November 15, 2024 • 40 mins
Most business owners have over 80% of their wealth tied up in their business, yet few are fully prepared to unlock that wealth when it’s time to exit.
In this episode, Jim McGovern dives into the transformative world of exit planning, emphasizing how smart planning today can position an owner to maximize and harvest their business’s value later.
With 75% of business owners aiming to exit in the next decade, understanding the essence of exit planning is critical. It’s not a task to save for the future—it’s a strategic approach you can use now to build, protect, and secure your business’s value on your terms.
Jim discusses:
Why exit planning and business strategy go hand in hand
The 5 stages of value maturity: Identify, Protect, Build, Harvest and Manage
Guarding against the “Five D’s” that threaten business value: Death, Disability, Divorce, Distress, Disagreement
Building Value and Business Attractiveness through your “4 C’s”
Why aligning personal, financial and business readiness is essential for a smooth exit.
And more!
Resources:
Episode 29: Retaining Key Employees with Non-Qualified Retirement Plans
Episode 21: Employee Stock Ownership Plans
Connect with McGovern Wealth Group:
jmcgovern@mcgovernwealth.com
info@mcgovernwealth.com
Schedule A Meeting
McGovern Wealth Group
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Facebook: Jim McGovern
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:06):
Welcome to the Maximizing Outcomes podcast,
brought to you by Jim McGovern and the
McGovern Wealth
Group. Achieving bigger and better results with money,
family, and business isn't about creating a bigger
to do list for yourself.
It's about who can help you create results
without you having to do all the work.
Listen as we provide uncommon perspectives,
(00:28):
powerful resources, and experienced people that can help
you maximize outcomes in your life.
Let's get to the show.
If you're a business owner,
odds are that nearly 80% of your wealth
is locked inside your business.
You know, most owners are unprepared when it's
time to harvest that wealth and exit the
(00:49):
business.
So today, we'll discuss how exit planning isn't
just about stepping away. It's about unlocking the
full potential of your business and building something
that can thrive without you. I'm Patrice Sikora,
and this is the Maximizing Outcomes podcast with
Jim McGovern.
Jim, with 75% of business owners aiming to
(01:10):
exit within the next 10 years, why is
having a plan in place so crucial?
It's a great question, Patrice. And it's it's
kind of a shocking number when you think
about it, that 75%
of owners plan to exit in 10 years.
It's a lot of businesses. It's a lot
of money in motion.
And and the big thing about exit planning
is that it is really crucial for owners,
(01:31):
and yet it's often mistaken for something that
a business owner does much later when they
feel like they're really ready to sell this
company or when they're ready to transition it
to
family members or key people in the in
the company. But the reality is
everybody listening in and owns a business. I
want you to think about exit planning as
a value management
(01:52):
system. So it's something that you focus on
today
to grow the value of the business and
drive income from the business.
And it it should be integrating
with the business owner's objectives.
It should be integrating with their personal and
financial objectives. So when it it does become
time to exit the company,
the owner is gonna have a lot of
(02:12):
options to harvest that wealth that's locked up
in the business
and maximize that
wealth as it transitions from the business to
their personal balance sheet, but they're able to
do it
on their timeline and on their terms.
So today, we're gonna be talking about what
exit planning is, but I also wanna talk
about exit planning is not.
I'm gonna talk about the process
(02:33):
of value acceleration
in the company
and why owners have to be not just
personally prepared
to exit the company, but they have to
be emotionally prepared exit the company. And the
business itself has to be ready for that
transition. So lots to talk about today. That
is a lot. That is a lot. So
let's start with what exit planning is. We'll
get to is not after this, but what
(02:54):
is it? Because I think there are some
real misperceptions with the name here. So in
your words, what exit planning what what is
exit planning, and why do so many business
owners misunderstand it?
So, yeah, I think that the word exit
itself, it sounds like it it's a moment
in time, and I'm not ready to exit
right now. You know, maybe it's it's 5
years, maybe it's 10 years, maybe it's 20
(03:16):
years from now.
So I think the thought is, like, that's
something that's on my to do list. I'll
get to that at the very end. But
in reality, I want you to think about
exit planning
as an ongoing process.
It's something that is it is really about
building the company.
It's about protecting
the company's value and the cash flow it
produces and positioning it so that you could
(03:36):
harvest that business value whenever you are ready,
which, again, may not be for for quite
some time.
So when this is done properly, like I
said earlier, it's gonna align the owner's personal
financial and business goals.
It's going to create
a way for the business to be,
transferable.
Right? Because that value, it only means something
if they can really be transferred to somebody
(03:57):
else and that company can continue to thrive
and succeed without the current owner.
And it also has to prepare the business
and the owner for all sorts of unexpected
life events and business events.
And this is not a complete list, but
there's some things we call the 5 d's.
And this is what happens if there's a
disability? What happens if there's a death? What
if there's a divorce?
(04:18):
What if there's distress either in the company
or in the business owner's personal life? What
if there's disagreements?
So it's not just about
growing the value. We have to protect the
value.
And ultimately,
it's about increasing
the business's
attractiveness
and the readiness for an ultimate exit, which
again could be a sale, but it could
also be transitioning it to employees or to
(04:40):
family members. So there's a there's a lot
that goes into exit plan, but it's it's
an ongoing process that really should be starting
today.
Alright. So that's what exit planning is.
What is it not?
So it's not about just selling the company
and stepping away all of a sudden. In
fact, I think it's it's more challenging when
somebody comes to us and and they say,
I'm ready to exit the company, like, right
(05:01):
this minute.
What's worse is when somebody says I have
to exit the company right now. There's been
a major health event. There's been some circumstance
in life that I have to get out
of this thing right away.
You know, it's like blood in the water.
The sharks smell it, and they're gonna you're
you're probably gonna get far less for that
company than you could have had you prepared
ahead of time.
(05:21):
So it's also it's not something that you
do just when you're ready to retire. There's
a lot of owners that we meet that
are saying I'm gonna retire in a year
or 2, and I need this value for
my company to go to my personal balance
sheet so I can retire. Again, your options
are gonna be a lot more limited if
you wait till that late in the game.
And the other thing is this is not
limited to just a a transaction.
It's you gotta take a holistic look at
(05:44):
this because there's a lot of your life
that's tied up in that business. It's what
you put your blood, sweat, and tears into
for many, many years. It's a big part
of who you are. So you have to
also start to think about,
what am I gonna do next? What's the
next chapter of my life gonna look like?
And what am I gonna do when I
don't have this company? Am I ready for
that? So it's, you know, it's not a
transaction. It's about getting your personal life, your
(06:06):
financial life, and your business life all on
the same page and and positioning you for
long term success.
No. I think a lot of people don't
understand how much importance that is, that has
the emotional aspect of it. It's your identity.
It's who you are. That's right. Yeah. Any
other big misconceptions here that, we need to
touch on?
Yeah. The only other thing I wanna add
(06:27):
to it is it's just I think ownership
really the thing about exit planning is just
good solid business strategy.
So for example, if you if you had
a way to improve the cash flow of
your business,
when would you want that to happen? Would
you wanna wait 10 years for that, or
do you wanna do that right now?
Yeah. I think every owner listening would say,
(06:47):
yeah. If there's a way to improve the
cash flow of my business. I'm gonna do
it right now.
Same thing if it's the the value of
the company. If you could get a much
larger multiple for that business, when do you
wanna see that become possible, today or in
20 years? We wanna see that now. So
that's exit planning. It's it's business strategy. It's
it's value management. In fact, if someone's taking
notes out there, I think that's something you
(07:08):
should write down that exit planning is more
about value management than anything else.
Alright. Now you did mention the 5 d's
as you call them, death, disability, divorce, distress,
disagreement.
How
does exit planning
mitigate these risks?
So, yeah, this is this is super, super
important because
(07:28):
there's a lot that's at stake with the
company, and there's a lot of an owner's
net worth that's typically tied up in the
business.
And you have to have good solid risk
management, which we're gonna spend more time on
a little bit later, but,
you know, these are things that can happen
without any warning,
but any notice.
You could wake up one day and have
a massive health issue that came up out
of nowhere,
and that could really put a dent in
(07:49):
the company. So when we talk about these,
these 5 d's, again, or death, disability, divorce,
distress, disagreement. You have to have
good, solid insurance planning, both in the company
and in your personal life.
You have to have good legal documentation,
whether it's business agreements, whether it's good estate
planning, wills and trusts.
(08:09):
You have to have documented processes in the
company.
You yourself or one of your key people
could go down at any moment, and who's
gonna step into their shoes and continue on
in a smooth fashion
to fill that role? What about retention planning?
Making sure that your very best people can
stick around through some of these
5 d's or other issues that pop up
in the company.
(08:31):
So it's,
it's really hard to get into growing the
company and pouring a lot of additional money
into the company to to get it to
scale,
if it could all be taken down. And
that value could disappear overnight because these these
risks weren't addressed ahead of time. Right.
Alright. Here, your your shift in our mindset
here, exit planning is smart business strategy.
(08:51):
It's about value management.
So walk us through the value acceleration
process that your team uses.
So there's there's really 5 stages to the
value maturity of a company.
