Intentional Growth

Our guest this week had to face up to tragedy and the realization that she owned a worthless company before turning things around to make the perfect exit. When her husband unexpectedly died, Kathleen Ferry had no option but to take over his business – a business that was struggling to adapt to a changing marketplace and one that was significantly over-staffed. Kathleen shared some excellent tips on how to streamline a business, and how planning a certain way can put you in the driving seat when it comes to transferring your business to the successor of your choice! Where was the company when she took it over? When Kathleen took over, after her husband and the General Manager of the plant were gone, she got the news that the company had been valued at next to nothing.  She had no choice but to keep the business going and try and turn things around to keep food on the table for the livelyhood of her and her kids. Her company was $1-2m in debt and needed some serious streamlining. What were the first key decisions she made? She brought in good-caliber senior staff: a head of sales and an operations manager. What was the streamlining process? After a year in charge it became clear that not only was the firm over-staffed; there were the wrong staff in certain senior positions. The rewarding of loyalty had been too influential in the process of recruitment. Kathleen cut 20% of the staff but only after she’d brought in an external consultant to prove that this needed to be done. Internally she had discussed trimming the workforce, but nobody would agree with her. How did she drive the business forwards after the streamlining? She had to tackle the “it’s always been done that way” culture. This involved her spending a lot of time standing on the factory floor and asking staff to explain what they were doing. As a result of this she implemented policy that significantly improved their cashflow, and a $2m credit line eventually became just $10,000 in working capital! “reduce your working capital of your business and make your business worth a ton! ‘buck the way things have always been done and find ways to reduce your need for capital!’ Then she established a board of directors. This is what she regarded as the most important decision she made – the sounding board proved invaluable. How did the company cope during the financial crisis? They lost $100,000 per month for a time, but when the marketplace picked up they were in a stronger position than before. The training and realignment of processes they undertook during the down times helped significantly, and because they had reduced their debt to almost nothing, they were better prepared than most to ride out the storm. “reduce your need for capital and prepare yourself for any downturn ” “debt sucks… making money and loaning it is better!” What was put in place to help prepare the company for sale? Before there was a plan to sell, the company had already brought some angel investors to the table. This prompted the company to properly document their entire operation for the first time. Kathleen said this as a very useful exercise when it came to the eventual sale because it helped her understand the true inner workings and value of her company. How did the sale come about? The eventual buyers were a private equity group who had already acquired companies in the same industry. They were impressed with the potential of doing business with one of Kathleen’s big clients. Despite this interest, it was very much business as usual. Kathleen and the firm still made a 10-year growth plan (because they knew they needed one regarless of what happend) which not only impressed the eventual buyers, but it gave them enough leverage for negotionation because they knew they were not desperate to sell. Kathleen knew she was in the driver’s seat! What happened next? Kathleen took a year off and splurged a bit by remodeling a part of her house but eventually got bored. She highly recommends that when someone sells their company they don’t necessarily have to have a plan for life after business immediately, but that they must at least be aware that they’ll have to make one at some point. Now she does CFO consulting on a part-time basis. Book recommendation: The Goal: A Process Of Ongoing Improvement – Eliyahu M. Goldratt Wise words for the road: “Everything starts with sales” “When you’re small you reward loyalty, when you grow you need to reward competency” “step back and actually watch how your business runs!” “So often when you’re in business you’re pulled in to solving the problem of the day. You don’t step back and actually watch how your business runs” Contact Kathleen: k.ferry@focuscfo.com Kathleen’s Bio Kathleen brings more than 27 years as a CFO and business owner to her clients at FocusCFO. She appreciates and understands the unique opportunities and challenges facing entrepreneurs and family owned businesses. Her experience has taught her how owners can have a pulse on the day to day operations, evaluate their business’s financial strength, and plan the strategies needed to grow their businesses. Before FocusCFO Kathleen’s financial foundation began in banking as a commercial credit analyst with Union Commerce Bank and then as a corporate financial analyst with Standard Oil Company of Ohio. In 1986, Kathleen co-founded a start-up fastener manufacturing company with minimal capital and machinery. Over 27 years she grew sales, decreased debt, drove efficiencies and cost-effectiveness, adopted lean manufacturing techniques, effectively managed capacity expansion, developed a hard-working and loyal workforce, and secured equity investors to bolster the company’s balance sheet. Through diversified operations and client base, she mitigated risks and navigated the successful sale of the company to a private equity firm in 2013. Kathleen received her MBA in Finance with a minor in Marketing from Northwestern University’s Kellogg School of Management in Evanston, IL. She earned her undergraduate BBA degree in Finance from the University of Notre Dame in South Bend, IN. She also completed COSE’s Strategic Planning Course and has recently become a Certified Exit Planning Advisor. Other Interests Spending time: with my five children and growing family Hobbies: Working on my golf game Enjoys: International and domestic travel, so many places on my bucket list Passionate about: Volunteering at non-profit organizations with limited resources provides an opportunity to take the skills I learned at my day job and give back to the community

