Exit Planning

BARRY: Next thing on the list is bold. I’m personally– I’m passionate about this issue. I guess you are, although you don’t really have a joint bolding mechanism in place here, so I’m not sure who did it, but basically the next one on the list is exit planning.

So I want to ask you this question: what the hell does that mean?

CHAD: Well, everyone’s gonna leave their business at some point, whether it’s because you want to, because you’re forced to, or when it’s not your choice and it’s due to death or disability. And to me, exit planning really comes down to: do you want to receive the value in the business that you built? And if you don’t proactively plan for that, businesses are very illiquid most times. Especially when the economy is not doing great. Not many people are wanting to buy businesses, and if they are gonna buy it, it runs into the issue of, “Okay, well, what are they gonna do to my business now?” And that kind of leads us to the next bullet point, which we’ll talk about after, in succession planning. But exit planning to me is really extracting the full value of your business and how do you go about doing that — receiving the full value in a very, very oversimplistic way of thinking about it.

BARRY: That’s pretty well said. I would characterize it as– When you think of going public, what that really means when you say you’re going public is that you’re gonna hire an investment banker — an investment banking firm — and they’re going to work on your business to package it and make it as shiny and beautiful as possible. And what that means in this context of a business is they’re gonna make sure that everything is buttoned up tight and it’s operating efficiently, effectively, and there’s as little loose ends as possible.

So what we’re talking about with exit planning is just a non-publicly traded, small closely held business scenario, where we come in and help a business tighten up. Fix the issues, identify the issues, and get them in a position where they can sell in, what, three to five years, you’d say? A fair short-term vision? You don’t engage in exit planning for a 20-year horizon. You engage in exit planning on a short-term horizon. But it takes time.

CHAD: Important to do it a few years out, without a doubt.

BARRY: Right. You know, say it was a car — I’m making this up as I go — say the business is a car. You’ve got to repaint it, you’ve got to open up the hood, you really have to see what’s going on under the hood, you’ve got to fix it, and you’ve got to look at the interior. You’ve got to make sure it’s all repaired and looks good and is functional, and that what you’re representing the car is and does is correct and accurate.

If you’re representing the car–

CHAD: If you don’t do all this stuff and it doesn’t appraise for what you sold it for, you’re gonna be in a problem.

BARRY: The car could have a defect that you either know about or reasonably should know about, and boy, is that gonna bite you in the butt when the buyer buys the car — it’s nicely packaged, shiny, has a ribbon on it — and it blows up in your face. So that’s kind of what this is talking about: really maximizing the value at a later date, but a short-term date– The alternative….

CHAD: Yeah, and as a side note, it’s really important for businesses to get professional business valuations done. You talk about exit planning– you can’t exit if you don’t know what your business is worth. And there are lots of different ways of valuing businesses. I know this is kind of a side note, but it goes hand in hand with exit planning. You can’t be looking for purchasers of your business if you have no idea what your business is worth.

And so the exercise of going through and getting business valuations done — especially when there are changes in the business or rapid growth in the business. It’s no different than an estate plan. If there’s a life change that happens — if you get another kid, you get married — you update your estate plan. If your business doubles in revenue, you should probably get another business valuation done.

BARRY: So, is it worth $20,000 to do a valuation somewhat regularly?

CHAD: I wouldn’t say you necessarily need to do it regularly. Really, it’s worth it when there are significant changes. I had a client whose revenue literally doubled from $25 million to $50 million over a two-year span. And the buy-sell plan I did for them was based off of one valuation and it needed to be revised. There were changes in the business.

So it’s not even necessarily revenue changes. It could just be changes in the business in general that you need to have those updates done. So I wouldn’t say it’s necessary every couple of years, but even if your business went up 40 percent, that’s still a significant change where it might be worth spending $20,000. But also, as you said, you want to start thinking about these things the three-to-five-year window from when you want the exit to occur. The closer you get to that point, the $20,000 cost of a valuation becomes more important. I don’t think it’s important necessarily for somebody who’s in their infancy to do it every couple years, but when you get closer to wanting to exit your business, it becomes more important.

BARRY: Without straying too far, I do think you make a good point worth talking about. You’re tying the valuation to something that has meaning. That’s substantial. Being your buyout planning, your disability buyout planning, your death-triggered buyout planning. That’s tied to contracts. And if you double in value, you need to cover that.

CHAD: I’m not going to jump ahead to the importance of contract language. We’ll save that one.

BARRY: I was trying to be mindful of that. But now you’re grossly underfunded. You don’t have enough coverage to properly execute on those plans. So in that case, it’s tied to something really critical.

Another thing you’re tied to in estate planning, say you have a couple kids. Three kids, four kids, whatever. One is in the business, two are not in the business, and some are getting the business as their inheritance and some are not, the value of the business needs to be addressed because the intent is to be fair. They should get the same value as the other one. The business owner. As the business-inheriting child. So the valuation becomes very important there, and there are ways to build that in so it’s as fair as possible.

There was another really good reason to do a valuation that you mentioned that was tied to something substantial. The funding of the contract is one, the estate plan is another… and I forgot the other one, quite frankly. It will come to me, though.