And where every company really should start
is
just the very first step, which is identify,
and that is conducting a business valuation
(09:14):
at the starting point.
So, in fact, let me just give you
all 5 stages first, and we'll talk about
each one individually. So step 1 is to
identify. Step 2 is to protect.
Step 3 is to build that company's value.
Step 4 is to harvest the wealth that
you've created in the business, and step 5
is to manage that wealth. So if we
go back to that step 1, like I
(09:34):
was saying, is that, you know, you really
need to measure what is this company worth
right now. That's our starting point.
And I would say with most owners we
work with, they may see somewhere between 80
to 90% of their net worth is locked
up in the value of this company.
So it's not just essential to know what
that wealth is right now,
but you should be doing valuations every year
(09:56):
to measure the progress. So the strategy you
are deploying, is it having an having an
impact or not?
The other part of this is with valuations.
A lot of times, owners look at the
valuation. They just kinda check the box. Okay.
That's the number. Mhmm. There's a lot of
hidden value in the business.
So one important thing to remember is that
all businesses have a range of value
(10:17):
based on that company's individual characteristics, based on
the industry that they're in. And the shocking
thing is is that
a lot of businesses cannot sell.
And I've heard stats that it's somewhere around
7 of 10 businesses that try to sell
can't sell. So that means it doesn't matter
what the valuation said. There's no real market
value.
There's nobody willing to transact with you to
(10:38):
write you a check for that company, which
is scary, because a lot of times owners
think that, well, that's my retirement plan. I'm
gonna sell this company someday, and that's what
I'm gonna have to ride off into the
sunset. And it doesn't always work out
that way. So the other thing I I
want people to think about with with this
hidden value that's in the company
is that, you know, all companies are gonna
sell for some range of multiple of earnings.
(11:01):
So where there's some hidden value is that
let's just take an example of a of
a company
that has annual sales of $20,000,000,
and maybe they have $2,000,000
of EBITDA.
So that's earning before his earnings before interest,
depreciation,
and amortization.
Mhmm. Not to get into the accounting world.
I'm not an accountant. I'm not gonna get
into all that.
(11:22):
But you have a company with 20,000,000 of
sales, $2,000,000 of EBITDA,
and maybe it could sell for 4 times
EBITDA. So that means that the value of
the business might be $8,000,000.
So what would happen
if the company was able to operate as
best in class in the industry?
Well, maybe they could take their $2,000,000 of
EBITDA, and they could work on getting up
(11:43):
close to $4,000,000 of EBITDA.
And what if the company could be positioned
where it's best in class in the industry,
and it
it it can command a multiple that's maybe
7 times EBITDA?
Just those two changes, taking EBITDA from 2,000,000
to 4
and getting the EBITDA from 4,000,000 I'm sorry,
from 4
times to to 7 times
(12:05):
means that that valuation could go from an
$8,000,000
value to $28,000,000.
So there's a value gap here of potentially
$20,000,000
in this example.
That's what I was really referring to is
this this hidden value in the company is
that you look at some of the efficiencies
that could be gained with proper planning, and
it could be a staggering difference
between
the result you would get without
(12:27):
proper planning and what you could get with
proper planning. So there's a lot that goes
into that that step number 1 of, of
identify. It's not super complicated, but it starts
to get the wheels turning on what the
potential for this company is.
And I should think that gets a lot
of owners'
attention.
Makes people excited. Yeah. Jump out of bed
in the morning. You know, if I can
get this thing from 8 to 28,000,000, I
mean, that's that's real money. At least where
(12:48):
I'm from, from Pittsburgh. It's real money in
Pittsburgh.
Alright. Step 2, protect.
So step 2 is all about mitigating risks.
It's about safeguarding the existing value in the
company. So before you grow and you scale,
you've gotta make sure that the current cash
flow the business is bringing in, continues under
as many circumstances as humanly possible,
(13:08):
which in turn helps protect that business value.
So you have to look at 2 balance
sheets side by side. You have to look
at your personal balance sheet and think about
what risk do you face over there. You
have to look at the business balance sheet,
figure out what risk you face in the
in the company, and protect against it. So,
again, this is where your insurance planning comes
into into the picture. This is where your
legal documents come into the picture. And, and
(13:30):
this is a bit of a team sport.
You know? So it's it's working with your
attorney, both your corporate attorney and your personal
attorney, to make sure everything from your estate
plan to your buy sell agreement to,
how you protect your your intellectual capital,
you know, what kind of agreements you have
with your employees. Like, there's a lot to
to really lock down and make sure that
you've you've looked at this risk management holistically.
(13:52):
Even things like just financial risks. Like, how
much liquidity
do you have currently, and how much do
you need
if, you know, things get a little bit
haywire in your personal life or your business
life? What about risks with loans that you've
taken? What about market risk? So there's a
lot that goes into this step.
And, you know, when I'm going through this,
there could be a feeling that it's getting
(14:12):
overwhelming. It doesn't mean you have to do
all these steps at once.
You know, it might be that you start
off with just the identity step, which is
not a really long exercise,
and then you just work on protecting things.
And you may be taking a little bit
of a break.
Right? Then we may get into step 3
a little bit later, which is the build
step. But Mhmm. You know, these are just
building blocks in in this this overall exit
(14:33):
planning process.
Well, how long does this take?
So this is a question we get often.
It's not like it's a
an initial project that we just do one
time when we're done. It's really an ongoing
thing that never really ends. You may not
have to go back and revisit all these
steps all the time. Like, the protection step,
if you did it correctly,
that may be a quick annual checkup
(14:54):
unless there's some some new things that have
popped up that warrants some additional time. But
if you'd if you'd done the protection side
correctly, it tends to stand the test of
time unless there's massive changes.
And that allows you to put more time
and effort into the 3rd step, which is
all about building the company value. Mhmm.
But, again, this is where you can't put
the cart before the horse. I mean, if
(15:15):
you're gonna build
the value of the company, you may have
to spend a lot of money.
You may be borrowing a lot of money
because you're trying to grow. You're trying to
hire new people.
You may be investing in new technology, new
equipment. You may be expanding territories. There's a
lot that you might be risking
in that build step. And if you haven't
protected first, I mean, you're you're taking super
high risk,
(15:36):
and you could be wiped out pretty quickly.
So when you look at the value of
a business, it's about 80% of the values
tied up in 4 intangible capitals. It's we
call the 4 c's. This is your human
capital.
It's your structural capital. It's your customer capital
and the social capital. I'm gonna define what
all those mean here in just a couple
minutes, but,
you know, that's that's where all the the
(15:56):
money's tied up in most companies. It's it's
really the people
and and what you do about your customer
base and what you do about your your
best employees. I mean, that that's really what's
gonna help drive all this. And, again, you
may be taking some risks to really scale
and grow. And if you haven't protected, it
it could be a could be a pretty
rocky road.
Alright.
So identify,
protect,
(16:17):
build,
and then the fun starts, harvest. And the
fun starts, harvest. Right? So it could be
that you're not even thinking of exiting the
company right now. You're just trying to build
a better business.
But you should have checkpoints,
whether this is, you know, once a year,
maybe it's once every 6 months. You just
start to take a step back and say,
am I ready to exit?
(16:39):
Am I personally ready? Is the business ready?
It's probably gonna be the answer is gonna
be no for quite a while.
But as you start to say, yeah, the
company is we're starting to get to a
point where it it can run itself.
It doesn't depend on me as the owner
as much anymore. Maybe it doesn't depend on
you at all.
Then you start to shift your thinking on
how do you wanna harvest this wealth. Is
(16:59):
this something where you're gonna keep this business
forever?
And maybe you're just gonna hire professional management.
You're gonna hire a CEO and a CFO
and a COO, and they're really gonna run
the company. You still own it,
but you're not in there day to day
anymore.
And that may be a company that can
transition,
you know, for many generations.
Or it could be, no. You want to
(17:21):
really get out of the company. You wanted
to sell it. Maybe you wanna sell it
to a third party. Well, is that gonna
look like you're selling to a private equity
firm? Is that gonna be you're selling to
a strategic buyer?
That's a very different exit than somebody who
wants to sell the company or transition the
company to those inside the business.
So it could be, you know, maybe I
wanna gift this company to my children someday.
(17:44):
Maybe I wanna sell it to my children.
Maybe I have I have key management in
the business that really
are prepared and positioned to buy me out
someday. Well, what does that deal look like?
Should we sell to all employees via an
employee stock ownership plan, which is a very
powerful plan? In fact, we did an episode
I think it was around episode 17 or
18 we did on on,
ESOPs is what they're called for short.
(18:06):
Very, very powerful exit strategy, very tax advantaged,
but, again, very, very different than selling to
a third party.
So
this harvest stage is where you start to
look at what's what's in the best interest
of me as the owner, what's best for
the culture of this company moving forward, the
the employees that have been loyal to me
all these years
in my family, and and starting to to
(18:27):
kinda whittle down to what are the maybe
the 2 or 3 best options
that are gonna fit what you're what you're
trying to do.
And you have to be prepared because sometimes
the door you think you're about to walk
through closes,
and you better be prepared to walk through
a different door. Like, I've I've had many
owners over the years that thought that they
were just gonna transition the company to their
kids.
