Transitioning Your Business? Plan Now to Increase Value and Impact

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1:33There's no safe like SimpliSafe. We're in the midst of one of the biggest generational wealth transfers of all time. And that's not just me saying that. We're in the midst of one of the biggest generational wealth transfers of all time. That's a guy who should know because he helps make it happen. My name is Brandon Knight, and I'm a managing principal of industry at CLA. CLA is a professional services firm that helps privately held business owners and their companies throughout their life cycle. I'll tell you even more about them in a minute, but just to be clear, we're talking everything from advisory, tax consulting, outsourcing services, valuation, legacy services, transaction advisory, and so on.

2:13And if you're going to be helping business owners and their companies throughout their life cycles, then of course, one of the most important, you could argue maybe the most important parts of that life cycle, is the very end of it. What happens to the business? What happens when you're ready to sell it? Well, the answer is, you better be prepared, which means you need to start thinking about this early. But wait, before we get into this any deeper, Brandon has an important thing to share. Well, Jason, before we get started, I do need to say a quick disclaimer that my comments today are intended as general information and don't constitute financial or accounting advice.

2:53And you know, a lot of people need this general information right now, need to be planning right now. Because let's just go back to that thing that you heard Brandon say a moment ago, we are in the midst of one of the biggest generational wealth transfers of all time, of all time. And you know why? It's because of baby boomers. They did an incredible job of starting and building privately held businesses. And now they're reaching that point in time where it's time to talk about transferring those businesses. Now they're thinking about retirement. We're thinking about transition. As a matter of fact, six out of 10 privately held businesses is going to transition in some form or fashion by the year 2030.

3:33That's 60 % of privately held businesses today, which is an astonishingly high number. And when we think about what that transition means, it could be to a third party, but it could be to the next generation of that business owner's family. It could be to a family office or private equity. And it could even be to the management team that's looking to do a management buyout, or maybe the employees through an employee stock ownership plan. So there's a number of ways that these businesses could potentially transition, but the time is now to start thinking about a lot of those things. Because here's the thing, Brandon says, people, you know, they spend their whole lives building a business.

4:09And maybe it's very successful, but just because it's successful, just because people like it, just because it has customers, just because it makes money, just because any of those things doesn't mean that it's ready to be sold or transferred or for the founder to step aside. You have to plan for that. And what Brandon is seeing in his work at CLA is that most people are not planning as well as they should. So we have the great fortune at CLA of working with over 85 ,000 privately held businesses. I would say that generally speaking, folks are not as prepared as they would like to be, or we would like to see.

4:4851 % of all business transitions are actually involuntary. That statistic was provided by the Exit Planning Institute, which surprised me. Oftentimes we don't think about transitioning businesses until we have to, or until we're ready to do so. when evidence would suggest that planning on a proactive basis, much better positions a business owner to maximize value and transition that business. So that's what we're going to be talking about today. How do you do that? Brandon has identified three major mistakes, because here we are on Problem Solvers, three major mistakes that people make when approaching the sale of their business.

5:27How they are not planning for it properly. What are they not looking at? and how can you approach this in a way that maximizes value for you and your business? Are you not ready to sell your business right now? Well, keep listening because that's kind of exactly the point. This isn't just for people who are right at that point, who see the finish line in sight. No, this is for the planners. This is for the people who think ahead. So that's what's coming up today on Problem Solvers. Though before we begin, I should note, we are actually producing this podcast episode in collaboration with CLA. So let me tell you a little bit more about CLA.

6:05CLA exists to create opportunities for our clients, our people, and our communities, providing industry-specialized advisory, digital audit, tax consulting, and outsourcing services. Whether you need traditional public accounting services or something more specialized like valuation, owner legacy services, and transaction advisory, we promise to know you and help you on each step of your journey. In one sentence, we'll get you there. CLA is Clifton Larson Allen LLP. See how CLA can help you, your family, and your employees prepare for the seamless transition of your business. Visit claconnect.com.

6:44All right, now let's really dig into the conversation that I had with Brandon and the three big mistakes that people make when planning or not planning enough to be selling or transferring their business. I started by saying to Brandon, you know, this conversation actually was really educational for me because when I think about selling a business, I think, you know, you get to that point where it's time to sell the business and then you buckle down and you figure out how to do it. But the counterintuitive lesson that he wants to share here is that you actually start preparing to sell your business long before you are ready to sell your business or maybe even long before you're ready to emotionally or reasonably be thinking about selling your business, because that's the only way to actually be prepared.