CHAD: The good thing is we’ll have more of these coming.

BARRY: It’ll come to me. Yeah, it’s relevant for succession planning too, which is the next thing on our list. So exit planning, just to recap, is– I know what I was gonna say now. Exit planning is really important in the short term, three to five years. Packaging it, fixing it. It’s not so much what I do, or I would say you do, as much as it is getting the team in place to work on it with a common vision and a structure.

CHAD: That one is very much a team sport, as is all of this. But having the legal side, the financial side, the valuation side, the tax side. All of that needs to come together with exit planning. And having the full team there is very, very important.

BARRY: Right. And I would only just add one more thing to be clear on exactly why it’s so technical. On the legal side, you’re going to want to look at every contract this company has in place, every person they have in place, the contracts with those people. The IP– is it protected? Is it not protected? Are there litigations pending? Is litigation reasonably likely to be pending? Are there formations, filings, licenses. Everything– is it in order. It’s a lot of work just for that. That’s a ton of work. You know, if it’s not, fixing it– Then you’ve got the tax side, which Chad can speak to.

But you also have the operational side. Who’s doing what? Are the right people doing the right things? Is there fat in the business that needs to be cut? Is it efficient? Is it optimized? Do we need to improve the business from a purely business operational standpoint? Is there technology needed that would help displace certain people and costs? If you want to speak on the tax side just kind of briefly, and the financial side review what they have as well.

CHAD: Are we talking about– have we moved on to succession or still on exit planning?

BARRY: Just exit planning, just to give a little bit of depth to why it’s such a comprehensive area to focus on.

CHAD: Well, from the financial side, a lot of times if you’re going through the planning ahead of time, there may not be the funds available for the business owner to exit. And they may end up being tied into their business for a while. You know, it kind of falls in with succession planning also, where if you don’t have the right successor for your business, you’re not going to turn it over. You’re not going to exit. And so there’s ways to position yourself financially speaking to almost pre-fund your exit. And there are different vehicles that you can use to do that.

BARRY: By exit, by the way — I don’t think we defined exit — but exit means to sell to either one or more parties. Whether you hire a broker–

CHAD: Yeah, you can sell outside, you can sell inside, you can sell to a family member, which you mentioned. And so that also comes down to planning. Having those conversations about who do you envision selling this to one day, because that can dictate the type of planning you have to do.

BARRY: Great point. So if you were to want to give your business– If you’re an owner and you want to cash out your business, and you have kids that want to be in the business, it’s an interesting concept as to whether you choose to sell to a third party and let your kids figure it out themselves, how that works. Or maybe sell to your kids. Or give it to your kids as part of succession planning and estate planning and tax planning. These are the conversations that we have, right? And there’s no canned solution.

CHAD: There’s no right or wrong– I mean, there is wrong, but there’s no single right way to do it. Yeah, there’s wrong that can be done. But everyone’s preference is probably the right way to position it. Everyone has their own preference in how they want to one day exit the business.

BARRY: Yeah, I would say in my experience, I don’t think that there’s ever been one that was exactly the same as another.

CHAD: Yeah.

BARRY: You know, the planning, the succession, the docs, prep, the conversations. The only other thing I wanted to mention was, with exit planning, when it comes to estate planning, say you have husband and wife, and husband is the owner of this business, it’s doing well, and there’s no planning. Shocker. It happens. Husband dies abruptly. Wife is not involved in the business. She’s not equipped to run the business. There’s no succession plan. What do you think happens in that case?

CHAD: The wife most times runs the business to the ground. Or just the surviving spouse. They’re not well-equipped. They don’t know how to run it. And whatever was built by the deceased spouse, the legacy kind of goes away if the planning is not done.

BARRY: Legacy is the key word there. That’s one option. Another option is a fire sale.

CHAD: Yep.

BARRY: Fire sale. I see fire sale being much more likely.

CHAD: That’s Wayne Harzanga getting the Dolphins for as cheap as he did. You know, everyone here in South Florida probably knows the Joe Robbie story. And no, there is not proper planning done, to say the least.

BARRY: Tell them the Joe Robbie story.

CHAD: To my recollection, Joe Robbie owned the Dolphins. And when he passed away, the family didn’t have the liquid funds available to– In a broad sense, there’s a lot of nuances, but they couldn’t afford to pay the estate tax. And that needs to be paid within nine months of date of death. And they had to basically fire sale the Dolphins to Wayne Huizenga for really pennies on the dollar. And I don’t know if you want to elaborate on that a little bit, but that’s the gist of it. They didn’t properly plan. They didn’t have the funds available to pay what they needed to pay.

BARRY: So fire sale is when a surviving spouse doesn’t want to deal with the business. They just want to settle up the estate and move on. And that means selling the business for basically, like, Chad’s really good example of a very famous asset that was fire sold. And so that means selling the business for a fraction of a dollar. It is basically the opposite of what we’re talking about in terms of exit planning. It’s the opposite result. The polar opposite result of planning ahead is to sell it quickly without packaging, without doing the work, for as little money as possible.