Doug: From Rea & Associates studio, this is unsuitable, a management financial services podcast for entrepreneurs, business leaders, and others who are ready to look beyond the suit and tie culture for meaningful measurable results. I'm Doug Houser.
Business owners hear a lot about the importance of succession planning and exit planning, and for good reason. Your business is, in all likelihood, your largest and most valuable asset. If you aren't thinking about how to protect it, increase its value, and eventually leave it, you could end up with the short end of the stick where your liquidity, longevity, and legacy are concerned.
Fortunately, for business owners everywhere, there are people out there who can not only help you avoid some of the more serious exit planning pitfalls, they are certified experts in the area of exit planning and can help you identify and achieve your ideal exit planning scenario.
Today, Mary Beth Koester, principal and director of valuation and transaction advisory services at Rea & Associates is here to talk about what certified exit planning advisory services are and how they can help you plan, deploy, and manage your long-term succession and exit plans. Welcome to unsuitable, Mary Beth.
Mary Beth Koester: Thank you Doug.
Doug: Good to have you back again, as always.
Mary Beth: Good to be back.
Doug: Thanks. So we hear so much in today's world about the aging of the boomers and getting to the point where so many of them are reaching retirement age. Obviously that goes for those that are business owners as well.
Mary Beth: Yes.
Doug: So we have ... I think you've shared some statistics in the past about the percentages of businesses that are predicted to transition in the next five or 10 years. It's astronomical.
Mary Beth: Yes. It's somewhere north of $10 million of assets being transferred. So just a lot of activity out there right now and a lot of business owners looking for that liquidity event, trying to determine what the optimal exit looks like for them.
Doug: Okay. So if I'm a business owner and I've thought about, "Gosh, 10 years ago I survived the great recession, and I've had maybe a good run here the last five, seven, eight years or so. What are some things that I should be doing to think about preparing myself for that eventuality?"
Mary Beth: So I think there's two ways of looking at getting prepared for a liquidity event or for planning your exit strategy. One is the business readiness side. Is the business ready to go to a sale? The other piece is the attractiveness side, and what things can the business owner be working on today to prepare their business and make it the most attractive for a potential buyer? There's a lot of ways that they can achieve that. I think starting off, one of the things we always say is sometimes business owners wait for that triggering event to get the ball rolling, and while that might work out in the end, oftentimes they wish they would've started two, three, five years sooner and had a valuation of their company done, especially if they've never done one before.
They might have a perception of value that can be somewhat skewed, being so intertwined and involved in the business, and that perception of value might not line up with the reality of the value. So I think having a valuation done, first and foremost, that really gets the ball rolling. That sets the stage for what the value of the business is today, and if there is a gap in value, what specific actions can the business owner take to minimize that value gap and get it closer to where they need it to be when they're ready to transition.
Doug: Okay. So it gives you a benchmark, gives you a starting point in essence, and you're right.
So oftentimes I hear ... being in say the construction segment, for example, folks will say, "Well, I have a peer group that I talked to and I have some sense of what their valuation might be or how they have had their business valued," and they think that applies to them, but just because you're in the same segment doesn't really mean anything.
Mary Beth: Right, and oftentimes they're hearing multiples that are thrown around and so they say, "Okay, well if my friend was able to get five times or six times EBITA, then that's probably what I'll get from my business," and that may in fact be the case, but we don't know unless we dive into the financials and take a deeper look at what's going on in the business, and the financial piece is really just one part of the bigger picture of all the things that they can be working on.
As it relates to the financials, having quality financials, ones that are reviewed or prepared by a CPA firm with a strong reputation so that when they get into that process of due diligence and going down the path of exiting, we've got sound and consistent financial statements that we can rely upon, that everybody feels good about, feels comfortable looking at.
Doug: And that value, the value of that information holds regardless of whether they're looking at some internal sale to the management team or family members or any other type of transition.
Mary Beth: Absolutely, and there's a lot of value there outside of a transition, of having quality, consistent, sound financial statements, as you and I are both very well aware.
Doug: Right.
