one goal at exit, then your Exit Magic Number™ – the net amount needed to get there – is the most important number to know. So, what’s the second most important number to help you prepare for exit? Your company’s adjusted EBITDA. Unfortunately, many owners either do not know this number or calculate it incorrectly. Here’s why.

 

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If you intend to sell your business at exit, potential buyers will typically look to your company’s adjusted EBITDA to determine their offer price. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Contrary to misconception, it does not really calculate a company’s profitability. However, buyers put such importance on EBITDA because it shows the company’s current earnings power. EBITDA, in essence, ignores a company’s current ownership issues (debt, tax structure, and depreciation and amortization, which are all largely the byproduct of past capital investment and acquisition decisions) to isolate the company’s current cash flow.

You don’t have to calculate or track your company’s EBITDA; it’s not required to complete your tax returns. You probably tend to focus more on top line growth. Yet for most buyers, EBITDA is the first and most important step in determining what they will pay for a company they seek to purchase.

So if that’s EBITDA, then what is adjusted EBITDA?

Well, like many business owners, you might not always make decisions that maximize your company’s EBITDA. Sometimes, you have other motives and priorities. For example, if your salary exceeds what you would pay somebody else to do your job, your extra above-market rate compensation is lowering the company’s earnings, hence lowering EBITDA. The same thing happens if you enjoy significant tax-deductible ownership-related perks such as company cars, expense accounts, travel reimbursement, and family members on payroll for generous amounts. All of these discretionary expenses depress the EBITDA, but most likely you don’t mind since they also lower your tax bill each year.

Other business decisions may cause EBITDA to be artificially overstated. For example, if you are paying yourself a below-market salary, either to free up money to grow the company, or because you take the lion’s share of your income from the company in the form of profit distributions, the EBITDA may be higher than it otherwise would be if you were paying yourself market-rate wages.

If you intend to sell your business at exit, potential buyers will typically look to your company’s adjusted EBITDA to determine their offer price.

It’s not just owner compensation and perks that can influence EBITDA. Other issues can impact your EBITDA one way or another, including: accounting methods, benefits programs, leases on space or equipment, and product development costs. As a result, many if not most privately-held companies either do not track their EBITDA, or if they do, EBITDA has not been “normalized” to reflect other business decisions and issues that may understate or overstate the figure.

An adjusted EBITDA therefore involves carefully reviewing these issues and calculating a truer picture of the earnings, as if the company was owned by somebody other than you. Items that artificially understate EBITDA are “added-back” into the figure and any items that artificially overstate EBITDA (“negative add-backs”) are factored in as well.

None of this may matter until you get to the point where you intend to exit within the next several years. If you intend to sell your business at exit, accurately presenting the company’s adjusted EBITDA is paramount. Because buyers typically want to see the prior three full years’ financial statements, owners need to begin calculating their adjusted EBITDA well before they intend to exit—we recommend at least five years before the desired exit, in case you sell more quickly than planned.

Unfortunately, too many companies do not accurately calculate their adjusted EBITDA. Adjusting the EBITDA properly and thoroughly requires somebody with experience preparing companies for sale; many small to mid-sized company bookkeepers and controllers lack this experience. If you get close to exit and don’t know your true adjusted EBITDA, then any of the following problems can occur:

  • If your EBITDA is artificially understated, as is common, offers from buyers will be much lower than otherwise possible. For example, if a buyer is offering to pay five times the earnings for your company, then every $1.00 that your EBITDA is understated will cost you as much as $5.00 off your sale price.
  • If your EBITDA is overstated, this will likely come out during negotiation or the due diligence process, throwing a rather large wrench into your plans to sell the company for a certain price. For example, a buyer paying five times the earnings may reduce its offer price by $5.00 for every $1.00 that EBITDA is discovered to be overstated.
  • Whether under- or overstated, if you and the potential buyer cannot agree on what the accurate adjusted EBITDA is, it will be hard to reach agreement on other important figures, undermining your chance to sell the business at all.

When owners do not accurately know their company’s adjusted EBITDA, one more problem commonly occurs. If a potential buyer unexpectedly comes knocking on your door via an unsolicited email or phone call inquiring if you wish to sell, you should not share any financial data before you can produce an accurate adjusted EBITDA. Prematurely sharing inaccurate or non-adjusted EBITDA figures gets the process with this potential buyer off on the wrong foot from the very first step.

