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Advising Clients on Exit Planning: Part 3

Sometimes clients can be their own worst enemies.

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 parts one and two 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, and offered some tips on how to get the exit planning ball rolling. In this installment, we'll discuss dealing with one of the most common impediments to a successful transition: your client.

Advisors have reported that when they begin their planning process it’s common for even the most seemingly economically successful client’s current plan to fall short of their anticipated GPS coordinates.  

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

One prevailing view is that the reason current planning doesn’t match with reality is that many business owners want to transition to the next generation—especially if they themselves are a second or third-generation owner. In this light, business continuity is akin to adding railroad cars to a train. The challenge is that to maintain the railroad, the train must be kept in good operating condition, the tracks cleared and certain critical events must happen, at times sequentially and with precision. Otherwise, the train can go off the track.  

One advisor we interviewed spoke of a client with a $200 million business that was seeking to transition to the next generation. Years earlier, when the first intergenerational transition took place, the company was only worth $18 million. Currently, the family members who lead the company are fixated on repeating their parents’ steps for inter-generational transfer. Before they began exit planning, they hadn’t realized that the transition between their father’s generation and themselves was no longer replicable.  

All too often, an exit planner needs to find effective ways to help clients understand that the dynamics at play today are fundamentally different than those of the past. To that end, another advisor recounted a recent meeting with the elderly founder of a business who viewed things very differently than the younger generation. 

Often, the lifestyles of the owners are dependent on the continuation of a high level of cash flow. Business builders acknowledge that they often need to increase capital reserves, but if the second-generation transfers ownership to their children, there often isn’t enough cash flow to pay everybody an amount that they are accustomed to receiving. Equally challenging is that when profits are heavily allocated to the generation that is transferring their interests, the business is restricted in its ability to diversify and grow. All of which limits the business value and can significantly reduce the ultimate sales value for a subsequent generation. 

Even after 35 years of advising clients, arriving at a point where a $60 million business can’t transition to the next generation without severely impeding its value can be a painful conversation for an advisor to have with a client. But in my experience, it may be the most important conversation to have. 

Family Matters 

Many years ago, I had a breakthrough. I discovered that it is often necessary to help high-net-worth families understand that what they have built is more than just a business; that they have created a certain lifestyle for themselves that encompasses shared wealth and a shared vision. Understanding that it’s a client’s family that remains at the fulcrum of activity is essential to a shared belief system that what you have created is more than an individual business. In a real sense, a multi-generational business becomes a self-sustaining enterprise.  

One way for you to empower a client’s family is to help them develop the vision and mission that want to accomplish. It should be motivating for each subsequent generation to understand that even if the founder of the business has long since passed, they remain part of an enterprising family. That they have capabilities, such seeding capital to form new businesses or to buy other businesses. In speaking with dozens of exit planners, my experience is that most successful family businesses have never even had that conversation. 

As one would envision, the sale of a business will often trigger a cascade of emotions for family members. Expert advisors recognize that there are a variety of conversations that need to take place with their clients. There’s a cadence that occurs in undergoing such conversations.  

The knowledge which is developed during the exit planning process is not static—it will evolve. It is not mathematically formulaic, such as a set of dominoes whose pattern of events depends materially, functionally and logically on the past.  

Leading advisors uniformly suggest that best practices incorporate a routinized, systematic process to identify a litany of key areas to be explored and understood. You as a business owner should recognize that each component of the process is uniquely important.  

Seeking Truth 

Sean Hutchinson is a partner at RFN Global with a CEPA and CMAA background. He posits that what is most essential for business builders who are looking to transition is “clarity.” He believes that many successful business owners are overwhelmed by a wide spectrum of data. To mitigate the overload, Sean suggests that business owners narrow their transition focus to the things that matter the most to them.  

Clients may contemplate business sales for years, with nary a thought about what matters most to successfully achieve their goals. A powerful role for a client’s exit planning advisor is to help them see through the noise to gain clarity on the strategic business assets they have and, on those that are missing, including resources, information, and conversations that need to be had. 

As Sean and his teammates work with a multi-generational family business, they often discover that what gets in the way of clarity is a series of what he calls “missing conversations.” These conversations can be uncomfortable to hold. It’s not uncommon for business owners to do what many of us do during our own lives—they push the difficult conversation off, and in doing so, the problem gets worse and the issue remains dormant until it later erupts, causing potentially irrevocable damage. 

