Latest / The Deciding Factor by Edward Jones / Planning Your Exit: The Financial Questions Founders Should Ask Before Selling a Business
Transcript
- speaker-1: Biggest financial decision you might ever make in your lifetime. If you're a business owner, it probably has to do with selling your company. That's because business owners often have 80 to 90% of their net worth tied up in their companies. All the more reason why it's never too soon to start thinking about your exit plan to preserve your assets and your legacy. Today I'm joined by Zach Gildehaus, a strategist in the advice and planning research group at Edward Jones. Zach, welcome to the Deciding Factor. speaker-0: Rox, good to you again. Thanks for having me. speaker-1: Zach, I've heard a lot of people throw around this term exit planning. And is it something that you're doing like in the moment before you sell, like you're planning right before the exit, or what's the timeline for this? speaker-0: So we say at least three to five years. So if you know that that's coming, at least start preparing then. But I would say a better answer is to start now, no matter if you're thinking about an exit or not. I mean, even if you're early in your ⁓ business ownership lifecycle, to start thinking about, you know, what might that exit look like is going to help provide you more options, preserve more options, so that when you get there, you can have the exit you want. speaker-1: How do people navigate that process when you start to think about the plan itself? speaker-0: Yeah. So there are a ton of advisors that come around a business owner to help think about this. And the financial advisor is really the quarterback of this this whole process. You have others that come into your, to your, to your world. It might be the the M<unk>A advisor that's going to help you prep and sell the business, but then they move on. But that financial advisor is going to help you, you know, as you're starting to think about it, as you're preparing for the sale and then helping you manage that wealth once you've you've harvested it. speaker-1: So exit planning is a critical consideration for most business owners, ⁓ but it's something that it's seems like they kind of tend to put it off. ⁓ what are some of the reasons why somebody might put off exit planning? speaker-0: It's not just a transaction. It's not like selling a stock, right? A lot of business owners have been building this business for years, decades, sometimes generations. And so there's a lot of identity tied up into the business. I mean, a lot of the social relationships are with the customers, suppliers, employees. A lot of their purpose is derived from what they're doing in the business day to day. And so it takes some time to think about what do I want life to look like after business? Who do I want to be? And there's a lot of industry stats out there that say, you know, the majority of business owners regret selling their business just one year after they do. You know, everything went right. You built the business, you got the buyer, you got the big payday, and then they're not happy. And so this personal planning gives that opportunity to say, what do I want life to look like once I sell the business? And and you know, I really think that's going to be the answer to not falling into that group that regrets the sale. It's it's so important that personal planning aspect and and knowing knowing what that is going to look like after after you leave the business. You know, and sometimes it's what do you want from a sale? Not only what you need, but what you want. Some sometimes people say, you know what, I just really want that twenty million dollars. I want to be, you know, my buddy at the country club had 19, I want twenty. Sure. And then and then there's the ⁓ the the last aspect of that is is getting the business ready. And so ans asking and answering some of these questions to make sure that all three are ready is really important. speaker-1: Well, let's stick with that sort of personal financial piece for a moment. Tell me like, you know, if I'm a successful business owner, I'm thinking about this as part of exit planning, how should I be thinking about the personal financial piece of it? speaker-0: Yeah, so a lot of business owners have eighty to ninety percent of their personal wealth tied up in the business. So you know a lot is riding on the sale of that business. So you know, one thing that that that we recommend is diversifying some of your wealth. And workplace retirement plans are a great way to do that. There's a lot of options. ⁓ it can allow you to save in a tax advantage way. It it can allow you to ⁓ provide benefits to your employees. So diversifying that net worth i is an important part of that. It's gonna give you a little bit more optionality, a little bit of runway. I mean Anytime we're talking about these long planning horizons, I really like providing more flexibility, more resiliency, more options into it. And I just think that saving outside the business and diversifying your net worth a little bit can can help with that. speaker-1: The third piece of this that you mentioned is this kind of like preparing the business aspect of it. What does that mean? speaker-0: Yeah. So the the harsh reality is that not every successful business can be sold. There are businesses that have created a great lifestyle for their owners and their family members for for decades. Yeah. And then the owner goes to sell and they realize there's not a market for it. And that's because these businesses tend to be so intertwined with their owners. The owner has all of the intellectual property, they do the sales, they do the marketing, they do the accounting. Yeah. And There's nobody else that knows how. And so when you remove the owner, if you buy the business from that owner, all of that knowledge, all of the customer relationships go away. Yeah. And so what is it that a buyer is actually buying? And so part of getting the business ready is doing the work to say, do I have the systems, the processes, the the personnel, the leadership in place to actually have a transferable asset that somebody would want to