(18:47):
And then when they actually talk to the
kids about it, they learn that the kids
don't want the business.
Yeah.
And they don't want them to buy the
company or, you know, take it over out
of loyalty.
And, but meanwhile, they're miserable as adults. They
don't wanna be in this company.
The other thing I've seen happen with that
is that I've seen parents that didn't really
(19:08):
plan financially outside of the business.
And they now have the kids running the
company, and they're paying the kids very little
in terms of salaries because the parents are
still, you know, extracting all the revenue out
of that company to support their lifestyle.
And the kids are watching their adult lives
pass them by.
They, at one point, may have been making
(19:29):
a decent living,
but it hasn't grown in many, many years.
Now they have their own cash flow pressures
at home, and it's all because the parents
are still trying to hang on the company
because they're they're afraid they're gonna run out
someday.
So it it can be rough. Right? So
you you've gotta plan ahead, and you have
to start to think through multiple exit options.
And and like I said earlier, this is
a team sport. So we oftentimes will serve
(19:51):
as the quarterback for a lot of these
conversations, but
it does take other people, like getting your
accountant involved, getting your attorney involved,
you know, being able to bring in somebody
who's an expert in getting into the weeds
of the company
in terms of, you know, how do you
really drive the value and how do we
get the people to to perform and working
on some of the culture of the business.
So there's some there's people that are that
(20:12):
are trained experts in that area, and there's
also some transaction advisers. You know, if you're
gonna evaluate an ESOP as an option, well,
we may need to do a feasibility study
to see if that's even gonna be possible.
Mhmm.
If you're gonna sell to private equity, well,
let's start to look at some transaction advisors
and some investment bankers that can come in
and be part of this process proactively.
So that that harvest stuff, it is fun,
(20:34):
but that's also where a lot of the
lot of the the work gets done in
the number crunching and figuring out, like, how
we're really gonna do this. Sounds like some
hard decisions get made then.
It it's hard decisions, but it it's easier
when the company has been positioned correctly. You
know, if you look at the company and
you say, wow. Our our four c's,
our intangible capitals, are all are all great.
We're gonna spend a few more minutes on
(20:54):
that, in just a second.
And it might be okay. Well, now it's
realistic. Now we we are operating best in
class. Our revenues are way up. Our customer
base is more diverse. Our our key people
are incentivized to keep growing this.
And now you start to look at, okay,
well, is a third party sale really the
way we wanna go? Well, if that's the
case, the company is in pretty good position.
Let's bring in an expert that can that
(21:16):
can take this company to market. Mhmm.
Alright. Does this all come into the final
stage here of the final of the process
here, manage
the 5 stages?
So this is managing all the wealth that
you've extracted post exit,
making sure that
whatever the next chapter of life looks like,
the last thing you have to worry about
is the money side of it. So maybe
(21:36):
it's you're gonna sell the company, and you're
gonna retire right after in the sunset. That's
great.
How much money is it gonna take in
order to give you that level of financial
freedom?
What are the risks that you face? How
do you manage that wealth? How do you
manage taxes, cash flows? And just making sure
that you have long term financial security.
The other side is that some business owners,
that's the last thing they wanna do. That
(21:57):
that sounds like cruel, unusual punishment to them
to retire. They're they're so active, and they've
all they're always thinking.
To them, it's just I'm exiting this company
because I'm gonna go into something different. I'm
gonna maybe start another company,
or maybe I'm gonna get more involved in
charity or whatever it is. That's fine.
I think just you have to have a
clear path as to what you're gonna do
because one of the worst things that we've
(22:18):
seen happen is
owners are so focused on getting this company
to this point.
They've never thought about their life after the
exit, and then we hear that they are
bored out of their minds.
Yeah. Yeah. There's only so much golf you
can play. You know, there's only so much
you can do that's it sounds fun. It's
like, what do you mean there's only so
much golf I could play? But when every
(22:39):
day looks exactly the same and you kinda
lose that compass and you lose that that
passion
and that direction,
that's where owners are like. That it's the
biggest regret that I've I've had. I should've
never I should've never sold this company. I
should've kept it. That kept me going and
kept me active and kept me motivated. Now
I'm just kinda floundering.
So you really gotta start to think through
not just the how do you manage the
wealth, but how do you manage your life?
(23:00):
And it's, it's a big part you should
discover before you before you exit that company.
Alright. And it all goes into being a
human being, which brings us to the next,
question here. You're you're talking about the capitals,
the intangible capitals. Got that. People. People is
the big thing here.
They they are the most important part of
a business,
but you can't you can't price a person.
(23:22):
I mean, it's they're not a piece of
equipment. They're not a building.
So how do you talk about the people
side?
What impact how does that impact the company
value?
So this is like I said earlier, this
is 80 to sometimes 90%
of the value of the company is tied
up in people. Right. So just let's talk
about the people in the business for a
minute. This is your your human capital. This
(23:44):
is the value of your team. This is
the value of your leadership.
And one of the biggest challenges that we
see
owners facing is it's really tough to find
top talent.
You know, it's it's hard to find really
good people that can perform really, really well.
So it's it's about recruiting those key people.
It's about motivating them.
(24:05):
It's about making sure that they stay with
you through especially a transition,
and they can help evolve
as as you evolve, as the company evolves.
So,
you know, there's there's some art and some
science to this.
You know, one thing that that owners can
do is start to look
at what's the measurable impact that my key
people have on my bottom line,
(24:27):
and what can I do to help them
drive that bottom line? That's not just good
for the company. It's good for the company
cash flow. That also helps drive the value
of the business. But if they can be
incentivized to stick around for the long haul,
it also makes the company a lot more
attractive to an outsider that may be coming
in to buy the business someday. If I'm
afraid that I buy your company and your
(24:47):
very best talent, which are responsible for most
of your revenue, are all gone the next
day, what am I buying? Yeah. You know?
So, in fact, we did an episode
about retention bonus planning and deferred compensation planning.
It's a really important part of the step.
It is that, you know, I've I've gotta
keep my best people
engaged because they're gonna help me grow the
(25:08):
value of this thing.
And and there's some unique plans out there
that are tailored towards executives or towards
just key performing people that, will will do
the job.
A lot of times, these deals finance themselves
because if the employee
performs,
perhaps there's significant
financial incentive for them to do that. But
(25:29):
if they don't perform, then they may not
get anything at all. Or if they quit
too soon,
then they may not get anything at all.
So we have some companies that have significant
packages they put in place for their very
top talent
that maybe they don't get anything out of
that until they've been with a company for
at least 10 years or 15 years.
But when that plan vests and they get
a big payout, they might be getting a
(25:50):
significant
chunk of money coming out to them
that is like a we call it a
golden handcuff. It's a kind of a carrot
that's dangling out in front of them. They
say, okay. If I do x, this is
what I'm gonna get later on. And it's
a very substantial benefit
for the right person that can be very
motivational.
But it also protects an owner because if
they don't perform, if they quit, they go
to a competitor,
then you may owe that employee nothing at
(26:11):
all.
So it it starts to align
the objectives of the business with the performance
of the employee,
and it goes well beyond the basic benefits
package that almost every employee gets every company.
So, that's I'll I'll put in the show
notes a link to that other episode. It's
a really, really critical part of this. But
that's just one type of of human of
(26:32):
of the the people capital you're talking about.
This is human capital inside of the company.
The other type of of people we have
to worry about is the customer capital.
What's the strength
and the loyalty of your customer base?
We see companies that have very loyal customers,
but it's a very concentrated customer base. Yeah.
Maybe 70% of their revenue is coming from
(26:54):
their top 3,
their their top three customers. That's a really
that's a really big red flag for a
potential buyer in most cases. They say, well,
what happens if we lose one of those
relationships?
And that that company's cash flow could tank
in an instant.
So And are they there are they loyal
to the company, or are they loyal to
the owner?
(27:15):
That's a great question. Because sometimes it's it's
very personality driven. They're loyal to the company,
but it's really that owner that's their golfing
buddy.
That's maybe a family member. There's there's many
relationships where it's like, well, if that person
goes, well, we're gonna take our business and
walk. That that's where we see companies in
many cases that can't sell.
But if there's relationships that are contractual
(27:36):
Mhmm. They're transferrable.
The customer base is very diversified.
And, yeah, you no one wants to lose
a customer, but there's some businesses where if
they lose a few, it's not gonna put
a dent into the bottom line.
Yeah. That might be more comfortable from a
buyer standpoint. So you have to think about
how how entangled are the customers with your
business. You know, the the tougher it is
(27:56):
to replace that business
or the more valuable those services and products
are that they maybe can't get anywhere else,
the more value the company is gonna be
in the eyes of a of a new
owner.
Now the next thing on the list here,
you have social capital. What do you mean
by that?
So this is the company's culture.
You know, this is the relationships with the
stakeholders, and this is what draws people to
(28:18):
the company. This is what,
not just draws employees, but also draws customers.
And this can take a long time to
build. So think about
think about a company
like Google, for example, that's pretty well known
for their their culture. Mhmm. You know, and
it's something where they've got I think Google
still has, like, all this amazing free food
(28:38):
when you go. They've got these little sleeping
pods. They've got ping pong tables and pool
tables. That's just part of their culture. It's
a it's a work hard, play hard kind
of a thing, but it's they kinda create
this family atmosphere, at least, like, what I've
heard from clients of ours that work at
Google.
