Sep 02 , 2021

Exit Planning – Interview with Mike Hart

Listen to the full interview HERE.

Heide: Welcome Mike. Can you tell us a little bit about your role here at All in One Accounting?

Mike: Sure. At All in One, I am a CFO. So I work with All In One clients on their forward looking business plans. At All In One, we’re looking to understand the numbers, get clarity on the numbers and also go beyond those numbers. So I step in at the “go beyond” phase where I work with businesses in terms of what does the forward looking aspect of the business look like? Projections, planning, forecasting, we have quarterly business reviews. Those sorts of things.

Heide: Today our subject is “exit strategy.” I’ve heard on more than one occasion someone saying that the first time you should think about your exit strategy is the day that you open your business. Most entrepreneurs do not do that and they are far behind in terms of planning, so what is exit strategy planning? Let’s start there.

Mike: Well you’re right, every business owner should start planning their exit the day they open the business. However, usually their working on getting that first client, that first sale, so that’s probably not the first thing on their mind. But at some point they will exit their business. Having the right plan for how that will look is very important. Like right legal structure, right accounting systems, right processes; having that all laid out in a way that’s duplicatable for someone stepping into those rolls is very important. And having that planned out and thought out is really what exit planning/exit strategy is all about.

Heide: Why should a small business owner or entrepreneur look into exit planning? Why is that even important?

Mike: At some point, every business owner, every entrepreneur, is going to exit their business. Whether that’s retirement, a sale of the business, a passing it on to family, merging with another company; whatever it is at some point, that owner is no longer going to be involved. So having that laid out in a way that is possible for a new person, a new entity to come in and continue on the business is of the utmost importance. Additionally, having the legal structures set up for tax implications, for transfers of assets is equally important; so that you’re able to maximize your efforts however long that is, whether it’s a year or five years or if you’ve owned the business for 30 years; once you’ve exited the business.

Heide: Exiting is not easy for entrepreneurs. Let’s be honest. We’re all very passionate (most of us) about our businesses and sometimes the first hurdle for us to get over is just to embrace the idea that eventually we will be exiting our businesses, so there’s an emotional component to this as well.

Mike: Absolutely. For many entrepreneurs, their business is a child. It’s something they’ve brought up from nothing and grown. So whether it’s a business that’s relatively new that you’re looking to exit because the growth has been great or you have other opportunities, or something that’s been in the family for generations, there is an emotional attachment too that. Knowing where that business is in its life cycle, knowing where the opportunities are for that business, knowing for that entrepreneur what the next phase of their life looks like. Is it going to be staying on with that business in some capacity in a consulting role or whatever that might look like, or is it going to be going and sitting on a beach somewhere? Knowing what that’s going to look like and having it planned out ahead of time can make that emotional transition much easier.

Heide: Given all that, when should an entrepreneur start thinking about exit planning? When is the right time?

Mike: Exit planning takes time. It’s not something that you’re going to complete in a month. It is something that is going to take time, it’s going to need to be thought out, you’re going to need to understand where your business is, what sorts of return you might be looking at getting on an orderly sale of your business. But at the same time, if we’ve learned nothing from this year, we’ve learned that business disruptions can happen. So having that plan in place when there are unforeseen circumstances is almost equally important. So if there is an issue, if something does come up, whether that’s personally for the entrepreneur, sickness, etc; or if it’s more macro-economic based; then that process has not only begun, but hopefully kind of been completed in a way that you can still go through with an orderly exit of the business.

Heide: Or as we’ve seen this year more than ever opportunities just presenting themselves for sale. I think there’s just a lot of movement in the market that if you have a plan it can at least fold into that

Mike: One of the things that exit planning can help you do is with the growth of the business, is with the opportunities that may arise due to market conditions or simply growth of the business. If you have a business that is growing and you’re looking at making acquisitions, having the proper exit plan and exit strategy will allow you and give you the insight as to: how should the acquisition be structured? What are ways that we can do this differently? Not only to maximize the acquisition that we’re making, but to limit the unintentional consequences down the road when I go to sell. So having that plan thought out even if you’re not looking to sell today; you might not be looking at selling for 20 years; but if you’re looking at growing your business, there are opportunities and circumstances where having that planned out and knowing what that is going to look like is equally important.