Mary Beth: And you bring up a great point. There's so many options when it comes to exiting the business. So for some it might be management buyout, it might be a sale to a third party or sale to a private equity firm. It might make the most sense for to an ESOP, and if it's a family owned business then maybe gifting is the strategy, and for others, they have no interest in leaving the business whatsoever. So maybe their strategy is staying with the business, working in it, and just letting things take the course that they may once they -
Doug: Yeah, we've seen that too.
Mary Beth: We have. Not the best option, but certainly one of them.
Doug: Hope is not a strategy.
Mary Beth: No, it's not.
Doug: Sometimes at the end of the day, that's what you're left with.
Mary Beth: Yes.
Doug: But yeah, I think a valuation to me, I always want to have some type of benchmark, and so this allows me to benchmark not only externally, because you're obviously doing a lot of work out there, seeing how companies are valued, how that's done. You go through a lot of, obviously, continuing ed and other things to understand that process, but it allows me, as you spoke of, to benchmark against myself and find out where I have gaps, that value gap that you spoke of. So that's part of the process as well.
Mary Beth: Absolutely. I think going through the valuation process, it's a huge learning experience for the business owner. It does identify areas where there is a value gap and it also identifies not only the strengths of the company, but also the weaknesses, and how do we mitigate and de-risk the company?
Doug: Okay.
Mary Beth: So for example, I might be doing a valuation and there might be customer concentration. That's going to add a layer of risk to that particular company versus another company, and so that's something that the business owner can then work on, trying to either expand service or product lines, do different things to try to minimize that customer concentration.
Doug: Yeah, perhaps go get a lengthier contract with that customer even, which can help mitigate some of that risk.
Mary Beth: Yes.
Doug: Things like that.
Mary Beth: Or businesses that don't have customer contracts with any of their key customers, that can pose a level of risk as well.
Doug: Yeah, because all of a sudden if that individual or key individuals aren't there, you wonder, can those client relationships stay in place?
Mary Beth: Exactly.
Doug: And no matter who I am, if I'm internal folks that are going to be transitioning into running the business or external, whatever, you're going to want to make sure that's in place.
Mary Beth: Exactly.
Doug: What about operationally, things like that? You talk about ... we've talked about quality of financial information a little bit. Do you help identify gaps there too, in terms of where you see things that maybe aren't best practice?
Mary Beth: Sure. So sometimes there might be a lack of internal controls or documented processes and procedures. Perhaps the business doesn't really have a full time acting controller, CFO, someone who can really ... who has the knowledge and the expertise in that area and can help drive the business, and the business owner, as it relates to the financials.
Doug: Okay.
Mary Beth: So for situations like that, it might make sense for the business owner to rely upon other professionals and advisors and bring somebody in who can assist with some of those areas.
Doug: Sure, and I imagine with the client base we deal with, closely held family run businesses, knowledge transfer is always an issue too. It might be concentrated with just a few folks, and talk about the risk there.
Mary Beth: Yeah. So that really plays into the level of management depth and who's being brought up the ranks and who understands how to really work the business and run the business.
Doug: Yeah.
Mary Beth: So having a documented succession plan and transition plan in place and actually working the plan ... not just having it written down, but really working the plan and bringing those family members or those key employees up in the leadership and management of the business early on so that it's not an overnight transfer of the reins, but it's really something that is done over time allows for the most successful type of transfer.
Doug: And I think that's ... and we run into this a lot. If you think about a lot of entrepreneurs, they're very successful. Many of them have a hard time letting go of some of that control or knowledge. I think that's a common thing that we see with those closely held businesses. Are there some techniques or things that you try to help with in terms of guiding them along that path to change that thinking?
Mary Beth: Start small, but start. So pick a couple of responsibilities or things that you can delegate where you can kind of let go of control a little bit. Maybe there's still some oversight, but you give that person the opportunity to, not prove themselves, but in a way prove themselves that they can handle it and they can take on that responsibility and demonstrate success in doing whatever that particular activity or thing is within the company, and then keep giving a little bit more.