Bo Burlingham is an absolute hero.  He was Editor at Large at INC. Magazine for years, Author of some of the business book classics like The Great Game of Business, Small Giants, Street Smarts and the Finish Big. His insights in Finish Big on how the greatest entrepreneurs exit on top lead me to create this podcast and build our firm. If it wasn’t for Bo, Solidity Financial wouldn’t be what it is today. He is undoubtedly the leading author on what it means to be a true Entrepreneur… one where there is a beginning, middle and end to a journey.  We felt it was high time we spoke to Bo about his experiences in putting together his trailblazing books… In this episode you’ll learn: How the greatest entrepreneurs exit their companies on top What the REAL journey of being an entrepreneur looks like How to finish big AND be a small giant Why 75% of entrepreneurs are unhappy after they sell their companies Why did Bo Burlingham write the book Finish Big? He’d been working for the magazine Inc for 25 years and never once had he heard anybody talk about the end game for the organization. This suddenly changed when his co-columnist Norm Brodsky received an offer for his company.This eventually formed a monthly column called “the offer”, which was basically an ongoing narrative on the trials and tribulations of the sale negotiations. The response they had was amazing – it turned out to be a topic that people simply couldn’t read about elsewhere – and it took off so much that at one point, the cover headline was “Norm Decides To Sell”. Alas, because certain things came to light towards the end of the sale, Norm didn’t sell after all, but the whole process made Bo realize that people were very interested in the subject, and that there was almost nothing else out there for people to read on the matter. So he decided to write his first book, which was to be based on the findings of a series of interviews with business owners who’d sold up. The regrets of selling a company… Through his interviews Bo found about half of the entrepreneurs were unhappy after they sold. He set about trying to understand the common themes in the back stories of those who were happy versus those who were unhappy. The 5 things entrepreneurs did to exit their company on top: They felt it was a fair process and got reasonable reward for the work they’d put into the business. They could look back at what they’ve done and feel pride that they’d contributed something to the world. They were at peace with what had happened to the other people that had been on the mission with them. They found something afterwards that they really became engaged in, i.e. something that gave them a life after business. Not an absolute constant but was true of some people…. their companies were doing well without them – they’d built a legacy. Bo felt that if an owner was missing just one of them, they were likely to have a very bad exit. How can you passionately grow a company that can thrive without you? To grow a company ‘artistically’ – with the kind of love that forms the basis of entrepreneurship – but then step away so the company doesn’t revolve around you like a hub and spoke can be the hardest part of being a business owner. Bo says this is the ultimate paradox, and was a constant source of conflict across the many companies he has studied down the years. What to do after after selling your business? Leadership is so important in any company, so when somebody sells, how does it impact the legacy of the business? This was another constant problem in Bo’s experience. Many companies simply weren’t the same afterwards. This was a huge deal to the entrepreneurs that wanted to watch their baby continue on without them. The happiest entrepreneur that Bo interviewed was John Warrillow… who just happen to write the book Built to Sell and now has a program called The Value Builder System™ which helps owners do what he did. Bo’s top advice for every business owner: Ask yourself these questions from the very beginning: What are you looking for out of business and out of life? If your goal is building a great company, what exactly will this do for your life? Are you building a company to work after you leave? What exactly is it that makes a company great? Why are you doing what you’re doing? Wise words for the road: “I always thought the most challenging thing in business was to build a great company. I now realize that the most challenging thing in business is to build a great company that remains great after you’ve gone.” “Remember that you’re on a journey, and all journeys have an end. Don’t think of it as a construction project.” Book recommendations: All of Bo’s books are amazing! Finish Big Small Giants Street Smarts The Great Game of Business – With Jack Stack A Stake in the Outcome – With Jack Stack Find them here

Eric Gustafson’s story is a great example of how the very best exit planning isn’t really a plan at all – it’s just a continuation of good business practice. Eric ran a tight ship, so when all of the stars aligned to make it the right time for a sale, the business was ready for it and the process of sale was a synch. Listen to his story or read the highlights to find out how he did it… How Eric rode out the storm to become the exit master There was a huge blizzard that brought Minneapolis to a standstill for a month and almost bankrupted his printing business early on in its life. Thankfully things picked up in the following month and they survived, and then it wasn’t long before monthly profits of $40,000 per month became $200,000 per month. How did this happen? By getting a hold of the data within the company and using it to empower the sales team. They implemented what was referred to as a “Telemagic system” back then, which was essentially the CRM system of its day. What made Eric’s company think about selling? The marketplace was changing. Margins were going down and more customers were doing their printing in-house. How was the company valued and sold? Eric used a personal contact who had raised private equity to buy two of his friends’ businesses, so he knew that throughout