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Get Prepared for your Exit
 
Published Tuesday, June 27, 2017
by JOHN HOWE

Jim was feeling burned out. His day started early and ended late, and there was no relief from the demands of customers. Worse, he needed to hire help but finding candidates that were the right fit was challenging. Finally, between his workweek and using weekends to catch up, there was no such thing as down time. Then Jim did something completely out of character. He left his cell phone home, told the crew they were on their own and took a much-needed break.

Returning a week later, he expected a mess. But that’s not what he found. His crew leaders had performed well without him; orders were still coming in; orders for future projects were scheduled; and payments were neatly stacked in envelopes ready to be mailed. It was a critical discovery. Maybe there was more to life than work. Maybe the crew wasn’t so bad after all.

Although I’ve changed the name and the circumstances, Jim is a real business owner with a profitable company in New England. Like so many business owners, his life was consumed by his business. He was good at what he did. He loved it too.

However, he was making key mistakes. Jim was the business’s top sales generator. He knew every job. He personally guided projects through the shop. He was the primary point of contact for customers. He hadn’t taken a break in years, and it had almost killed him.

Other things he did well. His crew was empowered and fully functional without him. He had fostered a “can-do” customer-centric company. He was frugal and kept profitability front and center. During good times, he shared the wealth. While reinvesting in the business, he also set money aside in personal investments. He kept the books clean. Finally, the business was not dependent on any one customer.

Evaluating what mistakes are being made and what is being done correctly in your business is essential for every business owner, because, you may not know when you need to sell. Listed below are several key challenges many business owners face with suggestions for correcting the problem.

• Not seeking advice. Business owners tend to be highly driven individuals. This attribute is critical to a successful company. But even talented athletes know that they need a good coach to maximize their potential. Tom Brady, for example, is a superb quarterback; he also has a great coach, Bill Belichick. They work well together. Owners may know the industry, but someone on the sidelines can offer valuable insights at key times. Consider engaging advisers who can tell you things you need to hear, not what you want to hear.

• Failing to delegate. It is probably true that things never get done as well by other people. On the other hand, do you want to be responsible for everything? Empowering employees reduces their stress as they will feel in greater control of their jobs. Empowering employees also allows the owner to get away from the mundane details and think strategically. Having employees with enhanced commitment and loyalty further increases the value of your company. It is likely more appealing to a prospective buyer to show that the business is not dependent upon you.

• Not having systems and processes. When you are in the thick of things, it is easier to just do rather than teach someone how to do it. But that’s short-term thinking. Instead, get all the processes written up in an instruction manual. And make it standard operating principle to write down directions for any new processes added to the company’s workload. Unless you want to solve every problem yourself, it is critical to spread responsibility around. Sam Carpenter’s book Work the System outlines how he changed his life by systematizing his company. Once you get things written down, give the directions to a trusted staff member and see if they can make it work on the directions alone.

• Treating the business like a job. It feels good to get things done; sometimes it’s easier to do it yourself. But the owner should focus on getting the staff to recognize when certain things need to be done without being told. Remember, a future buyer won’t have you to direct the orchestra. Create timelines for every department that illustrate what needs to be done when. Make sure the timeline is annual so that it includes those items that only happen quarterly or annually.

• Get outside your work. Frequently, a business owner’s entire identity is wrapped up in the company.  Free time is consumed with work issues; evenings and weekends are eaten up with a craving to finish or get ahead on the To-Do list. This isn’t healthy, and it can leave a business owner at a loss when they do sell the business. Rather, you must build a life with hobbies and interests outside your business. Start planning what you want to do when you sell your company. The answer shouldn’t be to golf or relax. Think comprehensively about filling an entire week. Another idea is to consider part-time work to transition from your 60-hour workweek to full-time retirement.  

Bo Burlingham, in his book Finish Big, describes four stages to an exit: exploratory, strategic, execution and transition. Every journey ultimately ends; most want to choose the path. That means having other interests, and also involves preparing and planning.

• Don’t assume. Business owners often assume they will get their return on investment in the long term or when they sell the company. But the safest thing a business owner can do is to take a regular salary that allows them to build a nest egg. Here’s why. Health issues could force you to sell before you are ready. The value of the business could be affected if you have to sell during a recession. Or, finally, your brilliant business idea could become obsolete, rendering your business worth a fraction of what you’d planned. Be prepared for the worst and plan for the best scenarios.

• Reacting is not planning. Finally, no business owner should be figuring out their exit plan when they think it’s 18 months out. Plan in advance. You may find a buyer that wants you to stay on for a while, which may elongate your exit. You will need to know what you can do to enhance the value of the company now, the tax implications of selling your business, a rough estimate of legal fees, and whether it is likely you’ll be responsible for financing part of the sale and brokers fees, all of which affect your net income from the sale.

So what ultimately happened to Jim from the beginning of the story? Did he avoid these common pitfalls?

After vacation, he returned to work with a new perspective. He thought about liquidating, to get away quickly, but this wasn’t wise. The company was successful, and his staff knew what to do. He wanted to travel, and his good financial planning provided him peace of mind no matter what happened.

So, Jim decided to sell. The business remains intact and the employees all have jobs. It proved to be a win win.

John Howe is director of Business Transition Strategies, an M&A advisory firm with offices in Pembroke and Andover, Mass. that works with owners of private companies throughout New England.


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