That's a very different type of a culture
than perhaps a firm that's,
(28:59):
suit and tie.
It's, you're in the office early. You're staying
late. You're just grinding it out. That's just
a totally different culture.
And one's not right and one's not wrong.
They're just very different. But if I'm in
the tech space
and I'm looking at a company that, like
Google, has all these cool perks and all
this fun social stuff that goes on outside
of the office hours,
(29:20):
versus other company that does none of that,
I might be like, yeah. I'll just take
the job at Google.
You know?
So this is something that you just have
to look at. What makes the company unique,
not just for the people that work there,
but other stakeholders, customers. And and,
you know, how do you kinda bottle that
up?
How do you feel that? How do you
grow it? Is it where it needs to
be, or or should it be going in
(29:41):
a different direction?
But social capital, I think, is a little
bit underestimated in many cases, and it's a
really important part of this overall exit planning
process.
And and then you have structural capital.
So structural capital, this is the, unique processes
of the company,
the systems that they use, perhaps technology.
(30:02):
This is what's gonna ensure the operational efficient
efficiency of the business.
So you have to document this stuff. A
lot of times, what goes on day to
day is tied up in people's heads,
And it makes perfect sense to those who've
been with the company for quite a while.
When you bring somebody new in from the
outside, it doesn't make any sense to them.
So we don't want the
(30:23):
knowledge and the processes
that drive this company to be stuck in
people's heads so that when the talent leaves,
well, there goes your business system.
So it's it's getting owners to start to
document everything they possibly can. So this stuff
starts to become more plug and play over
time.
And, again, this is something where there are
consultants out there that specialize in that area.
(30:43):
They can help you put all this
from an idea. You you can create pen
to paper at this point.
But this is getting all that know how
that makes that company unique, documented, so that's
you can start to scale the business.
Alright. You kinda touched on this before, Jim,
but
what do you say to an owner who
thinks it's too early
to plan for an exit?
(31:04):
So there's it's never too early. It can
definitely be too late, but it's never too
early. So I I think that owners that
that are starting to think about when should
I do this, I would say start now.
And it it's good business strategy,
and it's something you do every year. It's
ongoing. It's never gonna stop,
just like, you know, any other business plan
that you're doing right now.
(31:25):
Again, transition your thinking from exit planning to
value management and value enhancement planning.
And that I think that's,
that's a good way to approach this.
It's to think of it as value enhancement
and value management. Yeah. And then you also
mentioned the emotional and the personal readiness. This
is critical. I don't think people understand just
how how big a role this plays for
(31:46):
anyone who's retiring, but especially if you're selling
your business and that business has been your
life, your little baby.
Yeah. So I I give a quick example.
So I just talked to somebody today who
retired last summer,
and they said that, it's been hard. Yeah.
It's been really hard. And they say it's
it's it's odd the way it's hard because
you dream about this your entire life.
(32:08):
Then you'll retire someday, and you picture yourself,
you know, maybe playing golf, and you're on
the beach, and you're, you know, in a
boat, whatever it is.
But then you get there. It doesn't work
out that way.
You know? And they're like, you just don't
realize how much time you spent working, and
now that time is all gone. You're like,
what do you do?
So, fortunately, this individual
(32:28):
sprung into action quickly. He's like, I started
getting very involved in the community. You know,
I'm in different clubs and organizations and involved
with charities, so I'm I'm keeping busy that
way. But it was a struggle there for
a while that I just wasn't really prepared
for. I just thought it'd be the dream
come true that every day looks like Saturday,
except I got pretty bored pretty quick. Not
likely he was able to able able to
fill his time.
But, Yeah. I think you have to really
(32:49):
start to look at emotionally, like, what is
gonna be next? What are you gonna do
with your time? Are you personally ready for
that?
We don't want you to be bored.
You also have to look at the emotions
of are there any financial gaps that you
face?
And what's it really gonna take to exit
and not worry about money anymore? Because there's
nothing worse than stressing about your business, exiting,
and then stressing about money afterwards.
(33:11):
Thinking, well, if you're in your business still
and cash flow is hurting, well, you have
ways to deal with that.
Take on new customers, adjust prices, cut costs,
whatever. You have some levers you can pull
to start to adjust cash flows.
When you're retired, there's only so many levers
left to pull.
And it can't be that if you exit
the company with a fraction of what you
(33:32):
should have, there's not many strategies we can
deploy that can make it feel like you
sold the company for 4 or 5 times
the amount that you got. So, yeah, I
think you have to really be
diligent with your financial preparation
and have a good, solid financial plan leading
up to that exit.
And, again, it's gotta align the personal goals
with your financial goals and the ultimate business
goals.
(33:52):
What were some of the most common regrets
that you've heard? I mean, yes. People saying,
you know, I don't know what to do
with myself. But
what else are they saying?
I I think it's just not thinking through
what they would do post exit is the
number one thing that we hear.
And the other thing is by not planning
ahead,
the exit paths are very limited.
(34:13):
And sometimes it's after the fact. It's like,
had I only known this ahead of time,
this is what I would have done differently.
Like, I've I've had owners that have sold
companies
to third parties that said, I I had
no idea what an employee stock ownership plan
was, and I've learned about it since I
sold my company, and I wish I could
go back in time and do it over
again.
I've I've heard people that thought that, you
(34:35):
know, I I thought I had to sell
to a third party because I just didn't
think my key people could afford to buy
me out.
I didn't know the financing that was available.
I didn't know different ways to structure the
deal.
You know, and they're like, wow. I sold
to a company that came in, totally changed
the culture, got rid of a lot of
my people.
And
while I'm out and I'm okay, that company
in the community is just not the same
(34:57):
anymore. Had I only known how to prepare
for this, I would have I would have
exited differently. So that that's kinda like that
Monday morning quarterback kind of a feel. But
if you've planned ahead of time, you were
well aware of all your options ahead of
time, and you you chose the one that
was the best fit for everybody.
Alright. Taking it all together here. For someone
who's just starting to think about exit planning,
what are the first steps they should take
(35:18):
today?
So I I think it's just like anything
else. Just take a baby step. You have
to get started somewhere.
And I think sitting down and looking at
the value of the company, wait. What does
the value of the company look like now?
What's the cash flow business today? What does
your personal financial balance sheet look like?
And just start to to get a game
plan together of, you know, what's it really
(35:39):
gonna take
in order for you to live the life
that you want on your terms? What kind
of money is it gonna take? And start
to build a lot of times, I'll start
with a personal financial planning with a business
owner first to get a sense of forget
the business value for a minute. Based on
what you're doing personally,
what's the trajectory that you're on
outside of the outside of the business?
(36:00):
And then you start to see the gap
it's gonna take of what do you have
to extract from the company someday in order
to close this gap, because there's always a
gap.
And I think that's a really easy place
to start
as you start to put together the risk
management plan next,
and then we start to work on the
on the build factor after that. So it's
it's just a couple of baby steps. It's
not overwhelming. I think some owners think this
(36:20):
is gonna be this long
drawn out process. A lot of times these
conversations can happen,
like, an hour or 2 at a time,
and that's about it. And then just having
kind of a rhythm that you're able to
to stay with this framework, and it might
be every 90 days is a checkpoint.
And there's gonna be some homework, things you
have to do with your teams, things you
have to do, personally with your finances, things
you have to do with your your legal
(36:41):
team or your accountant. I mean, it's it's
just little checkpoints along the way. And before
you know it, you turn around and say,
wow. We've made a ton of progress,
and we've had fun doing it.
So it's not a process that's boring or
it's
you don't see the results right away. A
lot of the stuff, you start to check
the boxes off pretty quickly going, wow. We're
accomplishing a lot very, very quickly. There's a
lot of momentum going, and and owners are
(37:01):
excited. They're they're charged up by it. Excellent.
Well, Jim, how can business owners reach you
if they haven't already started planning? And even
if they have started planning, just to touch
base with you and say,
am I doing this right? Am I covering
my basis?
Yeah. So a couple of suggestions I would
make. You know, one would be you can
reach out to us directly on our website,
which is mcgovernwealth.com.
(37:22):
There's a contact us button.
You can also email us info at mcgovernwealth.com.
But it could be something as simple as
if you haven't done a business valuation before,
we can do a business valuation for you
and just see what is the company worth
roughly today, and then we can do a
risk assessment for you as well.
And start to get a sense of, okay,
where are the holes? Where are the gaps?
(37:43):
And and what are some of the areas
you should be putting your attention to first?
And at that point, you start to get
a sense of is a more comprehensive exit
planning process appropriate, or should it really be
just let's look at a couple components of
this overall plan
and focus on that. It's kind of a
little silo first before we get into the
bigger picture planning. But it all starts with
an initial conversation.
(38:03):
Blocking off an hour or so to have
a conversation
is, is usually well worth your time. Alright.
All you business owners, you heard this. Plan
so you can exit on your terms.
Follow this podcast, maximizing outcomes to know when
a new episode is ready for you.
And, of course, please share with others.
