Family Businesses: Exiting in the New Year!
Characteristics for Successful Exit Planning in 2023
It is the beginning of a new year--a time for renewal and reflection about the previous year, and oh, what a year it was! What went well, and what might have gone better? In that spirit, I thought I’d offer a few important topics to consider as you focus on growth and reflect on how best to proceed. These topics represent opportunities to leverage lessons learned in 2021 into better results and more profits, sustainable profits in 2022.
Channeling Johnny Carson’s “Carnac the Magnificent” (he had all the answers), perhaps you will find some crucial answers or even a few new questions ahead. I offer these for your consideration.
Top Ten Small & Family Business Success Characteristics
10. BUSINESS OWNERS SELF-KNOWLEDGE
What role might self-knowledge play in better positioning yourself to meet your goals and what do I actually mean by the term self-knowledge? Dr. Bill Anton, a noted psychologist, best-selling author, and speaker, works almost exclusively with CEOs. Through his company, CEO Effectiveness, he seeks to help leaders tap into, then harness, the great reservoirs of potential locked away in places we weren’t even aware of.
Until age eight, we humans are sponges and have developed most of our mental models by that age. We carry these experiences with us for the rest of our lives. These models are at the forefront of how we make decisions, how we lead, how we love, and how we live.
It isn’t until later in our development that connections between the left brain and right brain are made. These connections provide access to the frontal lobes, where maximum creativity and deep thinking are found. You want to access these lobes but mental models developed years earlier might be preventing you from doing so. By definition this stifles your potential.
The journey to self-knowledge (different than self-awareness) can help here. It is especially poignant in the aftermath of COVID 19 and how we responded to the challenges it brought to our doors. If you’re a reader and interested in the topic you can reference Bill’s books here.
9. EXIT PLANNING PROCESS
It is not by accident that I follow #10 with this topic. Whether you have seriously considered exiting your business or not you can benefit immensely by understanding the process. You have seven choices and there are serious implications associated with each of them. Understanding each and how they align with your goals is critical. The real value is in how this new found knowledge informs your operating decisions and improves the attractiveness of your business.
You learned in 2021 just how fragile the value of your business might be. For many of us, it represents the single largest asset in our portfolio. We created it or had a hand in growing it, and there is an inextricable link between that business and how we identify ourselves. Michael Valdez of Synergy Wealth Alliance says, “This is no small matter to easily cast aside but rather an essential psychological component of the sales process that must be acknowledged.” Yeah, our identities are definitely wrapped up in our businesses! Glossing over this reality is a root cause for much of the indecision I see where an owner says she wants to sell but makes no movement towards that end or kills the deal in the 11th hour.
Increased self-knowledge and understanding the exit process, whether exiting in the near future or not, is a decisive step in overcoming the inertia that results from having your identity inextricably bound up in the company you run. You are more than your company.
8. GOVERNANCE AND MEASURABLE GOALS
The quality of your earnings is directly linked to the multiple of EBITDA or Revenue an investor will assign to value your company. Governance is a key factor in ensuring that quality drives the highest multiples.
I just had a client sell his business 60 days from the time he received an unsolicited offer for 10x EBITDA all cash. One of the overarching reasons he was able to go through the due diligence process unscathed and why the buyer paid such a strong multiple was directly tied to his governance.
If you are interested, Investopedia defines corporate governance as the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as family, investors, management, workforce, customers, suppliers, and the community. Having this documented can be a game changer.
It also relates to a thoughtful approach to the exit planning process. Having taken the time to develop good governance can pay dividends in terms of a final company valuation. Did you know that different exit choices produce other valuations? Where a potential buyer is evaluating two firms of similar size and profitability, the one with better governance might reasonably expect a premium for their company. The premium reflects a reduction in risk associated with practicing good governance.
7. DAY TO DAY MARKETING STRATEGY
How are your marketing efforts going? Have you finally gotten to a point where you can measure the effective ROI of these efforts? How has the sales process benefited from this effort? If marketing’s point is shortening the sales cycle by being more effective in audience reach and messaging, you should see its impact. Are you?
In today’s world, it is no longer sufficient for many businesses to put up a website and simply call it a day. The great news is that modern marketing efforts are much easier to track and measure than those in the past. Any business that isn’t tracking and improving its results will lag the competition.
6. OPERATIONAL PROVEN PROCESS IMPROVEMENT
There are essentially two ways for you to drive more profitability in your business. You can drive the top line, and you can drive down costs. Yes, of course, you can also make acquisitions or take advantage of structured financing to boost profits, and these techniques remain in play. I’m speaking though on the core of the business, the engine that drives cash.
The call for continuous improvement has been a long and well-documented one. Despite this, I find too many organizations who know it intellectually but fail to pursue it. Processes get appended, not reengineered and the associated inefficiencies add a burden that erodes competitiveness. Remember, every $1,000 in cost savings adds $5,000 - $7,000 in value to your company. Will this be the year you take a hard look at this?