negotiations he was dealing with someone he could trust. Eric and the rest of his ownership team didn’t have a dollar amount in mind – the valuation was quite simply a fair multiple of easily agreeable figures. “A fair multiple is only fair if you put the time in to build the value of your company!” Did anything need to be done with the numbers in the lead up to the sale? Almost nothing needed to change. The company had been following good habits for a long time, running their financials every month in the proper way. The company benefited greatly from their advisory board which was made up of experienced heads from different industries. These were paid positions, but the range of experience around the table combined with their ability to speak more freely than an internal board of directors made it a very good investment. How long did the process take? The idea to sell came about two years before the ultimate sale, but because of the quality of the financial data, the due diligence only took two weeks! How did he cope after the business? Very well indeed because in his words “I didn’t have a skill set, so I wasn’t emotionally invested”. Because Eric had no background in printing and from the outset hired capable staff to handle the most challenging day-to-day tasks, he could easily walk away. Book recommendation The E Myth: Why Most Businesses Don’t Work and What to Do About It Wise words for the road “it’s good to deal with people you trust” “your business is worth more if you’re not involved” “you can have your cake and eat it too, but it doesn’t just happen” “pretend you’re outside of your business for a year… how would it run?” Contact Eric Phone: 612-239-7833 Email: eric@thegustfsongroup.com

We have an interesting character on this week’s interview on Life After Business… there are not many pro baseball players who also happen to be experts in private equity! Bobby Kingsbury is now part of the a different type of team when he joined MCM Capital.  He managed to land the gig when giving hitting lessons to the son of Mark E. Mansour, co-founder of the original fund. In today’s episode, you will learn: How private equity groups (PEGs) are structured Where private equity groups get their money What it could be like to partner / sell to a PEG How PEGs value companies Understand how PEGS look at potential deals Why a private equity group WOULDN’T buy you Having been a pro for the Pittsburgh Pirates for six years and having competed in the 2004 Olympics, it must have have been a bit of a shock to the system. Thankfully for us he went on to develop a brilliant insight into one of the most important aspects of the exit planning process, private equity. What is private equity? It is basically a liquidation option for a private business owner. A Private Equity Group is a pool of money, managed by a team of professionals.  Their goal is to grow that pool of money for the owners of the fund and the way they do it is by buying companies, making them healthier, stronger, and better and then eventually selling them again anywhere between 3-8 years out. It’s a way to diversify a portfolio by selling all or a portion of the business to a private equity fund. How does a private equity firm work? Bobby’s firm (MCM Capital) has eight professionals divided into deal teams. The main division of responsibility lies between transactions and raising equity. A firm will rely on limited partners, i.e. endowments, universities, pension funds etc. It is basically the job of the firm to make investment decisions on their behalf in the same way as a fund might invest in stocks & shares. The difference here is that a private equity firm is in the business of buying up companies. A private equity firm needs to have a good eye for corporate management. Although they clearly need to seek out the right deals and understand the numbers, the ultimate success or failure of their investments will depend on how effectively they operate after the investment. This doesn’t mean that a private equity firm has to be hands-on day-to-day (in fact it is Bobby’s preference to keep that kind of involvement to a minimum) but it absolutely does mean that a private equity firm must build strong relationships with the businesses they invest in, right from the very beginning of negotiations. Even in the event of a total buyout where the whole executive team sell up and disappear into the sunset, if a private equity firm hasn’t built the right relationships, it will likely end in disaster. What are the standard investment offerings? Typically four or five years to deploy capital. Funds will generally be spread across approximately ten businesses, each occupying a roughly equal percentage of investment. Pretty much all private equity investment is leveraged in some way, with Bobby’s firm preferring to invest in businesses using 50% equity and 50% bank financing. Many private equity firms prefer to use more leverage, typically putting up 30-35% equity and borrowing the rest. This increases the potential return/IRR but of course comes with a higher risk attached. How is the value of a business normally decided? Multiples of EBITDA. As a rule a smaller business will be afforded a smaller multiple than a larger business, and certain industries like aerospace, defence and life science will command higher multiples. How much business does MCM Capital do over the course of a year? Of the hundreds of businesses they come to hear about, there will be 200+ that fit enough criteria to require further investigation. This will be whittled down to 10-20 serious prospects. About half of those will get to the stage of a letter of intent, and then ultimately one or two deals will go through. These stats come out to a minimal amount of transactions because so many business are not ready for sale. What are the most common things that scupper a business sale? Beyond the obvious disagreements on valuation, the ‘cold feet’ of owners is a common factor in a failed deal. When an owner realises that they have no life plan afterwards they often prefer to play safe and carry on with their day-to-day work. Any advice for business owners looking to do a deal with a private equity firm? Get to know your private equity firm properly. Speak to previous CEOs they’ve worked with… were they fired? Any reputable firm will be willing to give up the details of their previous clients. Wise words for the road: “Don’t time the market. Exit the business when you’re ready.” “Historical numbers are historical,. We’re not buying the past, we’re buying the future.” “The business is the meat and potatoes. We are the salt and the pepper.” About Bobby Kingsbury: Mr. Kingsbury joined MCM in February 2008.  