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(38:23):
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(38:49):
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(39:10):
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Welcome to the Maximizing Outcomes podcast,
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McGovern Wealth
Group. Achieving bigger and better results with money,
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(00:28):
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Let's get to the show.
If you're a business owner,
odds are that nearly 80% of your wealth
is locked inside your business.
You know, most owners are unprepared when it's
time to harvest that wealth and exit the
(00:49):
business.
So today, we'll discuss how exit planning isn't
just about stepping away. It's about unlocking the
full potential of your business and building something
that can thrive without you. I'm Patrice Sikora,
and this is the Maximizing Outcomes podcast with
Jim McGovern.
Jim, with 75% of business owners aiming to
(01:10):
exit within the next 10 years, why is
having a plan in place so crucial?
It's a great question, Patrice. And it's it's
kind of a shocking number when you think
about it, that 75%
of owners plan to exit in 10 years.
It's a lot of businesses. It's a lot
of money in motion.
And and the big thing about exit planning
is that it is really crucial for owners,
(01:31):
and yet it's often mistaken for something that
a business owner does much later when they
feel like they're really ready to sell this
company or when they're ready to transition it
to
family members or key people in the in
the company. But the reality is
everybody listening in and owns a business. I
want you to think about exit planning as
a value management
(01:52):
system. So it's something that you focus on
today
to grow the value of the business and
drive income from the business.
And it it should be integrating
with the business owner's objectives.
It should be integrating with their personal and
financial objectives. So when it it does become
time to exit the company,
the owner is gonna have a lot of
(02:12):
options to harvest that wealth that's locked up
in the business
and maximize that
wealth as it transitions from the business to
their personal balance sheet, but they're able to
do it
on their timeline and on their terms.
So today, we're gonna be talking about what
exit planning is, but I also wanna talk
about exit planning is not.
I'm gonna talk about the process
(02:33):
of value acceleration
in the company
and why owners have to be not just
personally prepared
to exit the company, but they have to
be emotionally prepared exit the company. And the
business itself has to be ready for that
transition. So lots to talk about today. That
is a lot. That is a lot. So
let's start with what exit planning is. We'll
get to is not after this, but what
(02:54):
is it? Because I think there are some
real misperceptions with the name here. So in
your words, what exit planning what what is
exit planning, and why do so many business
owners misunderstand it?
So, yeah, I think that the word exit
itself, it sounds like it it's a moment
in time, and I'm not ready to exit
right now. You know, maybe it's it's 5
years, maybe it's 10 years, maybe it's 20
(03:16):
years from now.
So I think the thought is, like, that's
something that's on my to do list. I'll
get to that at the very end. But
in reality, I want you to think about
exit planning
as an ongoing process.
It's something that is it is really about
building the company.
It's about protecting
the company's value and the cash flow it
produces and positioning it so that you could
(03:36):
harvest that business value whenever you are ready,
which, again, may not be for for quite
some time.
So when this is done properly, like I
said earlier, it's gonna align the owner's personal
financial and business goals.
It's going to create
a way for the business to be,
transferable.
Right? Because that value, it only means something
if they can really be transferred to somebody
(03:57):
else and that company can continue to thrive
and succeed without the current owner.
And it also has to prepare the business
and the owner for all sorts of unexpected
life events and business events.
And this is not a complete list, but
there's some things we call the 5 d's.
And this is what happens if there's a
disability? What happens if there's a death? What
if there's a divorce?
(04:18):
What if there's distress either in the company
or in the business owner's personal life? What
if there's disagreements?
So it's not just about
growing the value. We have to protect the
value.
And ultimately,
it's about increasing
the business's
attractiveness
and the readiness for an ultimate exit, which
again could be a sale, but it could
also be transitioning it to employees or to
(04:40):
family members. So there's a there's a lot
that goes into exit plan, but it's it's
an ongoing process that really should be starting
today.
Alright. So that's what exit planning is.
What is it not?
So it's not about just selling the company
and stepping away all of a sudden. In
fact, I think it's it's more challenging when
somebody comes to us and and they say,
I'm ready to exit the company, like, right
(05:01):
this minute.
What's worse is when somebody says I have
to exit the company right now. There's been
a major health event. There's been some circumstance
in life that I have to get out
of this thing right away.
You know, it's like blood in the water.
The sharks smell it, and they're gonna you're
you're probably gonna get far less for that
company than you could have had you prepared
ahead of time.
(05:21):
So it's also it's not something that you
do just when you're ready to retire. There's
a lot of owners that we meet that
are saying I'm gonna retire in a year
or 2, and I need this value for
my company to go to my personal balance
sheet so I can retire. Again, your options
are gonna be a lot more limited if
you wait till that late in the game.
And the other thing is this is not
limited to just a a transaction.
It's you gotta take a holistic look at
(05:44):
this because there's a lot of your life
that's tied up in that business. It's what
you put your blood, sweat, and tears into
for many, many years. It's a big part
of who you are. So you have to
also start to think about,
what am I gonna do next? What's the
next chapter of my life gonna look like?
And what am I gonna do when I
don't have this company? Am I ready for
that? So it's, you know, it's not a
transaction. It's about getting your personal life, your
(06:06):
financial life, and your business life all on
the same page and and positioning you for
long term success.
No. I think a lot of people don't
understand how much importance that is, that has
the emotional aspect of it. It's your identity.
It's who you are. That's right. Yeah. Any
other big misconceptions here that, we need to
touch on?
Yeah. The only other thing I wanna add
(06:27):
to it is it's just I think ownership
really the thing about exit planning is just
good solid business strategy.
So for example, if you if you had
a way to improve the cash flow of
your business,
when would you want that to happen? Would
you wanna wait 10 years for that, or
do you wanna do that right now?
Yeah. I think every owner listening would say,
(06:47):
yeah. If there's a way to improve the
cash flow of my business. I'm gonna do
it right now.
Same thing if it's the the value of
the company. If you could get a much
larger multiple for that business, when do you
wanna see that become possible, today or in
20 years? We wanna see that now. So
that's exit planning. It's it's business strategy. It's
it's value management. In fact, if someone's taking
notes out there, I think that's something you
(07:08):
should write down that exit planning is more
about value management than anything else.
Alright. Now you did mention the 5 d's
as you call them, death, disability, divorce, distress,
disagreement.
How
does exit planning
mitigate these risks?
So, yeah, this is this is super, super
important because
(07:28):
there's a lot that's at stake with the
company, and there's a lot of an owner's
net worth that's typically tied up in the
business.
And you have to have good solid risk
management, which we're gonna spend more time on
a little bit later, but,
you know, these are things that can happen
without any warning,
but any notice.
You could wake up one day and have
a massive health issue that came up out
of nowhere,
and that could really put a dent in
(07:49):
the company. So when we talk about these,
these 5 d's, again, or death, disability, divorce,
distress, disagreement. You have to have
good, solid insurance planning, both in the company
and in your personal life.
You have to have good legal documentation,
whether it's business agreements, whether it's good estate
planning, wills and trusts.
(08:09):
You have to have documented processes in the
company.
You yourself or one of your key people
could go down at any moment, and who's
gonna step into their shoes and continue on
in a smooth fashion
to fill that role? What about retention planning?
Making sure that your very best people can
stick around through some of these
5 d's or other issues that pop up
in the company.
(08:31):
So it's,
it's really hard to get into growing the
company and pouring a lot of additional money
into the company to to get it to
scale,
if it could all be taken down. And
that value could disappear overnight because these these
risks weren't addressed ahead of time. Right.
Alright. Here, your your shift in our mindset
here, exit planning is smart business strategy.
(08:51):
It's about value management.
So walk us through the value acceleration
process that your team uses.
So there's there's really 5 stages to the
value maturity of a company.
And where every company really should start
is
just the very first step, which is identify,
and that is conducting a business valuation
(09:14):
at the starting point.
So, in fact, let me just give you
all 5 stages first, and we'll talk about
each one individually. So step 1 is to
identify. Step 2 is to protect.
Step 3 is to build that company's value.
Step 4 is to harvest the wealth that
you've created in the business, and step 5
is to manage that wealth. So if we
go back to that step 1, like I
(09:34):
was saying, is that, you know, you really
need to measure what is this company worth
right now. That's our starting point.
And I would say with most owners we
work with, they may see somewhere between 80
to 90% of their net worth is locked
up in the value of this company.
So it's not just essential to know what
that wealth is right now,
but you should be doing valuations every year
(09:56):
to measure the progress. So the strategy you
are deploying, is it having an having an
impact or not?
The other part of this is with valuations.
A lot of times, owners look at the
valuation. They just kinda check the box. Okay.
That's the number. Mhmm. There's a lot of
hidden value in the business.
So one important thing to remember is that
all businesses have a range of value
(10:17):
based on that company's individual characteristics, based on
the industry that they're in. And the shocking
thing is is that
a lot of businesses cannot sell.
And I've heard stats that it's somewhere around
7 of 10 businesses that try to sell
can't sell. So that means it doesn't matter
what the valuation said. There's no real market
value.
