On this week’s episode of the Thinker What Works podcast:
Jason: You’re listening to Thinker What Works podcast. I’m your host Jason Todd with my co-host Alex Gary, and today, Brian McIntyre. We’ve known Brian for a number of years, worked with him in a business consulting capacity, and today we’re talking about exit planning. Exit planning with Brian McIntyre. Brian, welcome.
Brian: Good afternoon, gentlemen. Thanks for having me.
Alex: All right, so when we’re talking about exit planning, there’s different ways to talk about it, but what are we talking about today when we talk about exit planning?
Brian: Well, there’s approximately, 70% of the businesses are going to change hands within the next 10 to 12 years. They’re going to change hands either by planned, or they’re going to change hands unplanned. The goal is to plan your exit.
Alex: Is it a problem? I mean, people build businesses. You would assume that they would have a plan for what’s next?
Brian: Yeah, I would ask any listener of this podcast to walk down his main street and find the owners of the businesses that he attends and just say, “Have you planned for your business exit?” And I guarantee nine out of 10 of them have yet to plan their exit from their business.
Jason: Which is interesting because that seems in contrast to how you hear talk about many startups, where it’s like, oh, you gotta know what your exit strategy is. Talk about exit strategy, exit strategy, exit strategy, but in practice, most people who start businesses have no thought in how they’re going to get out.
Brian: Absolutely. In practice, it’s about how do I get my next customer in.
Jason: Yeah. So what happens when a business doesn’t plan their exit?
Brian: Unfortunately, probably for the most part, it’s an unpleasant situation. The spouse is left with it. The partner’s left with it. There’s not a buy-sell agreement. I mean, too oftentimes, businesses have owner A and owner B, and they just assume they’re both going to be around forever. It doesn’t happen. It’s key to have those types of agreements put in place, if not when they start the business, shortly thereafter.
Jason: So how long have you been working with small business owners?
Brian: Since … I’ve been involved in small businesses just about my entire career. I started my firm as an independent back in 2000, and then we incorporated the firm in 2009.
Jason: Okay. But you’ve been working with small businesses for …
Brian: Oh, yeah-
Jason: Longer than that.
Brian: 25 years.
Jason: Yeah, so you know this space really well.
Brian: Yes. Absolutely. I mean, it’s what I enjoy doing. I’m not a corporate guy. I spent a few years in corporate America. I didn’t fit. They didn’t like me. I didn’t like them. So, I’ve now spent my life with small companies.
Alex: Yeah. How long do you have to start thinking to properly put an exit plan in place? Is it something, “Hey, I gotta have an exit plan. I want to get out in six months.” I mean, how long does it really take to put a good exit plan in place?
Brian: Yeah, a good … Alex, I mean, that’s a great question. The challenge becomes how good do you want it to be. You know, two-thirds of the folks that I work with, when I ask them when do you want to get out, and they say, “Tomorrow would be fine.” If the goal is to get them out tomorrow, we’re going to do our best to get them out as quickly as we can. The problem is it’s not necessarily planning. It’s doing. And it’s not planning. It’s reacting. So what we try to do is give somebody at least three to five years.
Jason: And what do they need to do? I mean, to have a company that’s ready to sell, to be turnkey to somebody else, what are some of the things you have to implement?
Brian: What we do is we try to find out what’s the financial situation, the financial situation of the owner, financial situation of the business. Too often, we’ll do a business valuation, and the owner things the business is worth, and we’ll pick a number, 10 million dollars, and he’s going to walk away with 10 million dollars. The problem becomes it’s not worth 10 million dollars. It’s worth maybe six million dollars, and by the time he pays his taxes and pays off his loan obligations, now he’s looking at maybe two or three million dollars. That’s nowhere near what his expectation is as a business owner looking to get out, so if he needs 10 million dollars out of it, we work over the two to three years we work with him to try and get the business valuation up to where it needs to be.
Jason: So you find that people somehow are, and I don’t mean this in a derogatory manner, but they’re ignorant, then, of what their business valuation is. And so they’re going into this inevitability really completely blind.
Brian: Yeah. They haven’t … It’s not on their radar. I mean, we’ve all been associated with startups. It’s an exciting thing, right? It’s exciting to get the first customer, exciting to move into your new office. It’s exciting to do an IPO if that’s something you want to do. Those are exciting things, and they’re beginning things. Business exit planning is like shopping for life insurance, right? You don’t want to do it because you don’t want to face the end.
Jason: Yeah. It’s mundane, and you’re paying now for something that, well, yeah, it’s going to come, but yeah, it’s not going to come, too. It’s too far off.