7:34These are tough conversations. You know, when we talk about baby boomers and doing an incredible job at starting our businesses and growing and operating those businesses, these individuals, these privately held business owners are incredibly good at doing those things. And when we think about planning for an exit, you'll hear a lot of comments around, well, I'm still in growth mode or I'm not ready to sell. I love what I do and I'm not ready to let go of the business. Maybe they don't want to have a lot of the conversations with family members around what a transition might look like or their management team because they're worried about flight risk.

8:10But these are healthy things to talk about when it comes to business transition, even if it's 10, 15 years down the road. I think by looking at just three of the major mistakes that people make, we get a really good guide for how people should be thinking about this important step in the life of their business. The first one you've already set up in a way, it is not planning. You told me that one of the greatest fallacies that business owners carry around with them is this belief that their business is always saleable. When in fact, it's not. Their business is not just always sellable. You can't just take it to market whenever you happen to want to and people will see great value in it.

8:57You have to plan. Take me into that. Why is that not true? Why is a business not just always sellable? So business owners generally have a high perception of their business, which is great. They work harder than it. They've grown it to where it is today. But when we think about a business being saleable, I heard a great line from an individual at a private equity firm that we work with here at CLA. And he said, when it's time to sell your business, you don't want to have to sell that business. You want your business to be bought. And when we think about business transitions or sales and business and transition and sales that are done well.

9:33We're thinking about things around the context of, is this business transitionable? One. And two, have we maximized value? Can you unpack that distinction for me? As soon as you said it, I started to kick it around in my head. It's the difference between you don't want to sell your business, you want your business to be bought. Translate that. Understanding how a given business differentiates itself in the marketplace. What makes it unique? Where is the inherent value within that business? You know, when we talk about saleable, we're also talking about price and how we maximize that price that's going to give that business owner, the seller, what they might need to accomplish their other life goals through family succession and planning.

10:17Maybe it's a vacation home, whatever that might be, but understanding truly what their need is to accomplish the goals that they have and understanding how the business fits into that broader plan. So it's almost like, look, everybody thinks, all right, well, I'll just go sell my business, which means that I'm going to put it on a marketplace or something, however people are going to do it, versus I'm going to plan to have something that is so optimized and that potential buyers are going to see such value in that they'll see the opportunity. I won't have to be sitting there selling it. They'll see it and they'll want it.

10:54And those are indeed different things. Absolutely, they are. You think about it like so many things in life, where are you trying to go? Where are you trying to accomplish? And we'd like to reframe the conversation instead of saying, let me think about retirement with what I have. What do I need to retire the way I want to? So when we think about business transition, it's bringing the end to mind today so that we can better predict and plan for what we want the outcome to look like. Now, the tenets of what it means to be planning is long and deep and complex, and that's the great work that you and your colleagues do at CLA.

11:33We obviously can't cover all of that here right now, but can you just take me into maybe one thread of it? For example, you'd said you need to be planning for your business to be transferable. What does that mean? And how would somebody be thinking about and planning for that years before they're ready to sell the business? Jason, one of the things that we see most commonly in privately held business is really understanding the bench and pipeline of the management team at a given business. Is this management team able to really understand the business value triangle as it relates to understanding our sales function, our financial function, our execution arm?

12:20so that we're positioned to execute on today, but also strategically think about what we're going to be up against in the future years? Or does a lot of that really rest on the shoulders of the business owner? Ah, that, Brandon, feels like a tease up perfectly. The second big issue, big mistake that you see people make when they approach selling their business, which is owner dependency. Tell me about that. Owner dependency is something we talk about and observe a lot in a lot of the clients we work with at CLA. And first, I'd just like to mention that these are talented individuals, business owners.

12:58They've started a business, oftentimes from nothing, and have created something of value today. And so it's because of the good and hard work they did that we have what we have today. But one of the things, Jason, that we do see is owner dependency. When a client is more mature in their life cycle of a business, we're off the ground, We're generating revenue. We're generating income. And we've amassed an employee base, taking a different approach and understanding who are the individuals that are really driving that company into the future. One of the things we see is owner dependency, whereby a lot of those decisions, it could be customer relationships.

13:33It could be the day-to-day execution. It could be the strategic vision for the company really rests on the shoulders of that business owner. And that can be okay in a lot of respects. But when we start to think about transition and value and purchase price, that brings into the conversation, where does that value reside? Is it value of the business or is that value really dependent upon that individual that owns the business? What you just said reminds me of a kind of story that's shown up a couple times in the years that I've been at Entrepreneur Magazine. And the story goes like this. There is a business owner and they've started something and it has grown.