His responsibilities include the execution of investment transactions and management of portfolio companies.  Mr. Kingsbury is also responsible for the sourcing of investment opportunities, leading the partnership’s e-marketing strategy, web-site design and managing and developing Limited Partner relationships. Prior to joining MCM, Mr. Kingsbury was drafted by the Pittsburgh Pirates in the 8th round of the 2002 Major League Baseball Draft. He spent six years playing professional baseball as an outfielder in the Pirates organization, participated in the 2004 Summer Olympic Games in Athens, Greece, and was a 2008 inductee into the Fordham University Athletic Hall of Fame. Mr. Kingsbury graduated from Fordham University with a Bachelor of Science degree in Finance. Email:  bobby@mcmcapital.com

The psychology of exits… we have a real intellectual take on exit planning and your state of mind this week. In a colorful episode, Allie Harding gives us an academic take on the importance of identity in business, and how this can affect life after it. Understanding the psychology behind the exit is a crucial part of a successful transition. Allie has built up two consultancy companies off the back of extensive academic study, including a PHD in Business Psychology. You know how we always say that a successful exit from a business is as much about life after business as it is about the transaction? (the clue is in the title of the podcast!) Well Allie has the science to back this up. Listen and learn! How does business change the identity of different people? Allie has advised hundreds of business owners down the years. She can define them in 3 separate categories: 1.) Ready Rogers: These are the easiest to deal with when it comes to exit because their self-awareness is at such a level they can walk away and know exactly how they will cope with life after business. They probably have many interests outside of their business, and are already in the habit of disconnecting from work in order to stimulate their mind elsewhere. 2.) Moderate Michaels: They might need some help with their guiding principles but can still be persuaded to change their mindset to help them manage their time after they sell. Their business is basically their life, but the original creative energy they had that helped them build up their business in the first place can still be harnessed with the right guidance. 3.) Foolish Freds: This is the bracket of entrepreneurs who simply are their business. Their entire life revolves around it; their happiness, their sadness, their friends, perhaps even their family. When it comes to exit planning they struggle immensely with the concept of change, both in the sense of readying their business for sale and also afterwards in adapting to a different lifestyle. What is the best way to find out how much the business is part of someone’s identity? Getting to know the owner is absolutely the best way.  However, along with the multitude of personality tests out there OrangeKiwi has a 15-minute online survey specific to the topic.  It should be given to them by a trusted advisor that can walk them through the results in a no threatening way. What is it that entrepreneurs people need to replace once they retire? Relatedness/relationships, competency and autonomy. Without daily interaction with colleagues and customers, it can be very hard to replace these things if you aren’t prepared. The 3 main stages that a business owner must face before a successful exit: 1. The exploratory stage: Answering existential questions about what you do and don’t want for your business, and who you are if not your business. This should be taking place long before a sale. In Allie’s words, “the bridge to the future [outside of the business] is being built while they’re running their business”. 2. The strategic phase: This is about the systematic building of value in the business in preparation for the sale. See our chat with the absolute expert in this field, John Warrillow. 3. The execution: The detail of the deal and the negotiation. It’s all too easy to concentrate on this, but without taking care of the other two stages, you will be doomed to failure. What’s the one takeaway for a business owner looking to sell now? Start by finding a trusted advisor and ask them “how many businesses have you helped?”. If they can point you to two or three, then pick up the phone and speak to the owner of one of these businesses. Book recommendations: Bob P. Burford – Halftime: Moving from Success to Significance: https://www.amazon.com/Halftime-Significance-Bob-P-Buford/dp/0310344441 Bo Burlingham – Finish Big: How Great Entrepreneurs Exit Their Company on Top https://www.amazon.com/Burlingham-Entrepreneurs-Companies-2014-12-12-Paperback/dp/B00R7KOT8A/ref=sr_1_2?s=books&ie=UTF8&qid=1477666944&sr=1-2&keywords=bo+finish+big Wise words for the road: “The psychology of the owner is the greatest opportunity for success and the greatest obstacle of success.” “Entrepreneurs limit their ability to achieve success because they don’t continue to develop themselves“ Contact Allie: allie@ockiwi.com www.ockiwi.com www.planfortransition.com Short Bio: Allie Harding Taylor is a partner at Orange Kiwi and an accomplished organizational consultant who assists CEO/owners, boards, and organizations at critical points of significant transition in their organizational life cycle. She is currently a Ph.D. Candidate in Business Psychology with a dissertation that is focused on change and effectiveness during business owner transition. The impetus for her research stems from working with business owner clients who were picking up the pieces after failed, sudden or unplanned exit events. Allie’s research is aimed at helping CEOs position themselves (and their firms) so that they can be part of the elite 7 percent of low to mid-market business owners who finish big and exit their companies on top and live a life of satisfaction and significance beyond their role as owner. 