Heide: You mentioned business disruptions. How do those impact your exit planning?

Mike: There could be any number of circumstances related to a business disruption. It could be a macro-economic business disruption such as Covid. It could be something very specific for the business, whether that’s an illness or a death related to the ownership of the business, whether that’s specific business disruptions that aren’t necessarily health related. You could lose a client, you could lose your number one employee. Whatever that might look like those will..

Heide: Covid!

Mike: Yes, those will change what your business is, how it operates. So having that planned out and having thought of various scenarios, what does this look like? And being able to minimize those up front. What happens if the owner dies? What happens to the business? Is there someone that’s going to carry it on? Is it going to stay in the family? What happens if your number one employee leaves? What happens if your number one customer leaves? Having that all thought out and thinking about that can help you plan. Diversifying your customer base so that you don’t have a customer concentration will help you maximize your return when you go for sale. And those are conscious decisions that you should be making today, even though they may not impact you for years to come, if ever.

Heide: Absolutely. I think as entrepreneurs, we don’t go there enough to think about things like this. We also need someone to help us think about those things. I think when you start a business, there are so many resources available and people will help you and it’s an exciting time to start your business. I feel like when you’re planning to exit, it’s much different. The environment and the people to help you is much different and we don’t know how to do it on our own. So what does your team look like when you’re thinking about exit planning and exit strategy? Who do you work with? It feels like this big unknown to me.

Mike: As a CFO at All in One, I work with our clients along with our All in One team to make sure their business processes are set up in the correct way, that their financials are set up the correct way. What are the things that we can do within that business framework to help maximize the value of the business? In addition to that, we’re bringing in other qualified, professional people (i.e. lawyers, tax planning professionals, financial planners) to make sure that the business owner understands: “here’s what we need to do to structure the business in the right way, to get the finances in the right way.” But also, what does it look like once you sign on that line and you’re no longer involved in the business and you’re walking away with some money hopefully, and hopefully it’s a big check, what does your next phase of your life look like? And are you able to do what you want to do in that next phase once that sale happens?

Heide: Can you maybe give me an example or two of something that you would work with the client on that they wouldn’t necessarily think about? I feel like we don’t know what we don’t know when  planning for exit. Some of the things that I have heard of, or know are a little bit counterintuitive. So you want to make your business as profitable as possible vs trying to save on taxes. That would be one example. Are there a couple other things that maybe are things that business owners wouldn’t necessarily think of?

Mike: Absolutely. What you’re looking to do, generally, is a business is primarily bought off of some trailing amount of earnings. So when a business owner is taking money out of that business and paying for various things, whether that’s a part time job for their child that’s going to college or their spouse has a car that’s run through the business, there are some things that business owners do that are completely legal and completely legitimate, but may impact the value of the business. Instead of the business making X amount per year, it’s making X minus this number that’s being paid out to other things. So those sorts of things for strategy. I go back to the key employees or the key customers, having the right relationship with that employee, having that employee compensated in the right way, having the customer base diversified. It’s great if a customer says, “Hey! I want to do a lot of business with you, but it’s gonna monopolize your time and it’s gonna monopolize your manufacturing company’s time.” So then you’re not able to manufacture things for other customers. It’s great today because you’re reaping the benefits of that income stream, but when a buyer comes in and says, “90% of your business is going towards this one company,” it’s going to significantly impact the value that you’re getting for your business because they’re going to say, “what if that company leaves? 90% of your business walks out of the door with it.” So those are sorts of things that on a day to day basis an entrepreneur or business owner might not be thinking about, but can impact the value of business significantly.

Heide: Yes, and getting those things in place and having them run that way for a few years prior to sale is key. These are just a couple of the tips that we would give to our clients on exit strategy. Start thinking about exiting your business today, give us a call here at All in One Accounting, and ask for Mike Hart. Thank you Mike!

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