14:18And then something awful happens to them. There's a health emergency. There's a family emergency. They need to step away from the business for some period of time. This is difficult because they are the beating heart of the business. The business has been structured in a way that relies upon them to be there every day, to be doing all these things, to be managing all these relationships. And the reason that this story has gotten told an entrepreneur is because they discovered that they needed to build systems in place so that they weren't the sole factor in their business's success. And that these systems, in fact, were supposed to be replacing them, these systems and these teams.

15:03And they always say this thing, which is, I didn't want it to happen like this. I didn't want it to be this health issue, this family emergency that pushed me to do this. But I'm so glad that there was some forcing function for me to realize that I needed to pull myself out of the hard center of this business and replace myself with systems so that this business could scale better and so that it wasn't entirely dependent upon whether I was able to show up at the office or not. It sounds to me, and I'd be curious what you think, but it sounds to me like what you're describing here is, hey, you don't need some terrible emergency to start thinking like this.

15:39You need to be thinking like this, number one, because it's the best way to grow a business, but also because it's the best way to make sure that your business is saleable. Because if you are so core to your business that it literally cannot operate unless you're there every day. Well, then who's going to buy that? Because they're not buying you. You're going off somewhere else. So they need to be buying something that can run without you. Am I right? Absolutely, Jason. When we think about transition, and let's just for a minute, think about the business life cycle. Starting, growing, operating, now we're at a profitable stage.

16:13One of the things that we like to talk about before we even think about maximizing value is de-risking the entity. And you just hit on in your story, what we call the five D's, death, disability, disaster, divorce, and disagreements. How do we protect against those things? Because 51 % of business transitions are involuntary. A lot of those things are due to the five D's. So what can we do to de-risk this entity? Because we've already built value. We've already amassed a company of employees and customer relationships. And we wanted to risk that as much as we can before thinking about maximizing value or an ultimate transition.

16:56I love those five Ds. It's a really clarifying way to think about it. Again, the answer to how to do this is deep and complex and it's the work that you guys do. But can you just give me a little bit of a window into it? How do you start? Let's say that you're working with a client who has not fully removed themselves from the center functionality of their business, but they're going to need to in order to make this business saleable. Where do you start? Jason, how we start is with that end or that new reality they envision for themselves. Where do we want to go? And when we paint a good picture of where we want to go in terms of size of the company, revenue size, maybe it's a price that they'd love to sell their business for, It's backing that up and saying, are we doing the things we need to today?

17:48Do we have the team we need today in place to make sure that we can achieve that? And when we start talking about questions around, well, what if this happens? Right to your point earlier, what if the business owner falls ill? What's going to happen? Okay, how do we protect against that? Who could be your number two? The individuals in the organization have a good idea on what your day-to-day looks like so that they could appropriately execute on some of those items in your absence, right? It's starting with that end in mind and backing into, do we have the team in place to execute on that? But then also, given certain 5D type events, are we protected if those would happen?

18:30So it's about identifying the team and the people, but then making sure that they're empowered and creating the organizational structure where they're able to do their best and know what they need to do. Because something you just said there, I think is probably a light bulb moment for a lot of people, which is, you know, when you run a business, there are so many things that you just learned to do, but you never wrote down, you never shared with anyone else. And if you were to disappear tomorrow, people might not know what it is. You know, it's almost like saying you never told anybody where the light switch is.

19:08And so you're the only one who can turn the lights on in the morning. How do people start to do that? Are they building out guidebooks? Are they training other people in their jobs? How do you start to transfer that knowledge? Jason, I think it'd be easier if I gave you a real world example. Perfect. We were working with a client that had this exact pain point. This business owner was in their mid fifties. They're thinking about retirement in the next few years. And we started going through a lot of these discussions for which was really his first time thinking about retirement. And this individual said, but you know, I really like what I do and I'd love to remain in this business for the next 10 years.

19:46But when I think about ownership of the business, or I think about a lot of the roles and responsibilities I have today, I'd love to scale that back a little bit and really start living some of my personal side of my life as well to better balance that. So this was a longer process in working through. This was a sizable company, started from essentially nothing. And what we spent a lot of time on Jason was really understanding who his leadership team was. He had important individuals internally that were doing important things for him. But I'll tell you that they weren't empowered to make a lot of the decisions themselves.

20:21It was a lot of group think. It was a lot of group decisions that ultimately landed on the business owner. So what we did as a part of this process is really understanding the roles and responsibilities of each of these individuals. They're swim lanes, if you will. And when we think about the decisions that each of these individuals was making, it wasn't many to start. But what unfolded as we worked through this process is really getting crystal clear around what responsibilities were for each of these individuals, the decisions they were empowered to make. So we could start offloading some of that from the business owner.