What a show we have in store for you today! Crammed full of useful stats and insight from a man who could legitimately call himself an exit planning godfather. Chris shared with us his starter guide to exit planning along with some of the more interesting top-level philosophies that go with it. Also discussed were weighty economic matters… is the US able to cope with the aging baby boomers predicted to transition 4.5 million companies and a predicted $10 trillion worth of assets in the next decade? As the owner of the Exit Planning Institute, Chris Snider sure knows exit planning! We strongly advise you listen to his conversation with us this week, but if you just want the quick & dirty summary, read on…. What is the Exit Planning Institute? In Chris’ words: “We don’t view ourselves as an association… we view our members more as customers. Our job is provide a compelling platform for them to launch their practices. It’s up to us to provide resources to enable them to produce revenue and do well by their clients.” Vital statistics from the industry: There are 6 million privately held business in the US market today, 2 out of 3 of which are owned by baby boomers. Within 8 years, all baby boomers will be over 60 years old. Since 2013 in surveys of owners, 3 out of 4 businesses say they want to exit their businesses in the next ten years, which is approximately 4.5 million privately held businesses and $10 trillion of wealth. That represents the biggest transfer of wealth in history. The success rates of exit transactions are 20-30%. 50% of exits are not on the business owners’ terms. 75% of business owners regret exiting a business a year after they do. What does an owner want from the exit planning process? Owners don’t want plans, they want results! What are the “three legs of the stool” in exit planning? The owner has plans for their “third act”, i.e. what they will do with their life after business. The owner plans their financial affairs outside of the business, i.e. estate planning, tax planning to maximize the net proceeds etc. “The Business leg”: the owner plans to maximize the value of the business. All three legs need equal attention in the exit planning process. Too often people concentrate on the third leg of the process and ignore the other two. The theory says, in short, if one of the legs is missing from the plan, the stool won’t stand. What are the differences between the mindsets of business owners and their advisors? Owners tend to be “right brained” and think holistically, i.e. in concepts and strategies. But most advisors are technical, “left brain” thinkers i.e. big on process detail. Advisors are naturally inclined to proceed into the solution without properly getting into the mind of the owner. This is one of the reasons why so many businesses are sold without due consideration of the personal factors that exist outside of the business. If you are an advisor, what should you do? Really get to know the business owner, but be patient before having the in-depth, sensitive discussions about the personal side. Make sure the rapport is built before getting into too much detail. If you are an owner, what should you do? If the advisor has made the effort to get to know you, ask them for a process. Ask them to walk you through how it’s going to go. A lot of people say they know what they’re talking about and might blind you with science, but at this point in the conversation you can tell whether they’ve grasped the brief holistically. Who should be in an advisory team for an exit? The key roles are an attorney, CPA, financial planner, M&A advisor, investment manager, and a value advisor/overall project manager. Intangible assets are generally far more important drivers of business value than tangible assets. What are the main examples? Deep customer relationships, recurring revenue, highly cultivated talent, strong structural capital, strong business culture. If a business owner decides they want to sell, what’s the first thing they should do? Identify their current value. Everything else must follow this. This includes a formal business valuation and a personal financial assessment. This will then enable an advisor to quantify the overall value in terms of numbers and ratios, and then formulate a plan to improve it if it needs improving. Book recommendations: The Masterplan by Peter G. Christman The Science Of Getting Rich by Wallace D. Waddles Walking To Destiny by Chris Snider Wise words for the road: “You can’t just plan, you have to do.” “You can’t just plan, you have to do.”” “Exit strategy is really nothing more than strong business strategy.” “Exit strategy is really nothing more than strong business strategy.”” “Most business value is not tied up in tangible capital – it’s intangible.” “Most business value is not tied up in tangible capital – it’s intangible.” How to get a hold of Chris Snider Christopher M. Snider Email: CSnider@Exit-Planning-Institute.org Phone: (216) 712-4244 Blog: www.SniderValueIndex.com Workshops: www.WalkingToDestiny.com Brief bio Christopher M. Snider, CEPA, CEO and President of the Exit Planning Institute (EPI), creator of the Value Acceleration Methodology™, author of Walking to Destiny: 11 Actions an Owner Must Take to Rapidly Grow Value & Unlock Wealth, and Managing Partner of Snider Premier Growth, is recognized as a thought leader and trendsetter in the field of value acceleration and exit planning.  With a message that resonates with entrepreneurs across the country, Chris is a sought after speaker for many major companies and trade industries, and the associated organizations that are dedicated to serving the transition and growth needs of business owners. He built his career as a key value growth integrator for major companies including The Sherwin Williams Company, FedEx Logistics, Nike, Dell, and Textron.  Finding passion in changing middle market business owners’ lives through rapid growth projects, Chris emerged a game-changer, noting a milestone project with a family-owned private company that he helped grow from $90 million to over $240 million in three years and successfully selling to a multi-national strategic buyer.  Now with a wealth of experience and a proven value acceleration system, Chris established a family investment company with his son, with ownership stakes in eight lower middle market businesses.

