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Advising Clients on Exit Planning: Part 2

The first step in formulating an exit plan isn’t focusing on 'the numbers' but rather evaluating where a client actually is in relationship to their expectations.  

As a wealth advisor you likely understand that every business has a life cycle. For most privately held businesses, that cycle is tied to the life of the owner. At some point for one reason or another, every business owner must face the fact that their business, as they know it, will cease to exist.  

In part 1 of this four-part series I laid out the challenges facing business-builder clients that advisors who take the initiative to add value to a client’s company can help them increase profits, lifestyle and their level of happiness almost immediately. In this installment, we'll discuss how advisors can begin getting the exit-planning ball rolling.

Melisa Silverman, JD, CVA, SBA, CMEA, is a certified exit planner (CEPA) and the founder and CEO of nationally recognized business valuation firm Avenue M. Having a deep acumen in tax law, business valuation and exit planning, Melisa has discovered that what’s most important at the onset of a client relationship isn’t focusing on “the numbers” but rather to first evaluate where each client is in relationship to their expectations.  

She begins each client relationship by gaining a deep understanding, examining their business objectives and operations, leadership team and key performance indicators. In doing so, she effectuates a high level of trust that is essential to build a working relationship. Her curated discovery process helps clients understand what’s necessary for them to properly prepare to transition. She finds this to be foundational in building mutual trust with clients.  

Read the Full Series: Part 1 | Part 2 | Part 3 | Part 4

At Avenue M, the initial “deep dive discovery” incorporates over 30 questions. According to Melisa, “We learn as much about the business and the business owner as we possibly can. That’s the time when we learn and understand their business.”  

According to Melisa, “We learn as much about the business and the owner. Not just to provide actionable advice, but to help owners understand that we ‘get’ their business, so that they can gain comfort in our capabilities.  

“Long before an owner will allow you to meet with and measure the capabilities of their leadership team, open their books for a valuation, or interview family members and other key stakeholders to understand their goals and aspirations, they first need to trust that you see them and understand things from their unique perspective. You must earn and demonstrate trust.” 

Melisa then moves on to a preliminary business valuation without the formal standards. Reports are developed to identify business attractiveness and readiness, and the owner’s financial readiness. These are followed by an executive summary that ties the current business value with the potential value of the business. Melisa includes some of the recommendations from the valuation and the assessments, identifying both strengths and weaknesses, and noting which incremental improvements should be made first.  

By integrating the business valuation along with assessments of both the business and client’s personal financial situation, exit planners like Melisa can gain a firm understanding before providing any advice. After what could be a dozen hours or more of meetings held over one to three months, an experienced exit planner is finally ready to approach clients with preliminary analysis and suggestions. For Melisa, this represents an opportunity to look her client in the eye and provide thoughtful, independent advice that’s based on reality.  

“That’s what we do. We share our conclusions and the data that drives them. Our independent thinking is based on working with hundreds of business owners with similar issues. It’s understanding today’s marketplace and how prospective buyers would likely think about that client’s business. What’s attractive about it. What rationally could be done to drive the value higher, and make sure that the owner is aware of their actual readiness to sell at top dollar based upon our analysis of their business, versus simply regurgitating the financials and making an assessment based on numbers. Numbers are important, but they’re only one component of many in determining the ultimate value of the business.” 

Over the decades, I have found it curious that clients will tell me that they are ready to sell within the next six months or a year. It’s rarely the case that a business is ready for sale when its owner or leadership team approaches an exit planner. In my experience, a business typically takes two to five years from the time the owner gets serious about exit planning to the time she or he can extract the most value in the market. This needs to be weighed against external economic factors that go beyond the economic health of strategic buyers. The influence of cycles within an industry, technological change, changes in marketplace and distribution, newly emerging risks and the economy itself need to be considered.  

In other words, depending on what’s in the calculus, it may be better to sell a business that isn’t quite ready to sell at a time when all other dynamics are at their peak, versus waiting to extract the most juice from the squeeze and then finding oneself in the throes of a macroeconomic downturn. What’s key is the application of intellect, experience and an understanding of all related factors in deciding when to sell. If a client doesn’t have this capability in-house, or if their existing advisory team bench doesn’t include players with deep experience in value enhancement, you’ll want to help your client interview and hire a designated hitter for this role.  

Many transition planners trifurcate the value enhancement and sales process; before the transition of ownership, during the transition itself and post-sale/transition. Each segment is imbued with its own set of “best practice” disciplines. 

Often, client-centered planners like Melisa Silverman begin with a curated series of questions that focus on helping enterprising families transition to the future. They examine the tools, capabilities, and experiences of the business and its leadership, and analyze a slew of factors related to capital acquisition. They drill down on thoughtful cost-cutting suggestions. They also identify the hard but necessary decisions that have yet to be made but are necessary to achieve a client’s long-term transition objectives. The standard of “Best Practices” dictates that an advisor should proceed with recommendations only after she or he understands how a client can exit as thoughtfully and economically successfully as possible.  

There are many facets to understand that are foundational to underlying topics. These are just a few. 

  • Why does your client want to exit? 
  • When is the ideal time for you to exit?  
  • How much cash flow is needed to transition?  
  • How much debt is your client willing to accept to achieve a client’s objectives?  
  • How much rollover equity are you willing to take in lieu of cash? 
  • If rollover equity constitutes 30% to 50% of the sales price, you may be left with only a small amount of liquidity after you pay tax on the entire amount. Will that be enough to meet the lifestyle that you desire? 
  • At what number does your client need to sell at—net after-tax—to continue a client’s lifestyle? 
  • What is a client’s risk-reward analysis? 

A thoughtful exit planner should continuously test a client’s hypothesis to ensure that a client’s beliefs and decisions are matched with reality. They should catalog their client’s goals and objectives, and interview their leadership team and other key employees, along with any family members who are in their business. They should also include others who influence the trajectory of a client’s business’s growth.  

  • What steps have a client’s other advisors taken to understand their business at a granular level?  
  • Have they analyzed and contrasted the client’s objectives with the current business KPIs to determine if a sale makes sense?  
  • Do the advisors understand the business solely from a client’s perspective, or do they also recognize and appreciate the views from other key stakeholders? If not, why not? 

The answers to these types of questions can be harnessed by you and your client to form the introductory building blocks to a series of analyses, decisions and actions that will enhance the value and profitability of their business. An effective advisor can then help a client shape the way in which their business grows to attract the type of buyers you seek, be it a strategic competitor, an external investor, family members, the leadership team or the employees through an ESOP. 

Brad Barros is the co-founder and a director of Private Risk Capital Development Advisor LLC and Private Risk Partners LLC.

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