buy? speaker-1: Sometimes you might be actually wanting to like acquire, right? You're at you want to hire the person that started the business for the exact reasons that you just mentioned. But if you're looking to do something else at this point, whether that's do another business or retire or whatever, you're not interested in that. And so what are some of the things that do make it more attractive ⁓ as a as a you know, sellable business, not just a valuable business? speaker-0: Yeah, so I I would start by saying that you you it's hard to do because a lot of times somebody's business is their baby. Yeah. So start thinking about this as ⁓ a buyer, as an investor. And if you were to look at your business and say, I want a turnkey solution for durable cash flow. So, you know, is there diversified customer base? Is there resiliency in the supply chain? Have they thought about the risk of the business? Is there long term c ⁓ contracts with them with with customers? Having some of these things that are going to take some of the risk out of cash flow. So that you have that durable cash flow stream that ⁓ maybe can scale over time is going to be what a buyer will find very attractive. speaker-1: I can see why you say also that, you know, there's no ⁓ it's never too early to start exit planning because what you just described also seems like very prudent, just sort of, you know, things that you would explore over the course of building and expanding a successful business, right? speaker-0: Yeah. Such a good point. I mean, I think so many people hear exit planning and they think it's a euphemism for retirement. Yeah, right. ⁓ and it it's it's really not. I mean, good exit planning provides context for how you want to run the business. And it's it's it's a lens with which to evaluate ⁓ whatever it is you want to do in the business. Do I want to take on a capital partner? Or will that limit my exit options down down the road? ⁓ you know, do I want to hire this person or, you know, how is that going to affect long term? So it it really is a A great observation, yeah. So speaker-1: As you put together an exit plan and you're getting closer to, you know, the the date of a sale, how do you think about finding the right buyer for a business? speaker-0: I think one of the things that owners should do is look at the full array of exit options available to them. But when we talk to business owners, a lot of them don't realize, like, ⁓ maybe I could sell it to a business partner. Maybe my business could be sold to a third party and get a higher dial dollar valuation. Maybe ⁓ there are structures that I could sell to my employees and get some tax advantages for that. And so stepping back and saying, wait, what are all of those avenues? But I think there's a step even before that. And it's asking. What do I want out of this transaction? What is important? And really starting with the owner's goals. I mean, they've they've built this thing. Let's let's figure out what they want out of it. And so is it that, you know, I really want to maintain family legacy and I want my my family name on the door and I want my son, daughter, grandkids to be in the seats running it? Yeah. ⁓ is it that I want to make sure that my employees are taken care of? Yeah. Is it that I want to get top dollar? And so starting with goals is is really important. And then you evaluate that full array. Yeah. Of exit options and say which one of them can help me meet my goals. Because there's no there's no one that is universally right or good. Yeah. It's only the one that's right and good for you. speaker-1: You know, you mentioned that a lot of people may have this intention of passing on a business to a family member and they don't really express this intention and there's lots of reasons why they may not do that, you know? How do people typically handle that in a way that's successful? speaker-0: Yeah, I I think first of all, you need to do what you're comfortable with. If if you're comfortable having that conversation in, you know, the the family home and a neutral site, that that can be good. If you're comfortable if you'd like help, this is where a a I think a financial advisor can step in and help facilitate that conversation. There's this concept of the family meeting. And you know, we have guidance on on how to run a successful family meeting and you know, what role every person should play and how the conversation should go. You know, I think especially as you're getting in these complex multi-generational assets, it becomes more and more important to have that sort of facilitator. speaker-1: So when you get to that point of making a transition, right, what does success look like? speaker-0: Yeah, I think it is that the business is ready, that the owner is ready to move into that next chapter. Mm-hmm. And that all of the stakeholders are aligned and ready for that transact transition. I mean, we want to see that the business continue to succeed. We want to see the owner and their family continue to succeed and all of those stakeholders that the owners identified as important continue to succeed. Yeah. speaker-1: So, you know, it seems like exit planning is not just about selling the business, right? It's about creating options for, you know, the business owner and thinking about, you know, what are the goals and the things that they want to achieve here? What are the sort of words of wisdom that you might leave for somebody who is listening to this and considering this sort of on the horizon for themselves? speaker-0: Don't overcomplicate it. Because a lot of times when you start talking about exit planning, people want to start with solutions. Yeah. And they're going to throw out so many acronyms at you. Your head's going to spin. You know, do you want to do an ASOP? Do you want to do a flip? Do you want to do a grat? And those may be great solutions for you, but let's not start with solutions. Start with goals. Figure out who can help you meet those goals. Then let's go to structure. And just start at that top line. Don't overcomplicate it and get good help along the way. speaker-1: I love it. Thank you so much, Zach. speaker-0: Thank you.