Knowing your adjusted EBITDA in advance is fundamental to a successful sale. At NAVIX, our clients know their adjusted EBITDA, as well as other key financial figures and metrics needed to prepare a company for sale to an outside buyer. To learn what it takes to prepare your company for sale, and to help you get ready for exit, contact us for a complimentary, confidential 45-minute consultation with one of our NAVIX independent Consultants.

 

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To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Friday, June 1st, 2018

Five Reasons Why “Letting My Management Team Run the Company” is Not an Exit Strategy

We occasionally hear business owners say something like, “My exit strategy is to hire a great management team to run the company, so I can step back and just collect a check.”

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Hiring quality leaders for your business is always desirable. Yet, this tactic on its own will not produce a successful and happy exit for these five reasons:

1.Even with highly capable leaders running your company, you still own the company.A significant portion—perhaps the majority—of your wealth remains locked inside the business. At some point you likely will want to access some or all of your capital tied up in the business. This requires an exit strategy.

2. Hiring excellent leaders may allow you to step out of the day-to-day operations of the company, freeing up a large portion of your time — but only a portion.Total absentee ownership is a fantasy. You will need to continue supervising the team’s performance, reviewing business plans and budgets, and approving major decisions. Reducing your involvement in day-to-day operations may help you pursue other interests, but you remain closely tied to your company.

3. In the real world, things change.At some point the management team that you hired to run the company will change, pulling you back into the company’s operations. If a key leader retires, dies, or quits, you will need to identify and hire a replacement. You might also have to temporarily fill in for the missing leader until the replacement has been hired and trained. Or, if a key leader has subpar job performance, you have to do the work of supervising that person more closely and perhaps terminating him or her. In our experience, losing just one key leader from a carefully-built team makes it frustratingly clear to the owner that you have not exited from the company.

4. As long as you own the company, your risks remain unchanged.Many owners seek to reduce personal and financial risks as part of their exit planning. Even with an excellent leadership team in place, the business’s risks are still your risks. You still have to personally guarantee the business debts where required. If the business gets into financial, tax, human resources, or legal difficulties you are still impacted. Any significant capital expenditures are still your decision and risk. Your personal financial net worth remains highly concentrated within the company. Letting a management team run your company typically does little to reduce your personal and financial risk.

5. Even with a highly capable team running your company for you, at some point you will still need a plan for determining what ultimately happens to your ownership interest in the company.You have only punted the issue. Even if you do nothing until your death, your ownership in your company will still either pass to your heirs, be sold, or be shut down. You still have important goals and objectives to plan and execute.

Hiring a competent leadership team is never a bad idea. A quality team not only drives business success but also creates exit planning flexibility and opens up additional paths for your exit. It allows you to delay exit if you wish. Moreover, a quality team usually increases company value at sale or, if passing the business to your children, provides for a smoother transition. Competent leadership teams help business owners achieve successful exits.

However, hiring the team and sitting back to collect a check is not an exit strategy. You are still an owner with all of the responsibilities, burdens, and challenges that ownership entails. Therefore, you still need an exit plan beyond a highly skilled management team.

 

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To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Friday, May 25th, 2018

Announcing Our New eBook: Your Last Five Years

5 years pad

We are pleased to announce the publication of our newest eBook, “Your Last Five Years: How the Final 60 Months Will Make or Break Your Exit Success.” This complimentary eBook expands upon our widely-watched webinar of the same title and covers:

  • Why business owners must begin planning their exit five years prior to their desired exit date
  • The most important questions to formulate an effective exit plan
  • Step-by-step guidance on how to get started

Click here to download this eBook now. At NAVIX, our sole focus is helping business owners plan for and achieve happy and successful exits.

 

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To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Friday, May 18th, 2018

Six Misconceptions About Business Valuations

When do you need to get a business valuation?
Many exit planning books, websites, and advisors recommend getting a business valuation as one of the first steps in exit planning, if not the very first step. At NAVIX, we disagree. While business valuations are a critically important tool in certain situations, business owners should not rush into getting a valuation without careful consideration. The following six misconceptions explain why.

 

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Misconception #1
A business valuation reveals what your company will be worth at sale.

Unfortunately, the only way to know what your company is worth at sale is to enter the market and see what potential buyers are willing to pay for it. While an appraisal by a valuation professional might produce a figure that is close to what some buyers might pay, not all buyers are the same. Buyers have different needs, interests, resources, and potential synergies. This is why it is not unusual to receive a wide range of offer prices when multiple buyers are bidding on the same company. A business valuation cannot anticipate every buyer’s motives and therefore cannot be expected to forecast a company’s final selling price.