20:59And the business owner would then, instead of making those decisions, spend their time on more strategic visioning sorts of things for the entity and leveraging his team to execute on what that vision was. That's a perfect example and shows you how, even if you have the right people, if those people aren't empowered and you're not being intentional about how you use those people, those are missing assets. Those are assets that are not fully realized. And if they're not fully realized, then I guess you don't have a really fully realized business, do you? Absolutely. All right. Let's move on to the third big mistake that people make when they're approaching selling their business, which is not understanding or fully considering what your legacy or impact is in your life.

21:46Brandon, when you shared this with me earlier, It was surprising because it doesn't sound like the tactical business advice that we were just walking through, but more of an excavation of purpose in your life and how that ties to your business. Tell me about that. What I think, Jason, of a given owner's legacy or their impact they want to have in their life, to me, it's far beyond the business itself. the business in many respects is a tool those individuals are using to accomplish the goals they want to have in life if i reduce this to myself i didn't truly resonate with the adage of time flies until i had kids and i really start to see how some of this time flies we had a business owner in their early 50s that was in a spot where they thought they could retire but they were also excited about really continuing to build this business and seeing where it could go and they had the runway to do so.

22:45But one of the interests of this individual was art. And they always wanted to have an art studio. And they said, you know, when I retire, I'd really like to spend a lot of my time painting, creating art, going to art shows, selling some of this, and just embedding myself into that industry. But I'm too busy in the business to get started on that right now. And so through some planning, we ultimately encouraged them, why wait? Why wait on some of that. Maybe get started on that today. Build a studio. If you're only in there an hour a week, that's okay. If you don't have time for any given week, that's okay.

23:19But build it and get going on some of those things because you have a passion for it and you want to spend time on that, at least at some point in your life. So this individual decided to do that. They had a big remodel in their house. They decided to put it in an art studio. And this individual was spending more and more time in the art studio. And a couple of years down the road, they said, you know what? I'd really like to do this full time. I don't want to spend as much time in my businesses. I thought I did a couple of years ago, but Jason, it's things like this where it's not tactical. It's not financial related at times.

23:52It's if we position ourselves to really take a step back and think about the impact we want to have in our lives, the legacy we want to have and the things we want to spend time on, it helps us better position how we want our company and our business to fit into that broader plan. You know what's fascinating as I was listening to that is it got me reflecting, and this might sound strange, but it got me reflecting on the, how many D's again was it? Five D's? Six D's? Five D's. Five D's. Okay. Death, divorce, disagreement, and so on. Got me reflecting on that because what those are in some way or another are forcing functions for clarifying how your business needs to be structured and what you want to do with it and how you want it to fit into your life.

24:37Those are the stories that I was hearing and then repeating in Entrepreneur Magazine. Somebody has a death in the family. They have some serious health issue. It's a forcing function to think differently about their business, and they were really glad for it. But of course, you don't need those, and you shouldn't wait for those. You shouldn't want those to be your forcing functions. What you just proposed, the art studio, for example, sounds to me like a happier, healthier forcing function, isn't it? You're creating another vision of what you want in your life. And once you can really see it, once you can appreciate it, once you can touch it, feel it, be inside of it, well, then it forces you to start thinking differently about the business.

25:22And the end result is the same, isn't it? The end result is you create that structure. You understand your team. You empower people. You build the thing that can grow and operate without you in the same exact way that eventually without you at all because you're going to sell it. But you get to do it on your own terms because if you've spent this time thinking about the things that motivate you or excite you, the legacy you want, the impact you want, The other things you want to explore, which is hard for people to think about when they're in business because they have business blinders on and you just think about the business.

26:00You don't think about the art studio that you always wished that you had. But by pushing people as you're doing at CLA to be engaging with those ideas, I suppose you end up in the same exact place. But at the same time, you create something additive and you understand what's next. What do you think? I couldn't agree more with that. And I think simply put, there's a differentiation between what needs and is taking our time today as individuals, but then also if we take a step back where we want to be spending that time. And not to go back to our second pain point or common mistake, but when we talk about owner dependency, what if in a business we could hire someone that's going to do a lot of what we do today?

26:50The financial impact in many cases wouldn't be that large, but the amount of time that would free up for an individual to focus on how they want to spend their time, where they want their impact to be in their business and their personal lives or otherwise. But if we think about where we want to spend our time or where our time is most valuable, it's incredible to think of the impact that has. I think, Brandon, the takeaway here, and I'll give you the final word on it, is to prepare to sell a business is to consider what the rest of your life is, which means that preparing to sell a business is very much about preparing you as a person.