There's nobody willing to transact with you to
(10:38):
write you a check for that company, which
is scary, because a lot of times owners
think that, well, that's my retirement plan. I'm
gonna sell this company someday, and that's what
I'm gonna have to ride off into the
sunset. And it doesn't always work out
that way. So the other thing I I
want people to think about with with this
hidden value that's in the company
is that, you know, all companies are gonna
sell for some range of multiple of earnings.
(11:01):
So where there's some hidden value is that
let's just take an example of a of
a company
that has annual sales of $20,000,000,
and maybe they have $2,000,000
of EBITDA.
So that's earning before his earnings before interest,
depreciation,
and amortization.
Mhmm. Not to get into the accounting world.
I'm not an accountant. I'm not gonna get
into all that.
(11:22):
But you have a company with 20,000,000 of
sales, $2,000,000 of EBITDA,
and maybe it could sell for 4 times
EBITDA. So that means that the value of
the business might be $8,000,000.
So what would happen
if the company was able to operate as
best in class in the industry?
Well, maybe they could take their $2,000,000 of
EBITDA, and they could work on getting up
(11:43):
close to $4,000,000 of EBITDA.
And what if the company could be positioned
where it's best in class in the industry,
and it
it it can command a multiple that's maybe
7 times EBITDA?
Just those two changes, taking EBITDA from 2,000,000
to 4
and getting the EBITDA from 4,000,000 I'm sorry,
from 4
times to to 7 times
(12:05):
means that that valuation could go from an
$8,000,000
value to $28,000,000.
So there's a value gap here of potentially
$20,000,000
in this example.
That's what I was really referring to is
this this hidden value in the company is
that you look at some of the efficiencies
that could be gained with proper planning, and
it could be a staggering difference
between
the result you would get without
(12:27):
proper planning and what you could get with
proper planning. So there's a lot that goes
into that that step number 1 of, of
identify. It's not super complicated, but it starts
to get the wheels turning on what the
potential for this company is.
And I should think that gets a lot
of owners'
attention.
Makes people excited. Yeah. Jump out of bed
in the morning. You know, if I can
get this thing from 8 to 28,000,000, I
mean, that's that's real money. At least where
(12:48):
I'm from, from Pittsburgh. It's real money in
Pittsburgh.
Alright. Step 2, protect.
So step 2 is all about mitigating risks.
It's about safeguarding the existing value in the
company. So before you grow and you scale,
you've gotta make sure that the current cash
flow the business is bringing in, continues under
as many circumstances as humanly possible,
(13:08):
which in turn helps protect that business value.
So you have to look at 2 balance
sheets side by side. You have to look
at your personal balance sheet and think about
what risk do you face over there. You
have to look at the business balance sheet,
figure out what risk you face in the
in the company, and protect against it. So,
again, this is where your insurance planning comes
into into the picture. This is where your
legal documents come into the picture. And, and
(13:30):
this is a bit of a team sport.
You know? So it's it's working with your
attorney, both your corporate attorney and your personal
attorney, to make sure everything from your estate
plan to your buy sell agreement to,
how you protect your your intellectual capital,
you know, what kind of agreements you have
with your employees. Like, there's a lot to
to really lock down and make sure that
you've you've looked at this risk management holistically.
(13:52):
Even things like just financial risks. Like, how
much liquidity
do you have currently, and how much do
you need
if, you know, things get a little bit
haywire in your personal life or your business
life? What about risks with loans that you've
taken? What about market risk? So there's a
lot that goes into this step.
And, you know, when I'm going through this,
there could be a feeling that it's getting
(14:12):
overwhelming. It doesn't mean you have to do
all these steps at once.
You know, it might be that you start
off with just the identity step, which is
not a really long exercise,
and then you just work on protecting things.
And you may be taking a little bit
of a break.
Right? Then we may get into step 3
a little bit later, which is the build
step. But Mhmm. You know, these are just
building blocks in in this this overall exit
(14:33):
planning process.
Well, how long does this take?
So this is a question we get often.
It's not like it's a
an initial project that we just do one
time when we're done. It's really an ongoing
thing that never really ends. You may not
have to go back and revisit all these
steps all the time. Like, the protection step,
if you did it correctly,
that may be a quick annual checkup
(14:54):
unless there's some some new things that have
popped up that warrants some additional time. But
if you'd if you'd done the protection side
correctly, it tends to stand the test of
time unless there's massive changes.
And that allows you to put more time
and effort into the 3rd step, which is
all about building the company value. Mhmm.
But, again, this is where you can't put
the cart before the horse. I mean, if
(15:15):
you're gonna build
the value of the company, you may have
to spend a lot of money.
You may be borrowing a lot of money
because you're trying to grow. You're trying to
hire new people.
You may be investing in new technology, new
equipment. You may be expanding territories. There's a
lot that you might be risking
in that build step. And if you haven't
protected first, I mean, you're you're taking super
high risk,
(15:36):
and you could be wiped out pretty quickly.
So when you look at the value of
a business, it's about 80% of the values
tied up in 4 intangible capitals. It's we
call the 4 c's. This is your human
capital.
It's your structural capital. It's your customer capital
and the social capital. I'm gonna define what
all those mean here in just a couple
minutes, but,
you know, that's that's where all the the
(15:56):
money's tied up in most companies. It's it's
really the people
and and what you do about your customer
base and what you do about your your
best employees. I mean, that that's really what's
gonna help drive all this. And, again, you
may be taking some risks to really scale
and grow. And if you haven't protected, it
it could be a could be a pretty
rocky road.
Alright.
So identify,
protect,
(16:17):
build,
and then the fun starts, harvest. And the
fun starts, harvest. Right? So it could be
that you're not even thinking of exiting the
company right now. You're just trying to build
a better business.
But you should have checkpoints,
whether this is, you know, once a year,
maybe it's once every 6 months. You just
start to take a step back and say,
am I ready to exit?
(16:39):
Am I personally ready? Is the business ready?
It's probably gonna be the answer is gonna
be no for quite a while.
But as you start to say, yeah, the
company is we're starting to get to a
point where it it can run itself.
It doesn't depend on me as the owner
as much anymore. Maybe it doesn't depend on
you at all.
Then you start to shift your thinking on
how do you wanna harvest this wealth. Is
(16:59):
this something where you're gonna keep this business
forever?
And maybe you're just gonna hire professional management.
You're gonna hire a CEO and a CFO
and a COO, and they're really gonna run
the company. You still own it,
but you're not in there day to day
anymore.
And that may be a company that can
transition,
you know, for many generations.
Or it could be, no. You want to
(17:21):
really get out of the company. You wanted
to sell it. Maybe you wanna sell it
to a third party. Well, is that gonna
look like you're selling to a private equity
firm? Is that gonna be you're selling to
a strategic buyer?
That's a very different exit than somebody who
wants to sell the company or transition the
company to those inside the business.
So it could be, you know, maybe I
wanna gift this company to my children someday.
(17:44):
Maybe I wanna sell it to my children.
Maybe I have I have key management in
the business that really
are prepared and positioned to buy me out
someday. Well, what does that deal look like?
Should we sell to all employees via an
employee stock ownership plan, which is a very
powerful plan? In fact, we did an episode
I think it was around episode 17 or
18 we did on on,
ESOPs is what they're called for short.
(18:06):
Very, very powerful exit strategy, very tax advantaged,
but, again, very, very different than selling to
a third party.
So
this harvest stage is where you start to
look at what's what's in the best interest
of me as the owner, what's best for
the culture of this company moving forward, the
the employees that have been loyal to me
all these years
in my family, and and starting to to
(18:27):
kinda whittle down to what are the maybe
the 2 or 3 best options
that are gonna fit what you're what you're
trying to do.
And you have to be prepared because sometimes
the door you think you're about to walk
through closes,
and you better be prepared to walk through
a different door. Like, I've I've had many
owners over the years that thought that they
were just gonna transition the company to their
kids.
(18:47):
And then when they actually talk to the
kids about it, they learn that the kids
don't want the business.
Yeah.
And they don't want them to buy the
company or, you know, take it over out
of loyalty.
And, but meanwhile, they're miserable as adults. They
don't wanna be in this company.
The other thing I've seen happen with that
is that I've seen parents that didn't really
(19:08):
plan financially outside of the business.
And they now have the kids running the
company, and they're paying the kids very little
in terms of salaries because the parents are
still, you know, extracting all the revenue out
of that company to support their lifestyle.
And the kids are watching their adult lives
pass them by.
They, at one point, may have been making
(19:29):
a decent living,
but it hasn't grown in many, many years.
Now they have their own cash flow pressures
at home, and it's all because the parents
are still trying to hang on the company
because they're they're afraid they're gonna run out
someday.
So it it can be rough. Right? So
you you've gotta plan ahead, and you have
to start to think through multiple exit options.
And and like I said earlier, this is
a team sport. So we oftentimes will serve
(19:51):
as the quarterback for a lot of these
conversations, but
it does take other people, like getting your
accountant involved, getting your attorney involved,
you know, being able to bring in somebody
who's an expert in getting into the weeds
of the company
in terms of, you know, how do you
really drive the value and how do we
get the people to to perform and working
on some of the culture of the business.
So there's some there's people that are that
(20:12):
are trained experts in that area, and there's
also some transaction advisers. You know, if you're
gonna evaluate an ESOP as an option, well,
we may need to do a feasibility study
to see if that's even gonna be possible.