Are you a parent thinking about handing down your business to your kids, but you’re not sure how to divide the earnings and the responsibility?Or are you about to inherit your family business but are unsure how it should be divided among your siblings who don’t work in the business as much as you do?  These scenarios and more will be covered off in our chat with Jon Schindel – a man who’s been doing this for 13 years and has really seen it all when it comes to family negotiations.    Handing a family business down to the next generation is a notoriously difficult process…  This week we thought we’d speak to an expert in succession planning to help give you the heads up if you ever find yourself in that situation. What’s the most common problem you face in the first meeting you have with a family? People don’t know what succession planning really is, and they are overwhelmed by the amount of possible options. The key here is to not worry too much about all of the potential different roads – it’s about sitting the family down as a group and finding some kind of common ground, and then finding the right frameworks and conventions to fit with that. How do you broach giving up control of the business yourself? First of all, you need to define exactly what YOU want out of the transition, i.e. a large payout that can see you through retirement, a retained interest in the business, a partial relinquishment of day-to-day work or a complete exit. Then make an honest assessment of who in your family is capable of picking up the slack in your absence. Then work out the boring stuff that can easily be defined in numbers, i.e. how quickly do you want to exit the business, and do you want to relinquish all shares or retain a stake? How do you divide up the different shares and wages for the inheriting members of the family? Frank discussions are required. The parents need to be clear from the outset with who gets what and why. Practically, how can you give people different amounts of responsibility going forward? A good way of doing this in succession planning is by creating different classes of share, i.e. “A-shares” that might carry the authority to manage day-to-day matters and “B-shares” that are non-voting shares. In theory you can create as many different share classes as you want, which gives you the freedom to define just how much say each member of the family can have over the future running of the business. How do you find the dollar amount? Think of it as if you were selling externally. Start off with a proper valuation and then value the shares from there. There are other things to consider when estate planning but a good rule of thumb is to start with a fair valuation. Who drives the shareholder agreement? It has to come from the parents, but it’s very important to make sure that the needs of the company are prioritized above anything else. Whatever the agreements may have been with the family, it has to be absolutely concrete that the company can afford to honor them. What is normally the biggest challenge in succession planning? The redistribution of responsibility is nearly always more awkward than the money. Honesty and transparency are so important to make this work. What happens if the children don’t have enough money to buy out the parents? Promissory notes are one option. But another option that is often overlooked is for the inheriting relatives to obtain a loan against the company. That way there can be a nice payout at the time of sale, and there are no potentially awkward situations in the future caused by members of the family owing each other money/shares etc. What if there have already been fallouts among the family and it isn’t possible to gather everybody around the table? It’s still possible to send documentation to each family member and advise them to have their own attorney look over it. Why do so many passed-down businesses fail? It’s normally because the parents haven’t handed the business over properly, rather than the errant behavior of family members. It’s vital that everything is done in an up-front, frank and professional way from the outset, otherwise the rest of the family will be doomed to fail from the start. Wise words for the road: [clickToTweet tweet=”“Most of the time the kids aren’t surprised what the transition plan is… no reason to be sly about it”” quote=”“Most of the time the kids aren’t surprised what the transition plan is… no reason to be sly about it””] [clickToTweet tweet=”“Whatever happens has to be fair to the company first”” quote=”“Whatever happens has to be fair to the company first””] How to contact Jon: jschindel@seilerschindel.com 952 358 7406 www.seilerschindel.com

