Why Successful Business Owners Utilize a Team of Advisors
The unfortunate fact is that there are professionals who are giving advice on Exit Planning have a somewhat narrow view of what an Exit Plan is. Often this view is not objective but instead predicated on a professional point-of-view. For example, Business Brokers are paid when a business sells. Thus when they are approached by a business owner about selling their business, they are more likely to work on getting the business on the market as fast as they can. Even if the business owner could benefit from delaying the sale to eventually obtain a better price, the tendency is towards completing a transaction, at which point the broker gets paid. An accountant may understand tax issues, but not be aware of all of the details of the client’s finances which could result in unforeseen tax issues that could be avoided if she understood the intricacies of estate planning. The fact of the matter is, effective Exit Planning is a team sport and the composition of the team will vary depending on whatever the unique components of the circumstances of the owner(s) are trying to achieve.
Often, the business owner is not really clear on what they are trying to achieve. If you don’t know where you are going, any road will get you there. Few professionals advisors have been trained to coach their clients on gaining clarity on what they wish to accomplish as they transition to their next act. Research by the Exit Planning Institute indicates that many business owners profoundly regret exiting their business after they sell it. This is regrettable since proper attention to the issue can minimize the trauma and sense of emptiness that many owners feel after they sell “their baby.”
Certified Exit Planning Advisors: The Quarterback of Your Advisory Team
The Vital Role of the Quarterback
No matter where you are in your planning or transacting, it is helpful to seek out an advisor who can and will serve as the quarterback to your exit planning as well as your exit transaction. These multi-skilled advisors are some of your best allies in drafting a plan for your exit while also helping you to recruit all of the necessary ‘soft’ and ‘hard’ skilled advisors who will be needed for this multi-year engagement. The quarterback holds a special place with the owner through all stages. Owners are well advised to seek out exit planning quarterbacks who have made a commitment to being trained, supported and have the tools and the right network to recruit the people needed for the planning and transaction.
What the Exit Planner Brings to the Table
• Strong consultative skills
• Strong project management skills
• The ability to prioritize key steps and manage the process
• Strong strategic planning skills
• A clear understanding of, and application of, the various exit strategies
• Training and understanding in both the personal and business aspects
• Capability to understand/analyze the client’s post-exit financial needs
• An in-depth understanding of business value drivers, or factors
• Capability to analyze and properly address the value gap
• In-depth knowledge of the team members’ disciplines
• Ability to properly vet the exit planning team members
Your Advisory Team
The basic exit planning team consists of the following:
• Corporate attorney/ transaction advisor
• Estate planning attorney
• Tax preparer
• Transaction tax advisor
• Financial advisor
• Business insurance agent
• Business consultant/value enhancement consultant
• Business valuation preparer
• Mergers & acquisitions advisor or business broker
You have created an advisory team that includes, at a minimum: an attorney, CPA, wealth or financial advisor, CEPA, spouse or partner or other family member who is a “significant other” in your life. Other advisors may be included as well: personal friends, banking advisor, M&A attorney, estate planning attorney, real estate attorney, business attorney, ESOP specialist, tax specialist, insurance specialist, foundation/charity representative, key employees, investment banker or business broker, board members, family, or personal counselor.
Issues to be Addressed
Exit Planning Issues and Appropriate Advisors
Let’s look at the types of advisors you will recruit for the many issues included in a comprehensive Exit Plan.
• Issue 1: Professional Determinations. Exit Planning is founded on a professionally accurate determination of the following:
• An owner’s income retirement needs as of the anticipated departure date.
• The degree to which an owner’s income retirement needs are likely to be met by non-business assets.
• The amount the transfer of the owner’s business must generate to make up any shortfall.
This determination should account for various assumptions about inflation, rate of investment return, life expectancy, and so on.
Possible Advisors: Financial planner, business-valuation advisor.
• Issue 2: Key-Employee Retention. At least one member of the team must understand how critical finding, training, motivating, and keeping key employees is to the success of your client’s exit. This advisor should be able to design an incentive plan (either ownership- or cash-based) that can increase the value of the business while it handcuffs key employees to the business on a long-term basis.
Possible Advisors: Business attorney, financial-services professional, compensation expert
• Issue 3: Management Capability and Effectiveness. There may be a need to evaluate and train existing management or find replacement management.
Possible Advisors: Business consultant, succession planner.
• Issue 4: Business Growth. One team member must be capable of accurately assessing a company’s current business practices to create growth plans that include necessary operational, marketing, and administrative changes and improvements.
Possible Advisors: CPAs or consultants with expertise in marketing, operations, strategic planning, or industry specialization.
• Issue 5: Protection of Business Value. There is often a need to reassess property and casualty insurance and create restrictive agreements with key employees to protect the business from the loss of employees, customers, vendors, and confidential information.
Possible Advisors: P&C insurance specialist, a business attorney.
