Announcing Our New eBook: Your Last Five Years

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.

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.

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.

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.

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.

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?

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.

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

Register for our next webinar:

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.

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.

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.