Mhmm.
If you're gonna sell to private equity, well,
let's start to look at some transaction advisors
and some investment bankers that can come in
and be part of this process proactively.
So that that harvest stuff, it is fun,
(20:34):
but that's also where a lot of the
lot of the the work gets done in
the number crunching and figuring out, like, how
we're really gonna do this. Sounds like some
hard decisions get made then.
It it's hard decisions, but it it's easier
when the company has been positioned correctly. You
know, if you look at the company and
you say, wow. Our our four c's,
our intangible capitals, are all are all great.
We're gonna spend a few more minutes on
(20:54):
that, in just a second.
And it might be okay. Well, now it's
realistic. Now we we are operating best in
class. Our revenues are way up. Our customer
base is more diverse. Our our key people
are incentivized to keep growing this.
And now you start to look at, okay,
well, is a third party sale really the
way we wanna go? Well, if that's the
case, the company is in pretty good position.
Let's bring in an expert that can that
(21:16):
can take this company to market. Mhmm.
Alright. Does this all come into the final
stage here of the final of the process
here, manage
the 5 stages?
So this is managing all the wealth that
you've extracted post exit,
making sure that
whatever the next chapter of life looks like,
the last thing you have to worry about
is the money side of it. So maybe
(21:36):
it's you're gonna sell the company, and you're
gonna retire right after in the sunset. That's
great.
How much money is it gonna take in
order to give you that level of financial
freedom?
What are the risks that you face? How
do you manage that wealth? How do you
manage taxes, cash flows? And just making sure
that you have long term financial security.
The other side is that some business owners,
that's the last thing they wanna do. That
(21:57):
that sounds like cruel, unusual punishment to them
to retire. They're they're so active, and they've
all they're always thinking.
To them, it's just I'm exiting this company
because I'm gonna go into something different. I'm
gonna maybe start another company,
or maybe I'm gonna get more involved in
charity or whatever it is. That's fine.
I think just you have to have a
clear path as to what you're gonna do
because one of the worst things that we've
(22:18):
seen happen is
owners are so focused on getting this company
to this point.
They've never thought about their life after the
exit, and then we hear that they are
bored out of their minds.
Yeah. Yeah. There's only so much golf you
can play. You know, there's only so much
you can do that's it sounds fun. It's
like, what do you mean there's only so
much golf I could play? But when every
(22:39):
day looks exactly the same and you kinda
lose that compass and you lose that that
passion
and that direction,
that's where owners are like. That it's the
biggest regret that I've I've had. I should've
never I should've never sold this company. I
should've kept it. That kept me going and
kept me active and kept me motivated. Now
I'm just kinda floundering.
So you really gotta start to think through
not just the how do you manage the
wealth, but how do you manage your life?
(23:00):
And it's, it's a big part you should
discover before you before you exit that company.
Alright. And it all goes into being a
human being, which brings us to the next,
question here. You're you're talking about the capitals,
the intangible capitals. Got that. People. People is
the big thing here.
They they are the most important part of
a business,
but you can't you can't price a person.
(23:22):
I mean, it's they're not a piece of
equipment. They're not a building.
So how do you talk about the people
side?
What impact how does that impact the company
value?
So this is like I said earlier, this
is 80 to sometimes 90%
of the value of the company is tied
up in people. Right. So just let's talk
about the people in the business for a
minute. This is your your human capital. This
(23:44):
is the value of your team. This is
the value of your leadership.
And one of the biggest challenges that we
see
owners facing is it's really tough to find
top talent.
You know, it's it's hard to find really
good people that can perform really, really well.
So it's it's about recruiting those key people.
It's about motivating them.
(24:05):
It's about making sure that they stay with
you through especially a transition,
and they can help evolve
as as you evolve, as the company evolves.
So,
you know, there's there's some art and some
science to this.
You know, one thing that that owners can
do is start to look
at what's the measurable impact that my key
people have on my bottom line,
(24:27):
and what can I do to help them
drive that bottom line? That's not just good
for the company. It's good for the company
cash flow. That also helps drive the value
of the business. But if they can be
incentivized to stick around for the long haul,
it also makes the company a lot more
attractive to an outsider that may be coming
in to buy the business someday. If I'm
afraid that I buy your company and your
(24:47):
very best talent, which are responsible for most
of your revenue, are all gone the next
day, what am I buying? Yeah. You know?
So, in fact, we did an episode
about retention bonus planning and deferred compensation planning.
It's a really important part of the step.
It is that, you know, I've I've gotta
keep my best people
engaged because they're gonna help me grow the
(25:08):
value of this thing.
And and there's some unique plans out there
that are tailored towards executives or towards
just key performing people that, will will do
the job.
A lot of times, these deals finance themselves
because if the employee
performs,
perhaps there's significant
financial incentive for them to do that. But
(25:29):
if they don't perform, then they may not
get anything at all. Or if they quit
too soon,
then they may not get anything at all.
So we have some companies that have significant
packages they put in place for their very
top talent
that maybe they don't get anything out of
that until they've been with a company for
at least 10 years or 15 years.
But when that plan vests and they get
a big payout, they might be getting a
(25:50):
significant
chunk of money coming out to them
that is like a we call it a
golden handcuff. It's a kind of a carrot
that's dangling out in front of them. They
say, okay. If I do x, this is
what I'm gonna get later on. And it's
a very substantial benefit
for the right person that can be very
motivational.
But it also protects an owner because if
they don't perform, if they quit, they go
to a competitor,
then you may owe that employee nothing at
(26:11):
all.
So it it starts to align
the objectives of the business with the performance
of the employee,
and it goes well beyond the basic benefits
package that almost every employee gets every company.
So, that's I'll I'll put in the show
notes a link to that other episode. It's
a really, really critical part of this. But
that's just one type of of human of
(26:32):
of the the people capital you're talking about.
This is human capital inside of the company.
The other type of of people we have
to worry about is the customer capital.
What's the strength
and the loyalty of your customer base?
We see companies that have very loyal customers,
but it's a very concentrated customer base. Yeah.
Maybe 70% of their revenue is coming from
(26:54):
their top 3,
their their top three customers. That's a really
that's a really big red flag for a
potential buyer in most cases. They say, well,
what happens if we lose one of those
relationships?
And that that company's cash flow could tank
in an instant.
So And are they there are they loyal
to the company, or are they loyal to
the owner?
(27:15):
That's a great question. Because sometimes it's it's
very personality driven. They're loyal to the company,
but it's really that owner that's their golfing
buddy.
That's maybe a family member. There's there's many
relationships where it's like, well, if that person
goes, well, we're gonna take our business and
walk. That that's where we see companies in
many cases that can't sell.
But if there's relationships that are contractual
(27:36):
Mhmm. They're transferrable.
The customer base is very diversified.
And, yeah, you no one wants to lose
a customer, but there's some businesses where if
they lose a few, it's not gonna put
a dent into the bottom line.
Yeah. That might be more comfortable from a
buyer standpoint. So you have to think about
how how entangled are the customers with your
business. You know, the the tougher it is
(27:56):
to replace that business
or the more valuable those services and products
are that they maybe can't get anywhere else,
the more value the company is gonna be
in the eyes of a of a new
owner.
Now the next thing on the list here,
you have social capital. What do you mean
by that?
So this is the company's culture.
You know, this is the relationships with the
stakeholders, and this is what draws people to
(28:18):
the company. This is what,
not just draws employees, but also draws customers.
And this can take a long time to
build. So think about
think about a company
like Google, for example, that's pretty well known
for their their culture. Mhmm. You know, and
it's something where they've got I think Google
still has, like, all this amazing free food
(28:38):
when you go. They've got these little sleeping
pods. They've got ping pong tables and pool
tables. That's just part of their culture. It's
a it's a work hard, play hard kind
of a thing, but it's they kinda create
this family atmosphere, at least, like, what I've
heard from clients of ours that work at
Google.
That's a very different type of a culture
than perhaps a firm that's,
(28:59):
suit and tie.
It's, you're in the office early. You're staying
late. You're just grinding it out. That's just
a totally different culture.
And one's not right and one's not wrong.
They're just very different. But if I'm in
the tech space
and I'm looking at a company that, like
Google, has all these cool perks and all
this fun social stuff that goes on outside
of the office hours,
(29:20):
versus other company that does none of that,
I might be like, yeah. I'll just take
the job at Google.
You know?
So this is something that you just have
to look at. What makes the company unique,
not just for the people that work there,
but other stakeholders, customers. And and,
you know, how do you kinda bottle that
up?
How do you feel that? How do you
grow it? Is it where it needs to
be, or or should it be going in
(29:41):
a different direction?
But social capital, I think, is a little
bit underestimated in many cases, and it's a
really important part of this overall exit planning
process.
And and then you have structural capital.
So structural capital, this is the, unique processes
of the company,
the systems that they use, perhaps technology.
(30:02):
This is what's gonna ensure the operational efficient
efficiency of the business.
So you have to document this stuff. A
lot of times, what goes on day to
day is tied up in people's heads,
And it makes perfect sense to those who've
been with the company for quite a while.
When you bring somebody new in from the
outside, it doesn't make any sense to them.