A thoughtful advisor needs to develop finely-honed skills that enable them to identify those missing conversations and then help the owner, their families and their management teams have those conversations. As he states, “it’s only through those conversations that legitimate, durable clarity emerges for the owner and the other stakeholders in their business and personal lives.” 

In retrospect, it’s not uncommon for business owners and management teams to talk about what exit planners call “the easy stuff.” These are discussions that center on revenue and earnings, or getting the books in order, instead of discussing big strategy questions like how a cohesive leadership team shows up in the business. Sean says “leaders ‘bring the weather’ and increases in enterprise value are directly linked to the strength of the executive management team.”  

It’s also possible that as a client’s business grows, it outgrows its current leadership team—which may include the client! Without change, enterprise value can decrease—it is a crucial issue to address, and clients should work with an experienced exit planner/value growth advisor who is skilled enough to encourage thoughtful and incremental change that ultimately benefits them. To get to the next level client may need to replace themselves with a more experienced CEO or COO. As their trusted advisor need be able to address this road block with your client if it arises. The intersection of these challenging issues and a willingness to put ego aside and seek truth in a way that empowers your client can be one of the most challenging—yet defining moments in their life as a business builder.  

As we’ve seen, exit planning may be better described as “transition planning,” not simply because of what happens after the sale, but in part because the planning per se demands that your client and their leadership team transition from a  pre-sale mindset to new ways of thinking, and often includes undertaking new activities.  

According to Melisa Silverman, it is the serious groundwork that creates the path for enhancement and initiatives that lead to new actions and improvements. “So that’s where we begin breaking components into ninety-day segments, we actually called them sprints to evoke momentum.” It’s during these sprints that Melisa helps her clients identify and choose what’s most important and to create a hierarchy of their initiatives.  

“Clients learn to select the three to five most important initiatives every ninety days. These could be in areas that are crucial to finding the right buyer at the best price, de-risking the company, and so forth. We are trying to make improvements that are going to hit their bottom line to increase the value of their business. That leads to the next ninety-day engagement, and that next engagement can go on for ninety days, or for years. Transitioning can happen as fast or as slow as clients want, but they happen in increments that are designed to add value all along the way.” 

Will They Miss You When You’re Gone? 

How many business owners do you know who are comfortable taking a month-long vacation without checking into the office? That would be a rare thing, indeed. The inevitable friction is that many business owners thrive on control, yet also typically seek buyers who at some point will fully transition them out of power. 

Entrepreneurs need to dedicate significant time and effort and develop a routinized process that enables their executive team to maximize value at the time of sale. Sometimes this means—and I offer this respectfully—helping a business owner to learn how to get out of his or her own way. It’s important to understand that the characteristics that enable a control-oriented CEO to successfully grow a company may be very different from what’s needed to build an independent, self-reliant leadership team that can run the company.  

Such can be the case with companies where the founder creates a “lifestyle business.” I’ve seen many instances where a mid-seven-figure K1 income translates into a business that only sells for a multiple of 1x or 2x because the so-called leadership team neither leads nor functions as a team. 

It’s that leadership, according to Joe Seetoo, Senior Vice President at Morton Wealth, that’s needed to carry these businesses through tough times. “Leadership is where the action is right now, you can imagine with inflation, with supply chain, with labor shortages, with all the things that happen every day for owners right now that create a whole bunch of noise for them. The character and quality of the team are going to either get in the way of their success or carry them across the finish line. An owner can’t shoulder this by themselves. If they try, they’re likely to fail. So, we want to give them clarity around the issues that matter the most, depending on where they are and where they want to go.” 

Conversely, it’s the lack of leadership that’s also driving fundamentals in the marketplace. To offset this, a skilled exit planner shapes a narrative for his or her clients where the transition becomes a surmountable challenge. This may include monthly “accountability meetings” with the CEO, internal executives such as the CFO and COO, and other leaders and external partners such as the CPA where they openly work on developing a leadership team that survives the founder, which is something they may have never done, and where instead they typically meet to put out the forest fire du jour.  


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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