Misconception #2
Business owners should get a business valuation at the beginning of their exit planning.

Getting a valuation at the start of one’s exit planning is unnecessary most of the time and might even be potentially harmful. At the start of your exit planning, you might not yet know if you need your valuation to aim high or low. What a business is worth is in part subjective. If you ultimately decide to pursue selling your business to an outside buyer, you hope and aim for a high potential price. But what if you decide to give the business to your children? If that proves to be your exit strategy, you will want an appraisal to aim for the lowest reasonable company value. To further complicate matters, if your exit strategy is to sell to an inside buyer (one or more employees), then depending on the circumstances the desired value could be high or low. Even if you believe that you know your exit strategy at the start, it’s not uncommon for owners to later change their exit strategy once they dig deeper into the exit planning process.

Getting a valuation right at the start of your exit planning is usually premature. You may waste time and money getting a valuation that aims in the wrong direction, and unfortunately once acquired, you cannot make the valuation just go away. Somebody, such as the IRS, may later ask to see that valuation and you might regret what it says.

Misconception #3
Having a business valuation will help you negotiate a higher price.

If, while attempting to sell your company, you find yourself negotiating with a buyer whose offer price is lower than your liking, you could try to get the potential buyer to increase its offer price by producing a third-party valuation that assigns a higher value than the initial offer. However, this tactic is unlikely to create much leverage for you. Most buyers will feel little pressure to raise their purchase price because the valuation comes from a third-party without a vested interest. A superior way to create leverage is to have multiple buyers competing to acquire your company, so that a bidding war ensues. Competition maximizes your leverage.

Misconception #4
Business valuations used for one purpose can be relied upon for another purpose.

Recently, a business owner whose company is partially owned by an ESOP (employee stock ownership plan) found himself in the midst of a divorce. ESOP companies are required by law to have an annual business valuation. This company’s most recent valuation calculated a total value of $10 million. The owner assumed that $10 million would be the value upon which his divorce would be settled. However, things became contentious and the divorcing couple ended up court. The divorce court ordered a new valuation, which came in at more than $30 million to the owner’s shock and dismay.

There are different methods to value a company, any one of which can produce a greatly different figure. For example, a privately-owned company’s value could be calculated based on its future earnings potential, its comparable market transactions, or its assets—or some combination of these three methods. Furthermore, valuations grow stale with time. A valuation done as recently as six months to a year earlier might be irrelevant if business or external conditions have changed. If a valuation was acquired for one purpose, it cannot be assumed that the valuation will be applicable or respected in other situations.

Misconception #5
Use a business valuation to keep score on how your company is performing.

We see this suggestion often. The idea is to get a valuation once a year (or sometimes even more often) to track and evaluate the company’s growth and the performance of its leadership team in particular. In fairness, publicly-traded companies are able to rely on this strategy because the stock market provides constant feedback on the company’s progress and value.

With privately-held companies, however, this tactic has two problems. First, as stated in Misconception #2 above, depending on your ultimate exit strategy you may later regret having on record those valuations stating the company is worth $XX amount. Second, in most situations this simply wastes money when a free alternative exists. All privately-held companies can and should track the key operational, sales, and financial metrics that drive healthy business growth. These metrics can be summarized on a dashboard to provide accurate and timely feedback on business progress and leadership team performance. This not only saves you the cost of a valuation but also provides leadership teams with an actionable tool for tracking performance.

Misconception #6
If a valuation is needed, you should hire the appraiser.

There are valid and important reasons to get a formal business valuation. Three of the more common reasons are:

  • It is required for regulatory compliance (such as with ESOPs).
  • You are doing important tax planning that requires establishing a business value.
  • You are seeking to minimize or resolve contention between interested parties such as spouses or business co-owners.

If facing one of these situations, getting a business valuation is prudent and usually necessary. However, do not hire the valuation professional on your own. Speak with your legal advisors first. It may be beneficial to have your attorney hire the valuation professional and receive the appraisal on your behalf. When having a valuation done, it’s impossible to predict the outcome. The final number may be what you expected, or it might come in significantly higher or lower than desired. If your attorney commissions the appraisal, the valuation’s findings may be protected by attorney-client confidentiality, meaning you will not have to disclose its results to an outside party. Again, it’s important to consult your attorney on these issues.