• Issue 6: Ownership and transition tax minimization.
Possible Advisors: CPA, tax specialist, pension-plan specialist, a business attorney.
• Issue 7: Exit Path Planning and Execution. If your plan design involves transferring a business to insiders, your team must include a certified (i.e., acceptable to the IRS and others) valuation expert who understands the benefits of using a low-value ownership interest. Business brokers and investment bankers supply similar information when owners choose a third-party sale as their Exit Path. They estimate a likely sale price for your client’s business.
Depending on which path an owner chooses, in addition to the advisors listed above, you may also have to recruit an ESOP consultant, SBA specialist, commercial loan officer, family-business consultant, and/or post-integration specialists and tax counsel.
Possible Advisors: Credentialed business appraiser, business broker, an investment banker.
• Issue 8: Business Continuity. As part of an Exit Plan, you must create contingency plans should the owner die or become disabled prior to the planned exit. This may involve the creation of buy-sell agreements.
Possible Advisors: Estate Planning attorney, business attorney, and life insurance professional.
• Issue 9: Business Owner’s Estate Plan. In order to coordinate an owner’s Exit Plan with his or her Estate Plan, owners must recognize that the owner’s lifetime goals and objectives (e.g., who is to succeed him or her in business ownership and how much the successor is to pay for that ownership) are often the same.
Possible Advisors: Estate Planning attorney, business attorney, life insurance advisor, trust department.
• Issue 10: Post-Exit Asset Investment. Most exits result in cash that now-former owners need to invest prudently and in accordance with their objectives. The same person who helps determine an owner’s financial needs and objectives upon an exit (probably already part of your team) is usually well-suited to advise an owner on the investments of those proceeds.
Possible Advisors: Financial advisor.
Interviewing Potential Advisors
Here are some key questions to consider when interviewing potential advisors:
• How long they have been an advisor?
• How many recent transactions they have successfully completed?
• Are they knowledgeable in your industry?
• How many transactions have they done in your industry?
• Are they willing to provide client references from previous transactions?\
• How are their fees structured?
• How do they source potential buyers?
Interview Best Practices
During the interview process, it’s also important to pay attention to questions you receive (or don’t receive) from prospective advisors. For example, if an advisor asks a number of probing questions about your business operation, it’s likely they want to gain a detailed understanding of your company. On the other hand, if an advisor asks only high-level questions, they may not be the right choice for your team. In addition, beware of advisors who guarantee unrealistic results (such as an overly aggressive closing date), or those who float an irrationally high potential sales price for your company without tangible valuation and market analysis to support it. Remember, there is often a gap between what you think the business is worth and what a buyer will pay.
Trusted Advisors
When we talk about advisors, not all advisors are created equal. In fact, for our purposes we can categorize advisors into 5 different levels:
1. Opinion Providers, advisors who offer a view based on their knowledge and experience. They mean well, but their knowledge on the subject is often limited and can be of questionable value to the business owner. It is fairly common to see advisors offering opinions that are outside of their knowledge and experience, they don’t know what they don’t know and think that their opinions are more valuable than someone with greater expertise.
2. Subject Matter Experts (SMEs), advisors who provide “technical” perspectives and recommendations related to their area of expertise. As long as the SME focuses primarily on technical issues (processes/procedures to follow, tools to use, techniques to apply, etc.), their opinions should take precedence on their area of expertise. Problems occur when SMEs offer guidance outside their narrow domain of proficiency. For example, an estate attorney’s opinion on matters related to estate planning would be more valuable than the opinion of a general practice attorney whose experience in estate planning is a limited part of their practice.
3. Valued Sources, practitioners with more reputation and prestige than SMEs. They are respected for their domain expertise to the point that they can exercise a great deal of impact. They are the best of the best at what they do. Continuing the example of the estate attorney, a valued source would be the estate attorney that educates other estate attorneys on best practices.
4. Influential Resources, These practitioners raise the persuasive bar yet again by fostering such respect and admiration for their opinions that their counsel is highly sought after. These are those individuals that are called upon when the stakes are high and you need the best of the best.
5. Trusted Advisors, the trusted advisor is a practitioner who has earned the right to be exceptionally influential when helping a sponsor develop the understanding, commitment, and alignment needed to fulfill his role achieving their vision.
There is no human being that exists that can become an expert in the many areas that you must deal with as a business owner.
Board of Directors/Advisory Board
The journey to personal prosperity will progress better if you have a stable of capable guides that can assist you with the obstacles that are sure to occur. If you structure your board appropriately can develop an effective mechanism to help advise your business strategy.
The beginning point for assembling a board of directors is clarity on what your strategic objectives are. Knowing your vision for the future of the company can be translated into criteria of capabilities that will help you accelerate your learning curve by tapping into the unique knowledge of your board members. For example, if you needed the ability to more efficiently distribute your product it might be useful to find a board member with logistics experience to help guide you along that journey. If you need to develop a sales function, it would be awesome if you could find someone that has done it before and can ask the questions that should be asked to ensure you can generate the sales you need to satisfy your strategic plan.