Doug: Okay.
Mary Beth: But that's a great point that you bring up. When we're valuing a business and we see a company that is so owner dependent that the owner hasn't taken a vacation in three, four, ten years, it feels like they can't walk away from the business ever because it'll crumble. I mean that really hurts the value of the company.
Doug: Right, because all the value, essentially, is that ... a lot of the value anyway is that person. It's hard, if they're not a part of it to the same extent, then what do you have? So yeah, that's obviously one we see quite a lot. So talk a little bit about the SIPA or the certified exit planning advisor role, something that you have gone through -
Mary Beth: And something that you've gone through.
Doug: Me as well and a few others within our firm. Talk about that, what that means a little bit, like the three legs of the stool and thinking more broadly.
Mary Beth: So I think a lot of the community or our clients might recognize the term SIPA or the designation. I think from a high level, what it means to me, it's a holistic approach to working with our clients and helping them craft and execute the most ideal exit strategy, and how do they accomplish that? So the three legs of the stool. So it's the business, the financial, and the personal legs, so to speak. So the business side, again, making sure that the business is ready and prepared for that transfer out of the business owner's hands and into the hands of someone else, but it's also recognizing that you have to incorporate with that plan, the personal financial plan of the business owner, the financial plan of that business owner's family and how that's going to impact the family, and then the personal life of the owner and what happens post sale or post exit. We've been talking with some fellow SIPA folks, and the term that keeps coming up is relevance and living a life of relevance beyond exiting your business. So there's a lot of importance there, and maybe it doesn't receive all the weight that it should, but talking to the owner and making sure that they're thinking about what that next step of life looks like is really important.
Doug: I agree with you, and so often that gets ignored. We have a client ... in fact, we're going to have a panel event coming up later in February, and this owner, who's a client, it's something he didn't think about greatly. Now he went through a transaction where he remained in the business but in a reduced role. So even for that individual, now it's not maybe 70 hours a week where it's all absorbing, it's maybe 35 or 40 hours a week, and he's got depth in management and other things, and still for him, I know he's commented, "Gosh, I feel like I have all this free time, and I never really thought how do I manage and handle that?" So that personal thing, I think is a huge part of the mental acceptance and success that you can see there.
Mary Beth: There's certainly a psychological component to all of this, and particularly when we're talking about family owned businesses and multi-generations working within the business. What are the dynamics going on within the family and how do we work through those as we plan the succession? Plan for the family is really critical too.
Doug: Yeah, it's amazing. I'm sure you see ... in your work you see all types of businesses. I know you've got some that are third, fourth, fifth generation and some obviously newer. Talk about some of the challenges that you see as you move along with those generations and maybe you get further removed from the original entrepreneur.
Mary Beth: those relationships are really interesting, Doug, and I know you're familiar with some of the clients that we've worked on from a valuation standpoint. One in particular that we're working with right now is in the fifth generation of family business owners.
Doug: Wow.
Mary Beth: So you've got aunts and uncles and cousins and then second cousins, all the way down, who are now the new business owners coming up the ranks.
Doug: Wow.
Mary Beth: What's interesting is when they come up in the business at a very young age and they're used to seeing certain people running the show, so to speak, and then it transfers, the ownership starts to transfer, there can be some challenges sometimes with accepting who the new owners are running the company, and even the owners that are exiting, being able to truly exit. Sometimes they come back in and the workforce still looks at that person as the boss.
Doug: Yeah. I'm familiar with an old client of mine, great company, been around quite a long time, and the patriarch agreed to step away and let his children run the company and they've done so very successfully. However, to your point, he was still there every day, and there was a certain element of the workforce that still kind of looked at him, and so they finally had to have "the talk" with him and said -
Mary Beth: Stop coming into the office.
Doug: You can't be here. Right, and so that's a difficult thing, but-
Mary Beth: And why was he still coming in every day? So maybe he just was so tied to the business, and so many of them are, that's truly ... their life and their business are one in the same.
Doug: It's their friends.