In summary, business valuations are an important tool in the exit planning process but should not be your first step. Before getting a valuation, owners should clearly define their exit goals and plans. Then, owners can work with their tax, legal, and exit advisors to determine if a valuation is needed and the best course of action to follow.

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To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Thursday, May 10th, 2018

9 Reasons to Unplug for Two Weeks

If you are like many business owners, you love what you do. The steady stream of challenges and rewards that come with successfully leading and growing your company are one of the best reasons to be an owner. Additionally, you probably are good at what you do. If you were away from the company for any significant length of time, the business might suffer without you. For these reasons, few owners schedule extended time away from the business. Why spend time away from the company, when it is something you enjoy and being away could undermine its growth?

 

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Of the few owners who take significant time away from their business, even fewer ever fully unplug while away. “Unplug” means avoiding all communications (phone, email, text, etc.) with employees, customers, suppliers, or other persons associated with the business. Modern technology ironically has made unplugging more difficult. Before the internet and smartphones, staying connected with the company while away required extra effort and work. Now, disconnecting from the company while away requires extra effort and work.

Put this together, and it’s easy to see why most owners rarely schedule two weeks or longer away from the company, and fully unplug during that time. Unfortunately, continuous connectedness and communication undermine exit success. To exit successfully, the company must be able to operate profitability and efficiently without the owner’s non-stop involvement. For example, if you intend to sell your company to an outside buyer, your buyer is unlikely to pay a premium price with a high portion of cash at closing if the company’s value is tied up in you. Likewise, if you intend for key employees or adult children to take over your company one day, they must demonstrate a track record of leading and growing the company without your involvement.

Listed below are nine advantages created when you periodically schedule at least two weeks fully unplugged and away from the company:

 

1.   Strengthen the Team
By stepping aside for at least two weeks, you force other leaders in the company to step up and handle other, higher responsibilities. This develops their skills and adds to their experience.

2.   Stress-Test the Organization
When you are away and not available to the company, its people and systems must operate without you. This tests how well these people and systems independently perform. Then, upon your return, you can address any weaknesses or limitations that may have been exposed.

3.   Uncover Unknown Strengths
Your absence may expose weaknesses, and it will also uncover hidden strengths. While you are unavailable, some people or systems may perform better than expected. These pleasant surprises present new strengths and opportunities within the company that you might not have discovered had you never unplugged.

4.   Wean Important Relationships Off You
Your future exit will be difficult or impossible if important relationships such as top customers, lenders, or suppliers expect you always to be available. Periodically unplugging creates manageable opportunities for these relationships to interact with the company without you, potentially boosting confidence in the broader company beyond you.

5.   Strengthen Morale
By giving other leaders in the company a chance to step up and perform, you are demonstrating a tangible amount of trust in them. If they perform well, overall team morale and confidence rises. (If they don’t perform well, you now have an immediate and specific opportunity to coach and develop them—see #2 above.)

6.   Sell for a Higher Price
If you intend to sell the company at exit, then a business that can operate and grow without you is a more valuable business to most buyers.

7.   Get More Cash at Closing 
Buyers are willing to pay a larger portion of the purchase price in cash when they see less risk. A company that has a track record of operating without your constant involvement is a less risky acquisition.

8.   Smoother Transition at Your Exit
If your company has learned how to operate without your ongoing presence, likely there will be less stress, drama, and anxiety associated with the transition to new owners and/or leaders when you eventually exit.

9. Prepare You for Life After Exit
One of the biggest challenges owners face in life after exit is finding activities and interests that provide meaningful involvement once your role in the company is reduced or ended. Periodically unplugging from the company creates time to investigate and test-drive your ideas for activities and interests after exit.
 
Now that you are (hopefully) convinced of the need to unplug from the company periodically, consider these tips and best practices:

  • Do not surprise your team, especially if doing this for the first time. Tell them several months in advance what you intend to do and why. You do not have to discuss your exit plans if you are unready to discuss that topic. Focus on the individual and team development opportunities created by your temporary absence.
  • Unplug for at least two weeks. Anything less is too short to gain any real insights or benefits. (Thirty days is even better than two weeks.)
  • Designate decision-making authority and responsibilities in your absence. This includes appropriately managing your email inbox. You cannot come back to find dozens or hundreds of unread and unanswered email messages.
  • Define what would qualify as a severe crisis that would require the team to reach out and contact you. Set the bar high—a crisis must be a serious emergency.
  • Schedule meetings with your leaders immediately upon your return, to discuss and debrief.
  • Consider doing this several times per year to build upon and accelerate the benefits.
  • Develop a plan for how you will spend this time. You should note that this article has not used the word “vacation” at any point until now. There is nothing wrong with taking a two-week vacation. But many owners do not want that much downtime. An alternative would be to design a schedule of productive activities while remaining unplugged. Examples include: reading several business books, attending an industry conference, or researching new markets or products.