Ideally, you structure your board with an odd number of members so that a majority is assured on matters on which you vote. You can always reserve the right to reject the recommendations if you feel strongly about a particular issue, although I would advise using this very judiciously if at all.
The board should meet at regular intervals. Quarterly is best since it will sync up with your value creation cycles if you are following any types of continues improvement or value maturity-type strategies. A yearly review should be incorporated into the schedule. Another best practice is to invite your board to a retreat to work on the overall strategy of your business. The schedule of strategy retreats varies with what stage your business is in.
The best advice for developing an awesome board of directors, choose people who have a different style of thinking that you do. Don’t surround yourself with people who look at problems the same way you do. Go for diverse capabilities, if you are analytic, find someone that is more creative, or if you are creative, find someone that is more analytical. Your overall goal is to develop a team to help you make better decisions. We can go into this more in my Leadership Mastery Class. (Make link, track activity, beta test of potential class)
Shifting From ‘Planning Team” to ‘Execution Team” Members
The Three Stages of Exit Planning
1. Pre-Transaction
This is the stage where you are constantly striving for Value Maturity. You are building a real company, you have employees, you are growing, you have a strategy for building more value for your company and you have a team that can execute on your vision.
2. Transaction
I actually think of the Transaction Phase as beginning before the actual transaction, it is that point in time where you are seriously committed to selling your business and you are ready to proceed with the documentation yo0u will need to provide during Due Diligence.
3. Post-Transaction
Congratulations. Post-transaction you begin a new phase of life. Hopefully, you have taken the advice of your CEPA (_hint, hint_) and you had a good plan in place for your transition.
There are some things you should expect no matter how well you have planned. The biggest is that when you leave your business, you leave part of your identity behind. For many of us, who I am is what I do. Some, who used to seek your approval may no longer find it as important as it once was, people sucking up to you is part of being successful. Once you can no longer facilitate a sale some of the more transactional members of your social circle may show less interest in your well being.
Your daily routine will change and it will feel weird at first, but trust me you will get used to it. At this point, you have reached the enviable place where you can do what you want when you want to it, or do nothing at all. Your choice.
You will need to have a plan for management of your financial assets since you will experience a major liquidity event when you sell your business.
The exit planning team required at each phase:
Pre-Transaction
– Tax Preparer
– Attorney
– Insurance Agent
– Financial Planner
– Value Creation Advisor
– Certified Exit Planning Advisor
Transaction
– Estate Planning Attorney
– Business Transaction Attorney
– Transaction Tax Advisor
– Business Valuation Specialist
– Certified Exit Planning Advisor
– Business Broker or
– Merger & Acquisition Specialist
Post-Transaction
– Financial Advisor
Pre-Transaction: Planning Stage
Pre-Transaction Planning should start as soon as you finish reading this sentence. In fact, you should commit to the fact that from this day forward your daily focus will be to create value. It can be value in your business, the value in your personal life, or it could be value that you give back to the community. Each of you reading this will be at a somewhat different place in the cycle of your life. Though, really all you need to know wherever you are in your life cycle or your business cycle that you need to focus on value-creating activities in your business. I read about a quote from Jeff Bezos the other day, I’ll paraphrase it, “Focus on what doesn’t change versus what will change if you want to be successful in business. By focusing on what doesn’t change you are focusing on a factor that you can compete on now and in the future.”
The Value Creation Process focuses on elements related to your business model that can enhance or detract from the value of your business. Focusing on value is what I call a both/and scenario, because it both maximizes value for the business owner while they still own the company (and by structuring the business the right way, you can harvest cash flow while someone else runs the business for you) AND will allow you to sell your business with a best-in-class multiple (another way of saying more money).
Owners are advised to initially seek out planning team members who are relationship-based as well as process-oriented to lead the initial stages of the exit planning. However, an exit planning process often culminates with a transaction. When this happens, transaction-based advisors are necessary additions to the team. At this point in the engagement, the focus shifts from the ‘planning team’ to the ‘execution team’ and different players are needed.
Planning Team Members vs. Execution Team Members
Planning team members – those described above – are critical to taking the owner through the initial stages of the exit planning process. However, when your exit planning brings you to the point that you are ready to transact, you will need to employ the services of transactional advisors. These include:
• M&A advisors to help find buyers and explain the business to the future owner, as well as to assist in the actual transition of the business to the next owner.
• Legal advisors who focus on transactions – these are ‘transactional attorneys’ who have experience negotiating and structuring deals for owners.
• Accountants and tax advisors who understand and have experience in the world of transactions and can help assess the tax implications of a transaction for the owner.