Mary Beth: It's their friends, they want to ... yeah.
Doug: It's all that.
Mary Beth: Yes.
Doug: So that's an interesting dynamic to it as well.
Mary Beth: Yes. The other piece of what it means to have a SIPA and to consult with clients from a holistic standpoint is really making sure that they've got the right advisors on their team and that there's a team approach from the beginning. The biggest thing that I think a lot of our clients fail to recognize is the time investment to accomplish ... from start to finish, to accomplish the exit strategy and execute it. It takes so much more time than they're expecting, and it takes a lot of time and energy away from focusing on the business, and so it is so critical to have the right advisors in place to assist and navigate them through this process. So that's your valuation person, your CPA person. It could be your banker, your wealth advisor, attorney.
Doug: Yeah.
Mary Beth: Yeah, so having all those folks ready to give you a very holistic team approach to getting the work done is really key.
Doug: You bring up a great point, and I think that's something that we should really remind the business owners of. I mean this can essentially be a full time job to try to prepare yourself for that transition, whether it's due diligence, all these types of things. Is that your experience?
Mary Beth: Yes.
Doug: Yeah.
Mary Beth: Well it's a full time job for us when we're doing it, so I can't imagine them trying to do it on their own while still running the business, and that's another important piece of it. While this process is going on and it's taking time, if it's sucking the time and energy away from the business owner and the business and the financials start to reflect that, that could hurt them. In their most critical, most recent year, pre-sale to have revenues and profits dip is not what you want to see.
Doug: Yeah, not ideal.
Mary Beth: Not ideal.
Doug: Yeah. So talk about situations that you've seen that have been most successful. Do they involve that kind of team all getting together with the business owner to discuss goals, et cetera?
Mary Beth: Yes. I think some of the most successful transaction, Doug, start with that first conversation with a business advisor, whomever that might be, and that person is really the quarterback.
Doug: Okay.
Mary Beth: So they have a conversation with the business owner, really gain a sense of the goals that the business owner has and what objectives they're trying to achieve and then assembles that team, pulls those other professionals and advisors, gets them around and in place. That might be structured in weekly or monthly meetings to just keep the ball moving forward, but somebody who really quarterbacks the entire strategy and just keeps it moving forward for that business owner.
Doug: Yeah, I think that's critical, because otherwise stuff kind of gets lost in translation. If you're not bringing everybody together, then the owner might be talking separately with their CPA on the tax side or their attorney or their wealth advisor and getting different pieces from all those folks and trying to filter that back to all those folks separately, stuff gets lost in translation, I think.
Mary Beth: It does.
Doug: Yeah.
Mary Beth: And it duplicates efforts and it's just not efficient.
Doug: Yeah. Yeah, absolutely. So talk about ... one of the other things I know with the SIPA is this sort of kind of a concept of liquidity, longevity, and legacy. I know we have folks, Darlene Finser here internally, that focus is on legacy family planning and things like that. So talk about how we sort of maybe try to integrate all of those things from your perspective as somebody goes through thinking about some type of succession or exit plan.
Mary Beth: So as it relates to that, yes. If they're going to be having a liquidity event, how does the business owner and their families want to deploy that wealth once they receive it? So it could be in terms of philanthropy or donations and doing charitable acts. It could be setting up certain college funds for the kids, or whatever that might look like, but there are so many options, and so to your point, working with somebody before that liquidity event happens and having a plan in place of what my options are, what's going to be the tax impact, what's going to be the take home cash, and then really how do I fund my life beyond exiting the business?
Doug: Great point, right. And what do I want? What do I need?
Mary Beth: What do I need? What do I want? Do I have enough to make it all happen?
Doug: Yeah, and then longevity. I mean oftentimes we don't think about that, but what's ... again, we touched on it a little bit, but what's the purpose or timeline beyond that event stage? Okay, if the liquidity event happens on this date, what then? Do they want to stay with the business? Do they not? Is there some kind of path to exit or all those types of things.
Mary Beth: So think about all the things that we've discussed today so far and the many things we've left out and think about how much time it would take to go through all those different options and prepare the plan and then start executing the plan.