Brian: Right. Yeah, and you might not get to enjoy the fruits of the labor.
Jason: Mm-hmm (affirmative).
Brian: So, yeah, it’s a difficult thing. And you try to get … and I know we’ve done it here in town a number of times. You try to get folks together to talk about business exit planning. Well, I don’t want to go to that event because then my competitor thinks I’m going to be out of business.
Brian: So you have a very, you know, not only a mortality of your business and yourself as your business, but now you’re announcing to the world or to someone else that I’m going to get out at some point, and it’s a vulnerability thing.
Jason: How much of this thought process do you think is related to small business owners thinking about their businesses as an extension of themselves rather than thinking about their businesses as investments that should be treated as an investment like any other investment?
Brian: The folks that I work with, it’s an extension of themselves.
Jason: Mm-hmm (affirmative).
Brian: They can’t separate the business from themselves because they’ve been working 70, 80 hours a week for 30 or 40 years. So it becomes a serious part of their life, and obviously it’s worth what I think it’s worth because I put the work in. Right?
Jason: Right. And everyone should value my work, right? Okay.
Brian: Right. Right. When we do a valuation, we don’t value your work. We value your results.
Jason: That seems harsh.
Brian: Wall Street’s harsh. The bottom market’s harsh.
Alex: Like flat organizations, right? When you read Good to Great, they talk about … No, sorry. Built to Last. That was another Jim Collins book. Built to Last. You know, flat organizations, where everything revolves around the owner or the president or the CEO, and those companies tend to not do well when they’re passed on because they didn’t build the structure of, you know, a proper way to do business.
Brian: Yeah, that’s a factor you look at when you’re doing a valuation, is how involved is the owner and how critical to the business is the owner. If the owner is involved in day-to-day operations and just mundane type tasks, that’s a higher risk factor for somebody else going in. You know, it’s real easy to have an investor purchase a company where the owner is looking strategically at the business versus where the owner’s involved day to day.
Jason: Do you ever work with people looking to buy businesses?
Brian: Not as much.
Jason: Because the question would be, when you’re looking and helping somebody to buy a business, what should they be looking for? What should they look at the business to see if it’s worth the investment?
Brian: You gotta look at the industry. You know, fax machines were real popular, what 20 years ago. Don’t exist today. You’ve got to look at … Obviously, you’re going to run all your financial models and look at that. You’ve got to look at … What we used to do, when I worked for an investment firm, is we would spend a month on-site. We’d talk to customers. We’d talk to vendors. We’d talk to employees. We’d look at quality systems. I mean, we would look at a lot of just what I would call operational business-type details to ensure that there’s goodwill out in the community with the business, that the employees are happy, not necessarily happy but productive, and want to stick around.
I mean, worked with a guy here in town, bought a small machine shop, and only had three or four people to it. Obviously, three or four people are key, that have had 30 years experience with the business. I mean, we spent a lot of time ensuring that those three or four people stuck around. So I think the key is having the infrastructure, however big it is, it needs to be solid.
Jason: Mm-hmm (affirmative). And you talked about one of the risk factors being the owner of the organization. Typically, in small businesses, that owner is kind of the linchpin that holds the whole place together, and if that owner were not there, someone would have to replace that owner. And I think one of the things we talk about is that investors don’t want a job. They want a business.
Brian: Correct. They’re buying cash flows.
Brian: They already have jobs.
Jason: So as an owner who is involved with the business, you’d have to be replaceable because your buyer who wants to pay you cash doesn’t want also your job.
Brian: Right. We’re working with a company right now here in town where he has his son involved in the business. Son has expressed some interest in taking over. What we’re going to do in the next several weeks is find out (a) does the son want to take over and (b) does the owner want the son to take over, and if he does, we need to find the gaps that are involved with the son. If the son doesn’t want to take over, then we need to look at some other areas. And the owner, great guy. He’s just saying, well, if the son doesn’t want it, he doesn’t have to take it. I’m not going to force it on him.
Okay. Let’s make a decision. Start the process.
Jason: So, how do you look at a situation such as a family-owned business, because those are kind of unique situations, I think sometimes, where you have a son who might take over and you also have this idea of what is the business worth kind of on the open market … How do you look at a business in a situation that, well, it’s a family-owned business, son might take it over, or we need to prep it for sale on open market? What are the thought processes that go through your mind? What’s your counsel?
Brian: Ultimately, what we want to do is set the business up and sell the business to a competitor. Right? If I can sell it to a competitor, competitor already knows his space. He’s got the infrastructure. He doesn’t have to pay the overhead. Competitor’s going to buy strictly the gross margin of the business, which means the value of the business is much higher. You don’t have to pay your controller. You don’t have to pay your receptionist. All those things are in place.