This week on Life After Business we have the benefit of an appearance from an absolute master, Sam Thompson. This man built up his business, hired the right partners and then sold to them at a price that everybody was happy with. He sold at the perfect time… with time left to spare. It took him seven years of careful planning, but Sam is an example of just how much can be gained by thinking about your exit at the earliest opportunity. He even took heed of the advice from one of our previous guests on the LAB podcast, John Warrillow. Sam combined his exit planning with a rock-solid strategy for his next career and basically achieved the ultimate life after business. When did he first take on his partners? The first partner came on board four years after he started. Why did they buy in? Sam openly courted partners because he knew he needed them to grow the business. They were all incentivised with bonus shares which proved to be a very effective strategy. What were the company sales? Approximately $5m for a number of years, then post 9-11 they had to radically change the business model to be less dependant on people flying in. They bought a warehouse and focussed on teambuilding for local businesses. Why did he decide to sell? There wasn’t one event. He thought about exiting casually, went to seminars, and bought the book Built-to-Sell by John Warrillow. There was agreement among the partners that they needed to do something. What was the first thing he did after he decided to sell? He empowered his team of employees to have more responsibility by promoting a number of people, and thus safeguarded the value of the business without him. How did he cope with the delegation? It was tough, but worth it. How long did it take? Seven years in total. How did he prepare himself for life after business? He did some research, went to a convention and eventually became certified to be a business intermediary. How did they value the business? When Sam wanted to sell, the other partners didn’t, so the only way he could exit would be for the partners to buy his share. They arrived at a figure by using the average of an accountant’s valuation and a less conservative valuation from a business broker. What were the stumbling blocks? The main stumbling block was how much Sam would be missed, but because of the increased responsibility that Sam had given other members of the business, this was eventually overcome. What was their agreement? Originally there was an SBA loan along with a promissory note of 10%. Basically he got a loan from a bank that was financed using the company cash flow and a personal guarantee on a stream of payments of a certain period of time. Would he have got more money from a third party? Probably, but the exit option he chose felt better for him and everyone overall. What happened next? He stayed on for a year first but then said to the partners after six months that it was time to stop – they didn’t need him. All of the key employees stayed on after the sale and the business continued to be successful. What would he do differently? The transaction went well but maybe he should have used an exit planner. Wise words for the road: “You want a business attorney when selling a business. They know how to get these deals done.”” “You want a business attorney when selling a business. They know how to get these deals done.” “There’s a lot of good businesses out there but they hit a brick wall & they’re ready to move on.” “There’s a lot of good businesses out there and there’s nothing wrong with them – they’re like me, they hit a brick wall and they’re ready to move on and do something different.” “Make sure when you’re ready to sell that you’re making money” “Make sure when you’re ready to sell that you’re making money. Sometimes owners don’t realize that… they’re doing everything they can at the end of the year not to take a tax hit. But when you’re ready to go, you need three good years.” How to contact Sam: email – sthompson@calhouncompanies.com phone – 612 282 750 website – https://www.calhouncompanies.com/staff/51-sam-thompson.html Sam Thompson Bio: Sam Thompson is founder of metroConnections, a Minneapolis based event and conference planning company that has been in business for over 32 years.  In 2012 Sam sold his shares of metroConnections to his three partners and began his next career as a business intermediary helping business owners sell their businesses.  Sam is past president of  the Association of Destination Management Executives International (ADMEI)  and has received the Lifetime Achievement Award from both ADMEI and Meet Minneapolis (Minneapolis Visitors Bureau).  Sam is certified with the International Business Brokers Association and is very active with the Edina Rotary Club.  Sam has a BS degree from the University of Wisconsin- Stout in Hospitality Management.  Sam lives in downtown Minneapolis and had 3 daughters ages 23 and 19 (identical twins).