To further help you reduce your company’s dependency on you, download our free tool, the NAVIX Owner Independency Audit. Then, consider meeting with a NAVIX Consultant for an in-depth assessment of your overall exit readiness.

To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Tuesday, May 8th, 2018

The Home Front: Preparing Business Owners and Their Spouses for Success and Happiness After Exit

Register for our next webinar:

 

PU Presenter

The Home Front: Preparing Business Owners and Their Spouses for Success and Happiness After Exit

May 22, 2018 @ 2PM – 3PM EST

Exiting from a business creates change, both at work and at home. It changes routines. It redraws financial pictures. It reshapes social circles. Exit changes how we see ourselves, and our life goals. Unprepared couples may experience uncertainty, unease, and stress—no matter how financially rewarding the exit may be. When one spouse is not actively involved in the business, that person feels like an outsider, watching a life-changing event play out with little input. And, since most owners exit only once, neither partner in the relationship knows what conversations to have, and how to get started.

This webinar is the place to start. Business owners (and their spouses) who attend will learn:

  • What are the key issues couples will likely face at exit and afterward
  • How to prepare for exit’s impact at home: financial, family, lifestyles, and routines
  • Exercises and tools to help couples achieve happy exits

 

Register

 

To discuss your unique business, and how to plan for and achieve a successful exit, Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.

Thursday, May 3rd, 2018

7 Mistakes Business Owners Should Avoid When Discussing their Future Exit with Employees

Business owners often struggle with how to talk with their employees about their future exit. Most owners want to be straight with their team but talking about exit feels taboo. As one owner said, his exit plans felt like “a dirty little secret” that he regretted keeping from his team. To some degree, that sentiment is common. Yet, having exit goals and plans is not dirty and should not be kept a secret.

7-mistakes

To approach this issue effectively, there are seven mistakes business owners should avoid when it comes to discussing their exit with their employees.

1. Not telling anybody in advance

Perhaps the most common mistake is not telling any of your employees until the moment of your exit. Owners who exit by selling the company to an outside buyer are most likely to make this mistake. Owners don’t tell any employees out of understandable fears: if employees learn about the sale of the company in advance, some employees may leave, morale may suffer, customers may learn and flee, or competitors may learn and take advantage of the situation.

While these are legitimate concerns, not telling anybody in advance is like throwing the baby out with the bathwater. By going it alone, owners make the process of preparing for exit much harder on themselves, because they have to do everything without help from within the organization. Keeping this information from employees also produces moments where you have to mislead people and perhaps even be downright dishonest. Finally, not telling anybody in advance only delays the inevitable; waiting to tell employees the news until the moment of your exit, a time when you want to minimize uncertainty and turmoil, produces the greatest shock to your people and company exactly when you need it the least. Ironically, not telling any employees only increases risk when your motives are to reduce it.

2. Telling everybody in advance

If not telling anybody in advance is a mistake, the other extreme of telling everybody in advance is also ill-advised. There are topics within a company that should not be openly discussed with every employee—compensation is a familiar example. Likewise, not all employees need to know your exit plans. Telling every employee maximizes the risk that the information will end up in the wrong hands at the wrong time, potentially leading to harm. Thankfully, most owners recognize this, and few make this mistake.

3. Not identifying your trusted co-leaders

If telling nobody is a mistake, and if telling everybody is a mistake, then there must be a subset of your employees that you should speak with in advance of your future exit. We call the group with whom to be forthright your “trusted co-leaders.” Let’s look at the meaning of this label. First comes trust. Any employee whom you do not trust should not be part of a conversation about your exit (and perhaps should not be part of your organization.) The second part of the label, “co-leaders,” refers to employees with whom you work closely and whom you rely upon to lead the company. Senior executives such as the CFO and COO (or their equivalents) come to mind. You may also have an employee lower on the organizational chart who needs to be part of this conversation, such as your executive assistant. It is this group of trusted co-leaders that you must brief on your exit plans. Without their support, exiting successfully will be harder and riskier, or may not occur at all.