You’re buying a book of business, and the value is tremendously higher for that. If we end up selling it to a family member, we take a whole different approach. The key is to make sure, if you’re going to give it to a family member, do you give it to, wow, I’ve got three sons. Son A has been with the business, and he wants it. But I want to be fair to all three sons. So do I give it a third, a third, a third? I mean, those are situations that come up all the time. And maybe son number three was with the business, has left the business on bad terms. Now what do you do?
Brian: So there’s a real balancing act between the needs of the family and the needs of the business, and you can’t overemphasize one over the other. You’ve got to have both.
Jason: Everybody has different values, what they prioritize, right? Some people might prioritize the business higher than family, and some people prioritize family much higher than business.
Brian: Right. That’s what you’ve got to get down and dirty on, and sometimes it’s ugly.
Alex: That’s a question, is have you had times where you went in and your counsel was to go one direction, and the owner just didn’t want to go that direction, so …
Brian: Absolutely. I can tell you I experienced myself personally that some folks we were working with, and headquarters was in St. Louis. They opened up a Kansas City branch. Son worked at the business, and the kids were probably in their 20s. Yeah, son was in his 20s. Daughter was in her 20s. Daughter wanted to go to school out in Kansas City, so she worked part-time at the Kansas location, was really draining the location both emotionally and financially, and I highly recommended that the daughter no longer be involved in the business. And the owner’s response was, “Goodbye, Brian.”
Two years later, the business sold for a fraction of what it should have sold because the owners just couldn’t divorce themselves from the family issues. You’ve gotta balance them, right? You can’t fire your whole family, but at the same time, you can’t let the business go downhill because of a family member.
Alex: So let’s say you’re 55, maybe 60, and you’re thinking about retiring. And you haven’t done any preparation. Right? What are the steps you need to start taking to get ready?
Brian: You need to find a quarterback. Quarterback will help you balance the family issues along with the business issues, will also work with your attorneys. Usually, if somebody’s had a business, say, 30 some years, they’ve got a pretty good support system whether it’s insurance people, attorneys, CPAs, and they all have a special role in getting the business transferred to the next owner. You can’t exclude them. They’re vital. But you also need a quarterback, and you need somebody that’s going to put all those pieces in place. So I would say that’s the first step, is finding your quarterback and finding what are the family needs of the business, and what are the business needs of the business. Step one.
Alex: What’s step two?
Brian: Step two is going through the process of saying, okay, I’m a business owner. I’ve owned this shop for 30 years. What does success look like for me when I get out? So, a success plan is being able to keep all my employees working. You probably know, you work with small business owners who have had the same team for years. They will tear up when you talk about their employees. I mean, they want their employees taken care of. So let’s figure out what the success plan looks like for you personally and then figure out what the next steps are for the business.
If we decide that we want an outsider or even a family member involved in the business, now it’s like, okay, how do we make that happen. If we want the son to take over the business or the daughter to take over the business, we need to make sure they’re prepared, and that doesn’t happen in six months. Usually, they’ve been a great right-hand person, or maybe they’ve been in the sales department and haven’t worked in finance or operations, so you’ve got to get them well-rounded.
Statistics are that, I think, eight out of 10 businesses that transfer to the second generation don’t make it. It’s because they weren’t properly prepared.
Jason: Mm-hmm (affirmative). Yeah, and I think is it into the third generation, you’re looking at 97, 98 something like that, percent of businesses-
Alex: It’s even wider. Even-
Jason: Don’t survive.
Alex: Even none … If you sell a business to another entity, typically because the business hasn’t been set up properly, one of the things I looked up … 40% of those businesses lose money in the first year.
Alex: Because the buyer didn’t know exactly what he was buying.
Brian: Right, and he probably lost some key folks that didn’t come along for the ride.
Jason: Yeah, so, I think one of the things that we look at is preparing for a proper disruption in business because business will be disrupted. People make decisions based on belief, and when you change ownership, people’s belief sometimes changes, and their buying behaviors change with it. So they thought, you know, Joe, the owner, was a great guy, amazing standup gentleman, been there forever. All of a sudden, he leaves, and they think, oh, business going to go downhill, so I might as well get out now, not even thinking, no, no, no, the business is actually operated by a bunch of people, and it’s not just Joe.
Jason: And Joe hasn’t been involved in it for the last three to five years.