Doug: Right.
Mary Beth: Takes a long time.
Doug: It does take a long time, and I think to your point, you want to have ... it's great to have a plan. As I always say, don't make your lack of planning my crisis, my number one thing with my kids back in the day, but it's fine to have that plan, but it can be fluid too.
Mary Beth: Absolutely.
Doug: I mean things change, needs change, all that. Do you see that much as you go through this process with clients?
Mary Beth: Quite often, actually, the plan is very fluid. The point is that there is a plan, that they start somewhere. We're working with actually several clients right now. Each of the ones I'm thinking of, they are all family owned businesses that had a specific gifting succession plan laid out over a three or five year period, but because the valuation of the company has changed in ways that they weren't previously anticipating, we have made changes and kind of adapted that plan that will best help everybody involved. So I do think it's important to have a plan but also be flexible with it.
Doug: Absolutely. So that goes back to your point about the valuation. What's best practice? I mean obviously you want to do this not as it necessarily relates to some triggering event, but to benchmark and help plan. Do you do that every year, every other year? What do you see as best practice for that?
Mary Beth: Many of our clients for best practice will do an annual update once they have the initial valuation done. As you said, Doug, that's the starting benchmark. Then to update it annually it's a lot easier because we're just dealing with one new year of financial information. So from a time and cost perspective, that's usually most advantageous for many of our clients, but we have other clients who will do an update every two years. Sometimes they'll do the valuation update based on their intended gifting schedule and then -
Doug: Go from there.
Mary Beth: Go from there.
Doug: Interesting. So have you seen ... in terms of the valuation market, obviously it seems like multiples have been increasing here in recent years. Do you see any trends there? Is that flattening a little bit or what are you seeing with regard to that?
Mary Beth: They're still increasing. I'm not seeing too much flattening yet, and actually I had a conversation recently where ... just a couple of days ago where an investment banker was saying that some logistics companies are going for multiples upwards of 20, which I've not heard.
Doug: That's insane.
Mary Beth: That's what I said. So I don't think -
Doug: It just depends.
Mary Beth: I just depends. It depends on the industry.
Doug: Yeah, and that's all part of the market and segment value that you place on the company when you go through that process.
Mary Beth: Yes.
Doug: Very cool. If you have maybe one or two key takeaways for a business owner ... I don't know where to start. I've been thinking about it, but I haven't done anything. Where do I start today? Do I pick up the phone? What do I do?
Mary Beth: Pick up the phone, send an email, probably start with your CPA. Send an email and say, "Hey, I want to start my succession planning, or I don't even know where to start. What's the first step?" We'll make sure that their financials are in good order, in good shape, and if they're not, coach them on how to get them in better shape, have a valuation done if they haven't yet, and then from that point, once we have the valuation done, then we can really start having a discussion, a meaningful discussion about what their actual exit options are, because not all options are available to every business owner. So then I think that gets them started down the path of, "Okay, now these three options are my best three, and what do they look like? And then how do we start making one of them happen? What needs to take place?"
Doug: That's awesome. So kind of from there you assess what makes most sense, what's feasible, that kind of thing.
Mary Beth: Yeah, and I think having the valuation of the company, as you started off the podcast, for so many business owners, their business is their largest asset. So how do you have a meaningful conversation with your financial planner, your wealth advisor if you don't truly know the value of your largest asset? So that really facilitates a lot of those conversations right from the get go.
Doug: Yeah. Excellent point. Well that's great insight. I know, Mary Beth, we could go on and on on this topic. It's something you're very passionate about, which is wonderful, and that that makes you a wonderful advocate for your clients and we appreciate that, and I'm sure we'll have you on again to dig into this a little deeper, but thank you.
Mary Beth: Sounds good.
Doug: Thank you very much for your insight.
Mary Beth: Thank you for having me, Doug.
Doug: If you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. Thanks for listening to this week's show. You can subscribe to unsuitable on iTunes or wherever you like to get your podcasts, including YouTube. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