4. Not telling your trusted co-leaders early enough

Once you identify the employees with whom you need to share your exit plans, the next question is when should you tell them? Many owners wait too late, most commonly telling these employees only a few months to perhaps a year before exit. The later you wait to discuss exit with your trusted co-leaders, the less time they have to help you get the company ready. The company likely has strategic issues you will need to address to maximize value and exit and ensure a smooth transition. If the trusted co-workers do not yet know about your exit plans, they cannot help address these needs. For example, if your business needs to reduce customer concentration to improve the potential sale price, your key employees may not feel any sense of urgency around this issue because they do not know you intend to sell the business within a given timeframe.

The later the trusted co-leaders learn about the sale, the less time they also have to get themselves ready. Your exit may create opportunities for these employees to take on greater leadership roles, either within your company after you exit or within the buyer’s company. Trusted co-leaders who don’t know exit is coming until shortly before it happens may miss the opportunity to sufficiently develop themselves in preparation for this opportunity.

There’s another reason why you should discuss this with your trusted co-leaders well before your intended exit. The more advanced notice you give them, the less unnerving the issue. As an exaggerated example, if you told your trusted co-leaders that you intend to exit “about twenty years from now,” not only would they not be alarmed, they would also likely wonder why you even bothered to mention anything at all. In our experience, five years before you wish to exit is the ideal time to give your trusted co-leaders a first indication of your intentions.

5. Not singing from the same song-sheet (multiple owners)

Within companies with multiple owners, avoid telling trusted co-leaders about the exit before the business partners are on the same page regarding their collective exit goals and plans. As soon as trusted co-leaders are told about a potential future exit, they will have questions. These questions commonly include: When? Who’s staying or leaving? If selling, what will the co-owners look for in a buyer? How will the exit impact the company’s team and culture? These are natural questions. If the non-owner employees hear different answers from different owners, that may undermine the very trust and transparency you are trying to foster. Business partners need to be sure they are in alignment and singing from the same song sheet on these important questions before talking to trusted co-leaders.

6. Predicting outcomes you cannot know nor control

Once owners initiate this conversation with trusted co-leaders, it is important to clearly stay within the boundaries of what is knowable and unknowable when talking about the future exit. There is much that owners cannot predict about their future exit; therefore, they should carefully avoid declarations they cannot guarantee. Owners, in a well-intended effort to minimize employee concerns, may claim, “We are not going to sell to a buyer that eliminates jobs” or “I am not going anywhere for a long time.” (In one real example, an outgoing owner once told all of his company’s employees that “everybody who works here will have a job here as long as they like,” leaving the new incoming owner sitting there knowing it would be impossible to honor that promise.)

Owners usually are not intentionally misleading people with these predictions and assurances. However, no owner has complete control over his or her exit. Exiting involves turning things over to a buyer and/or new leaders who may feel or act differently than the current owners. No owner can predict when a company will sell, for how much, under what terms, and to whom. The best an owner can do is to be truthful, which in these moments includes saying “I don’t know” and “we will do our best” when necessary.

7. Not turning the dial to WIIFM

The last mistake to avoid is failing to remember that each of us, as the saying goes, is tuned in to our favorite radio station—WIIFM: What’s In It For Me. Your trusted co-leader employees are not being selfish or poor team players when they ask reasonable questions about how your future exit impacts them, especially if they have little to no equity.

It’s easier to answer this question than many owners initially believe. There usually are genuine potential benefits for employees when the owner exits. At the top of the list is new career opportunities, especially if your company is sold to a larger company. The acquiring company may offer expansive new career paths to ambitious employees. Bigger companies may also have attractive benefits and compensation programs, training and development resources, and a welcoming culture. In the absence of precise and clear information, many people assume the worst. Current owners have to work to make sure that trusted co-leaders don’t jump to negative conclusions about the future exit. Rather, emphasize that the exit may bring exciting new futures for the team.

An additional tactic to add to the WIIFM broadcast is to design incentive compensation programs that offer financial rewards for top employees at your exit, assuming they perform well and stay with the company. These programs provide the full economic win-win at exit that many owners seek to provide their employees without giving employees actual ownership. We refer to these programs as golden handcuffs plans. To learn more, watch our webinar Putting Golden Handcuffs on Key Employees.

Transparency, openness, and team-alignment are values essential to any company’s sustained success. Not talking with top employees about exit undermines these values. Avoiding these seven mistakes helps owners effectively have this conversation with the right people, at the right time, and in the right way.

 

Call 772-210-4499  or email Tim to schedule a confidential, complimentary consultation.