So we don't want the
(30:23):
knowledge and the processes
that drive this company to be stuck in
people's heads so that when the talent leaves,
well, there goes your business system.
So it's it's getting owners to start to
document everything they possibly can. So this stuff
starts to become more plug and play over
time.
And, again, this is something where there are
consultants out there that specialize in that area.
(30:43):
They can help you put all this
from an idea. You you can create pen
to paper at this point.
But this is getting all that know how
that makes that company unique, documented, so that's
you can start to scale the business.
Alright. You kinda touched on this before, Jim,
but
what do you say to an owner who
thinks it's too early
to plan for an exit?
(31:04):
So there's it's never too early. It can
definitely be too late, but it's never too
early. So I I think that owners that
that are starting to think about when should
I do this, I would say start now.
And it it's good business strategy,
and it's something you do every year. It's
ongoing. It's never gonna stop,
just like, you know, any other business plan
that you're doing right now.
(31:25):
Again, transition your thinking from exit planning to
value management and value enhancement planning.
And that I think that's,
that's a good way to approach this.
It's to think of it as value enhancement
and value management. Yeah. And then you also
mentioned the emotional and the personal readiness. This
is critical. I don't think people understand just
how how big a role this plays for
(31:46):
anyone who's retiring, but especially if you're selling
your business and that business has been your
life, your little baby.
Yeah. So I I give a quick example.
So I just talked to somebody today who
retired last summer,
and they said that, it's been hard. Yeah.
It's been really hard. And they say it's
it's it's odd the way it's hard because
you dream about this your entire life.
(32:08):
Then you'll retire someday, and you picture yourself,
you know, maybe playing golf, and you're on
the beach, and you're, you know, in a
boat, whatever it is.
But then you get there. It doesn't work
out that way.
You know? And they're like, you just don't
realize how much time you spent working, and
now that time is all gone. You're like,
what do you do?
So, fortunately, this individual
(32:28):
sprung into action quickly. He's like, I started
getting very involved in the community. You know,
I'm in different clubs and organizations and involved
with charities, so I'm I'm keeping busy that
way. But it was a struggle there for
a while that I just wasn't really prepared
for. I just thought it'd be the dream
come true that every day looks like Saturday,
except I got pretty bored pretty quick. Not
likely he was able to able able to
fill his time.
But, Yeah. I think you have to really
(32:49):
start to look at emotionally, like, what is
gonna be next? What are you gonna do
with your time? Are you personally ready for
that?
We don't want you to be bored.
You also have to look at the emotions
of are there any financial gaps that you
face?
And what's it really gonna take to exit
and not worry about money anymore? Because there's
nothing worse than stressing about your business, exiting,
and then stressing about money afterwards.
(33:11):
Thinking, well, if you're in your business still
and cash flow is hurting, well, you have
ways to deal with that.
Take on new customers, adjust prices, cut costs,
whatever. You have some levers you can pull
to start to adjust cash flows.
When you're retired, there's only so many levers
left to pull.
And it can't be that if you exit
the company with a fraction of what you
(33:32):
should have, there's not many strategies we can
deploy that can make it feel like you
sold the company for 4 or 5 times
the amount that you got. So, yeah, I
think you have to really be
diligent with your financial preparation
and have a good, solid financial plan leading
up to that exit.
And, again, it's gotta align the personal goals
with your financial goals and the ultimate business
goals.
(33:52):
What were some of the most common regrets
that you've heard? I mean, yes. People saying,
you know, I don't know what to do
with myself. But
what else are they saying?
I I think it's just not thinking through
what they would do post exit is the
number one thing that we hear.
And the other thing is by not planning
ahead,
the exit paths are very limited.
(34:13):
And sometimes it's after the fact. It's like,
had I only known this ahead of time,
this is what I would have done differently.
Like, I've I've had owners that have sold
companies
to third parties that said, I I had
no idea what an employee stock ownership plan
was, and I've learned about it since I
sold my company, and I wish I could
go back in time and do it over
again.
I've I've heard people that thought that, you
(34:35):
know, I I thought I had to sell
to a third party because I just didn't
think my key people could afford to buy
me out.
I didn't know the financing that was available.
I didn't know different ways to structure the
deal.
You know, and they're like, wow. I sold
to a company that came in, totally changed
the culture, got rid of a lot of
my people.
And
while I'm out and I'm okay, that company
in the community is just not the same
(34:57):
anymore. Had I only known how to prepare
for this, I would have I would have
exited differently. So that that's kinda like that
Monday morning quarterback kind of a feel. But
if you've planned ahead of time, you were
well aware of all your options ahead of
time, and you you chose the one that
was the best fit for everybody.
Alright. Taking it all together here. For someone
who's just starting to think about exit planning,
what are the first steps they should take
(35:18):
today?
So I I think it's just like anything
else. Just take a baby step. You have
to get started somewhere.
And I think sitting down and looking at
the value of the company, wait. What does
the value of the company look like now?
What's the cash flow business today? What does
your personal financial balance sheet look like?
And just start to to get a game
plan together of, you know, what's it really
(35:39):
gonna take
in order for you to live the life
that you want on your terms? What kind
of money is it gonna take? And start
to build a lot of times, I'll start
with a personal financial planning with a business
owner first to get a sense of forget
the business value for a minute. Based on
what you're doing personally,
what's the trajectory that you're on
outside of the outside of the business?
(36:00):
And then you start to see the gap
it's gonna take of what do you have
to extract from the company someday in order
to close this gap, because there's always a
gap.
And I think that's a really easy place
to start
as you start to put together the risk
management plan next,
and then we start to work on the
on the build factor after that. So it's
it's just a couple of baby steps. It's
not overwhelming. I think some owners think this
(36:20):
is gonna be this long
drawn out process. A lot of times these
conversations can happen,
like, an hour or 2 at a time,
and that's about it. And then just having
kind of a rhythm that you're able to
to stay with this framework, and it might
be every 90 days is a checkpoint.
And there's gonna be some homework, things you
have to do with your teams, things you
have to do, personally with your finances, things
you have to do with your your legal
(36:41):
team or your accountant. I mean, it's it's
just little checkpoints along the way. And before
you know it, you turn around and say,
wow. We've made a ton of progress,
and we've had fun doing it.
So it's not a process that's boring or
it's
you don't see the results right away. A
lot of the stuff, you start to check
the boxes off pretty quickly going, wow. We're
accomplishing a lot very, very quickly. There's a
lot of momentum going, and and owners are
(37:01):
excited. They're they're charged up by it. Excellent.
Well, Jim, how can business owners reach you
if they haven't already started planning? And even
if they have started planning, just to touch
base with you and say,
am I doing this right? Am I covering
my basis?
Yeah. So a couple of suggestions I would
make. You know, one would be you can
reach out to us directly on our website,
which is mcgovernwealth.com.
(37:22):
There's a contact us button.
You can also email us info at mcgovernwealth.com.
But it could be something as simple as
if you haven't done a business valuation before,
we can do a business valuation for you
and just see what is the company worth
roughly today, and then we can do a
risk assessment for you as well.
And start to get a sense of, okay,
where are the holes? Where are the gaps?
(37:43):
And and what are some of the areas
you should be putting your attention to first?
And at that point, you start to get
a sense of is a more comprehensive exit
planning process appropriate, or should it really be
just let's look at a couple components of
this overall plan
and focus on that. It's kind of a
little silo first before we get into the
bigger picture planning. But it all starts with
an initial conversation.
(38:03):
Blocking off an hour or so to have
a conversation
is, is usually well worth your time. Alright.
All you business owners, you heard this. Plan
so you can exit on your terms.
Follow this podcast, maximizing outcomes to know when
a new episode is ready for you.
And, of course, please share with others.
Thanks for being with us.
(38:23):
Thanks for listening to the maximizing outcomes podcast
brought to you by Jim McGovern and the
McGovern Wealth Group.
Be sure to follow the show to be
notified when new episodes become available.
To suggest a topic or guest for a
future episode or learn more about how we
can help to maximize outcomes in your life,
visit our website at www.mcgovernwealth.com.
(38:49):
This podcast is intended for general public use
and is for informational purposes only. Guest speakers
and their firms are not affiliated with or
endorsed by Park Avenue Securities,
Guardian, or McGovern Wealth Group, and opinions stated
are their own. By providing this content, Park
Avenue Securities LLC
is not undertaking to provide investment advice or
(39:10):
recommendation
for any specific individual or situation or to
otherwise act in a fiduciary capacity. Please contact
a financial representative for guidance and information that
is specific to your individual situation.
Guardian, its subsidiaries,
agents, and employees
do not provide tax, legal, or accounting advice.
Consult your tax, legal, or accounting professional regarding
(39:31):
your individual situation.
Jim McGovern is a registered representative
and financial adviser of Park Avenue Securities LLC,
PAS.
Securities products and advisory services offered through PAS,
Member FINRA, SIPC,
financial representative of the Guardian Life Insurance Company
of America,
Guardian.
New York, New York.
(39:52):
PAS is a wholly owned subsidiary of Guardian.
McGovern Wealth Group is not an affiliate or
subsidiary of PAS or Guardian.
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(40:15):
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