Chris Goebel spoke to us about the intricacies of operating and then selling a business that included nine other siblings… and he actually did it twice. Read on for some of the highlights of Chris’ story (which is available for download above): What was the business? The business was split across two companies: one was predominantly airport coach transfers, while the other was focussed on leisure travel. How big were the companies? At their peak, a total of approximately 400 employees and 175 vehicles spread across four different major airports. How did they define the roles for each of the 10 children? Age order was the first criteria, then it was an organic process of matching the roles with people’s specialisms. Key drivers of business? Contract revenue rose from 3% to 21%, which not only provided a useful hedge against seasonal factors like weather and events, it also made the business a more attractive proposition for a buyer. What triggered the exit? The age of the management team combined with serious interest from two different companies. What were the most important aspects of the sale? The dollar amount and taking care of the future of the employees. How ready were they? They had a lot of numbers already in place. The company was so big that they had no choice but to have their financials in good shape. How long did it take? Six months. What happened next? The business was sold to one of the bidders but a few years later ended up being sold again to the other bidder. The first takeover was from a private equity firm, but it eventually became part of a publicly listed firm. Did the family members stay on? After the first takeover, those who wanted to stay on did stay on. They kept hitting their targets and were given the autonomy they wanted. After the takeover from the public company it was more difficult, so some left. Chris stayed for a couple of years but didn’t enjoy the additional scrutiny and reporting requirements of a public company. Where did Chris go when he left? Chris is now working as a consultant, and using his experience to help smaller businesses with their exit planning. How did he cope? After only two days he felt bored. It wasn’t long before he embarked upon a career as a consultant. Would he have done anything differently? -He wishes they’d have planned more in advance and had a longer timeline for the sale. -They should have done more to make the sale tax efficient. -They should have been more specific about everybody’s roles in the business after the sale(s). It is not enough just to agree that “we need to grow the business”. Exactly how that growth is to be achieved should be mapped out from the very beginning. The most common mistake he sees from the businesses he advises: “People are surprised that all revenue and profit are not treated the same, therefore, many are ill prepared.” “People are surprised that all revenue and profit are not treated the same, therefore, many are ill prepared.” Wide words for the road: “So many entrepreneurs are involved in building the business and operating it that exit planning is one of those things they realise they have to do, but it’s not a priority. The priority is building the business or maintaining it or expanding it, whatever it may be. They focus on that, thinking the other will eventually take care of itself…. but sometimes it just doesn’t take care of itself and you really need to address those issues early.” How to contact Chris: chrisgoebel@crossroadsconsultinggroupllc.com

What does ESOP actually mean? ESOP stands for Employee Stock Ownership Plan. This week we talk about a great tax-saving method of exiting a business that can also take care of your employees for years afterwards. Sound too good to be true? Andre Schnabl spoke to us about ESOP: a method of selling a business that could save millions in tax, as well as safeguarding the future of the firm. His explanation was fantastically simple so we recommend you take a listen, but if you only have time for the brief highlights of what we talked about, then read on: How do the employees fit into it? The principle is similar to how an employee contributes a percentage of their monthly paycheck to into a 401K retirement plan. However, the difference is that the ultimate value (and holdings) of their retirement plan is invested into their own employer, rather than whatever stocks, bonds or mutual funds a normal 401K has invested its money in to. Now each employee literally has an invested interest in seeing the value and growth of the company grow! Why would a company owner want to sell a business in this way? There are a multitude of reasons, but to skim the surface, here are some key benefits: The owner can receive a market-rate price for their business without actually having to go out to the market. The owner can save or ELIMINATE on capital gains tax Selling a company to its own employees is a great way of safeguarding the future of the workforce after the owner retires. The general flexibility of this kind of deal is useful to help manage the different needs of the many people involved in the sale of a business. WHAT ARE YOUR OPTIONS? How does the owner get their money in an ESOP? Normally they would receive a proportion of the value of the business in cash up front (most of the time via bank financing), and then the rest of it through a note that would be paid out through the company profits in a certain time period and dependent on KPIs (Key Performance Indicators) agreed upon at the time of sale. Where does the up-front cash come from? There are many ways but the most common is leveraged bank finance (aka bank loan). Why would the banks lend money to make this happen? Because a trust would be set up to effectively ‘buy’ the company, and the banks would loan the trust a certain amount of money in order to do so. ESOPs have one of the lowest default rates among borrowers – better chance that the bank gets THEIR MONEY BACK! Isn’t this risky for the banks? Banks actually like these deals. For one, even though the trust itself doesn’t have any assets, the trust’s loan can be secured against existing company assets. Secondly, because ESOPs end up in the hands of employees, this makes banks confident that the future of the firm is sustainable. They figure that if the employees have a stake in it, they’re more likely to drive the business forwards. How can this save on tax? If the deal is structured correctly, based on section 1042 of the tax code, the business owner can ELIMINATE Capital Gains! Depending on which state you live it this can be up to a 30.9% percent tax savings! 20% Federal tax rate savings 3.8% savings on the affordable health care act 7.1% Minnesota tax See your state combined capital gains tax HERE Debt that is accumulated by an ESOP is paid for PRE-TAX! This means the bank loan, sellers note, and other forms of debt can be paid back much quicker while significantly increasing company cash flow. This can be a 40% savings in tax! Why is this good security for the employees? Beyond the money they may make from their own salaries, there is a greater job security here than if the company was sold on the open market because now the employee is a part owner of their own company. An ESOP provides an incentive for the existing company to succeed because the employees can see the value of their shares rise along with the success of the company. However, a third party buyer from the open market may have a completely opposite agenda, i.e. job cuts, restructuring etc. Also an ESOP can include certain incentives for the future management of the company after the owner has departed which creates the perfect scenario of management and employees pulling together to achieve the same incentivized goal. How long does the ESOP sale process take? The most difficult part of the process is determining whether an ESOP is actually the best option for the owner. After all the pros and cons are weighed and all parties agree, it would normally take in between three and four months to complete the formalities. How can I contact Andre? 404-372-2759 andre@tenorcap.com www.tenorcap.com