Jason: And then I think the other thing is, you know, not building in enough financing, making sure that they’ve got a runway there, ensuring, I think, was it Harvard’s rules of business, number one, don’t run out of cash. And then two, three, four, five, six, seven, eight, nine, 10, don’t run out of cash.
Brian: Absolutely, absolutely. Far too often, there’s an expectation that there won’t be a disruption. So if you don’t plan for a disruption, you will have a bigger disruption.
Jason: And then along with that disruption, those key employees, they may say they’re going to be there, but if they’re not contractually obligated to be there for some reason, they’re going to get cold feet at some point in time. How are you going to manage that when you’re now the new guy on the block and trying to build rapport with those employees?
Brian: Yeah. You want them there contractually, but you also want them there because they want to be there.
Jason: Yeah. Right. So how do you help people navigate that kind of muck and mire? What’s day one look like? So now you’ve come to the end of your transition. Now you’re into day one.
Brian: If you planned it properly, day one looks a lot like the last day.
Jason: Mm-hmm (affirmative).
Brian: And you’ve had conversations with key people, you’ve put people at ease, you’ve told them what you’re going to do, and you’ve showed them what you’re going to do, and you’ve involved them. With any business, the less people know, the less secure they are. So what we try to do is just share all the plans with the folks … and again, each one’s unique, but, hey, you know what, we’re going to replace this piece of equipment in the next two years.
“Well, I’ve been using this for the last 20.” “I know, but I felt it important for you to know we’re going to replace it in two years. We need your help getting the replacement.” So keep them involved, and they’ll feel a lot more secure.
Jason: So I think maybe one exercise to think about for a small business owner who recognizes the need to have some sort of succession plan but maybe they’re going to cold feet with even thinking about that and they’re not ready to take it to the next step, but they realize that, yeah, I should probably do something … What do you think about maybe the process of even starting to write down everything I do. As the business owner, here’s everything I do, here’s how often I do it, and here’s who I do it with [crosstalk 00:18:57] just that list.
Brian: Excellent. That’s an excellent, excellent approach. We work with clients who are often just a normal business owner who doesn’t have enough time to do what he wants to do because nobody has enough time, right? So we try to get him to take a log. I want you to log what you did today and take out five minutes of every hour and write down what you did that hour. It’s a pain.
Brian: But they’re going to find out that they’re involved in some pretty serious things that they need to be involved in and, far too often, they’re involved in a lot of mundane things that they should not be involved in. You know, we have owners with two million dollar companies that have to look at every invoice. Not quite sure the value of it, but they feel they need to do it.
Alex: One of the things that we’re facing now is a lot of the business owners that are looking to retire would have retired 10 years ago, right, if it wasn’t for the recession. And so now you have this big glut of businesses for sale. How is that affecting the market? Are there almost more businesses out there than buyers?
Brian: Probably. I can’t say that for sure. I can tell you that one of the keys of a business valuation is what are like businesses do, how are they selling in the marketplace? So, probably about 50% of the value of your business is going to be what are comparable businesses selling for throughout the U.S. and throughout your area.
Jason: So, kind of like homes, then?
Brian: Exactly, so, and we look at it as a multiple of sales prices to revenue or as a multiple of sales price to what the owner has taken out. So it can be transferred through different industries and different locations, but that’s a key part of what’s going on. So you may have a machine shop that may show financial worth or cash flows of x, but like machine shops that are doing fabrication in the one million dollar a year range aren’t selling for anywhere near what you think they should be worth because they’re just … it’s like home.
Jason: So where should a small business owner, who’s listening to this podcast, go to, or what should they do next, having heard all this?
Brian: I think they have to come to grips that the business is not going to be the same in 20 years probably. They have to come to grips that they have a major influence and control over what the business is going to look like in 20 years. I mean, we all buy life insurance because we want to take care of our families. Let’s look at the same thing as to what you want the business to look like when you’re no longer involved. And you make it happen instead of letting the market make it happen.
Jason: Because transition’s coming for you. You can choose your transition, or your transition can choose you?
Brian: Exactly. Well said, Jason.
Jason: Well, Brian, it’s always a pleasure speaking to you, particularly on this exit planning issue, which we know is a huge issue for a lot of small businesses going through this generational change, and then also as small business owners begin this planning process, how do they run their business today based on how they might want to sell it, you know, several tomorrows from now. So, again, great talking with you. Is there anything that you’d like to leave our listeners with as we end our podcast with you?
Brian: No, it’s what you said, Jason. The transition’s coming. It’s whether you want it to come or not, so let’s get prepared for it.
Jason: Awesome. Well, thanks for joining us this afternoon.
Brian: Thanks for having me.