5. MANAGEMENT TEAM LEADERSHIP DEVELOPMENT
Many businesses are run by a workforce in the waning years of their work life. This has never been truer than now in the middle of the Great Resignation. The potential for significant turnover is high. The challenges in filling needed positions is inexplicably more difficult than ever.
What are you doing today to plan for that turnover and loss of institutional knowledge? What are you doing today that addresses the labor shortages most of us are experiencing? There is a direct link to the value of your company and the answer to this question. Will the core competencies you need to compete in the future be different than those you have now? Is your industry morphing? Do you see change on the horizon?
You need to identify the competencies needed in the future now and begin bringing candidates for tomorrow’s leadership into the pipeline today with leadership development planning. Your survival may very well depend on it.
4. STRATEGIC PLANNING ISN’T JUST FOR LARGE COMPANIES
To quote Dr. Phil, “Plans move vision to reality, intentions to results and purpose to performance.” Growth planning is a continuum of thinking, planning, and acting on purpose. According to John E. Johnson and Anne Marie Smith in their best-selling book, 60 Minute Strategic Plan, you first think of outcomes you favor most, then plan the steps to accomplish those outcomes, and finally, you take action to get results.
This last step is where I see most organizations fail. They fail in the execution. If you do plan on developing your plan, or you’ve already revised last year’s plan to recognize today’s realities, DON’T DROP THE BALL! Get it across the goal line by taking action. If you need outside help to manage the process or hold you accountable…get it. It is that important!
3. BOARD DEVELOPMENT IS AN OPPORTUNITY
Frankly, I don’t see many small family businesses taking this step of bringing non-family business people onto a board of directors. Whether a fiduciary board of directors or a less formal advisory board, I think Board Development is a missed opportunity. I recently had lunch with a sailor friend of mine, the CEO of a large healthcare company. We were discussing the value of different perspectives in solving problems. While the context was about the importance of teams in problem-solving, the lesson for boards is the same.
He recounted the time he and a group of 19 other colleagues took a Coast Guard “Lost at Sea” test designed to demonstrate the value of different perspectives. The test essentially put everyone on a boat crossing the Atlantic when it was struck and began sinking. The captain and crew were lost. Their task before them was to list the items they felt should be salvaged in order for them to survive until rescued. My friend, was confident he would ace the list, and in fact, he was the most correct. It turns out, though, there was room for improvement. The second part of the exercise had them tackle the same question in teams. As you already suspect, the team approach with its varied perspectives brought new information into the discussion, and the final list was an improvement over the individual one.
Diverse Boards, developed intentionally, can raise your game and help the executive team see around corners more clearly. In today’s competitive environment, this can be a huge boon to profitability.
2. BUSINESS SUCCESSION PLANNING
It is no accident that I followed board development with succession planning. Succession planning takes time. Whether passing the mantle of leadership to family or non-family members, we do our successors a disservice if we give them the responsibility of leadership before they are ready, before they have earned it. The plain fact of the matter is that we grow our businesses with the effort of those who show up to work every day. By recognizing the importance of leadership acceptance by the rank and file, you’ll improve on the very disappointing statistics of failed succession plans.
The board, especially an outside board, can be an effective mentoring mechanism for preparing this next step. We are currently doing this for a public company whose board I serve on.
To lead effectively with a keener appreciation for different perspectives can inform decision-making and position the next generation of leaders for the success they deserve and that you wish for them.
1. BUSINESS AND PERSONAL CULTURE
Your culture is perhaps the most impactful thing you can do to sustain the trajectory of your success for years to come. Most companies exist in a commoditized environment where their products and services look mostly alike. Coming out with new products and services is great, but it merely creates a short-term window of opportunity to be different. All serious competitors hire smart people, so you probably don’t hold a distinct advantage because your people are smarter, though they might be. The problem is that good products/services, and smart people are not enough to create a sustainable competitive advantage. Culture, however, and the experience your people deliver to customers and each other along with their contribution of discretionary effort is not so easy to duplicate. Therein lies the silver bullet to remaining competitive in a dynamic environment.
So, there you have it! My countdown for 2022 for your business. Your issue(s) not on the list?! Put them on it and work them. Showing up is ½ the battle.
NEED HELP TO ACHIEVE YOUR DESIRED OUTCOME?
Are you thinking about selling your business? Have you explored all the exit options? Does the planning you’ve done align the business and personal goals along with your financial needs? This last piece is critical and differentiates Pathfinder Group from the pack.
Let us know if we can help you with your 2022 growth and exit planning strategy. Our team of subject-area experts could provide just the outside view you need to improve your business’s performance and profitability. We have decades of experience servicing businesses in the Tampa and greater Florida area.