100% of business owners are going to exit one day, but less than 10% have a written and communicated plan for doing so. If you fall into the remaining 90%, it’s time to get a plan in place.
In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Laurie Barkman, “The Business Transition Sherpa.” She’s the former CEO of a $100 million revenue company, the author of The Business Transition Handbook: How to Avoid Succession Pitfalls and Create Valuable Exit Options, and hosts the award-winning podcast Succession Stories.
In this episode, you will learn:
- How to proactively plan your business transition before it’s too late.
- How business owners can get clear on the value of their business, including tips any business can use to add value.
- What it means to create a contingency plan, and compelling reasons for doing so.
- How to assess potential risks, and protect your business against them.
- How to determine what’s more important to you regarding numbers and emotional decision-making.
- And more!
Resources:
thebusinesstransitionsherpa.com | The Business Transition Handbook: How to Avoid Succession Pitfalls and Create Valuable Exit Options | Succession Stories | Bautis Financial: 8 Hillside Ave, Suite LL1 Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call
Disclosure: The transcript below has been edited for clarity and content. It is not a direct transcription of the full episode, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by a special guest, Laurie Barkman.
Laurie, “The Business Transition Sherpa,” is a former CEO of a $100 million revenue company that was sold to a Fortune 50 company. As a mergers and acquisitions advisor, Laurie provides a structured process for business owners to plan successful transitions of their companies.
Laurie is the author of The Business Transition Handbook: How to Avoid Succession Pitfalls and Create Valuable Exit Options. The book demystifies the often overwhelming exit process, guiding business owners who are considering leaving their ventures or simply beginning to think about their next steps.
She’s an adjunct professor of entrepreneurship at Carnegie Mellon University and hosts the award-winning podcast Succession Stories, where she speaks with hundreds of entrepreneurs who’ve shared their journeys through succession. Laurie, welcome to the show.
Thank you, Marc. I’m so excited to be here.
There’s plenty of entrepreneurs who love what they’re doing and want to continue doing it forever. But, of course, there are some who are looking to transition out of their business. What should that second group of business owners start doing now if they’re thinking about selling their company in the next couple of years?
Yeah, let’s recognize the reality: 100% of business owners are going to leave their company one day. But what’s amazing to me is that so few of them – less than 10% – have a written and communicated plan for doing so.
Business owners, if you have ideas swirling in your head, ask yourself: What are the chances of them coming to fruition? Too many times business owners experience variables out of their control – things happen to them – which underscores the importance of having a purposeful plan and intentions for their future exit.
My mission is to work with business owners to help them set a course of action. It’s not like business owners have to do this on day one, but in the educational environment, exit is introduced early. For example, if you take an entrepreneurship class, your leader will help you decide on a business, and one of the questions they may ask you to answer is: Who are you going to sell this business to? I think that’s fantastic.
The more time we have to plan or reverse engineer, the better.
Asking the Tough Questions Early On
Oftentimes we hear the term “accidental entrepreneur.” It’s used to describe someone who gets into business ownership accidentally, because they’ve created a great product or offer a great service. But how often do you hear of accidental exits? They’re rare, because planning is required to have a successful transition out.
Oh, absolutely. There’s a lot of statistics out there that support this discussion. For example: Eight out of 10 companies in the lower middle market that have an intention to sell, don’t sell. That means that only two of 10 do successfully sell. So, what happens to the other eight?
These owners have worked so hard, they’ve put energy, time, and money into the businesses they’ve created – or maintained – to just leave all that money on the table?
I’ve had clients tell me they regret not working earlier on a transition plan. For example, when you have loyal employees with you for 20+ years, that’s amazing. The challenge is if they’re your age, you’re all going to reach retirement age together. That’s what happened [with this one client]: He’s in his early sixties, his key employees are in their early sixties. So, when potential buyers take a look at the business, they ask: Who’s going to run this thing?
If you have a service business, it’s a bigger issue compared with a product business. Many service companies have created value from the know-how. How do you transfer that? It’s difficult.
When I work with clients, I begin to understand the assets they have. I’m not just talking about physical assets – the storefront, the tables, the chairs – I’m looking at the intellectual property and the client relationships. From there, I can determine just how transferable those assets are, and what the perceived value may be for potential buyers.
Related: Episode 72 – How to Maximizing the Value of Your Business Before Selling
While I know that every business transition will look a little different, is there a general timeframe that someone should engage with a professional like yourself? If an owner is considering making a transition, should the planning begin one year out, three years out, or on some other timeline?
When to Create a Business Transition Plan
I’d love to see this work be a part of a regular business plan. It’s actually quite common in the venture capital space, but most everyday businesses don’t think that way. So, in short, the answer is: It depends.
It helps to talk about it by age or stage of life.
- If you’re in your thirties, you’re probably in the building stage. Maybe you have a mountain climber mentality, and you want to be a serial entrepreneur.
- If you’re in your fifties or sixties, you’re probably entering the transition stage. Maybe you’re looking at a specific window of time, and beginning to get ready.
I think beginning a plan 10 years before you transition is a comfortable amount of time.
For those of your listeners who are thinking ‘that sounds like a lot of time,’ let’s unpack by asking some important questions:
- What’s the value of business right now?
- What’s the nest egg you estimate needing to sustain your lifestyle after the business transition?
- If there’s a gap in these two values, how much time do you need to close it?
The more years we have to address this – to create more value – the more options there will be on the table to maximize that value. That way, the owner can exit on their terms.
Are there certain things that a business owner can do to increase the value of their business? I kind of equate it to someone selling their house. Typically, before a house goes to market, the owner(s) will make improvements to increase the value. Is there a similar concept in place for businesses?
How and When to Maximize the Value of Your Business
Yeah, absolutely. I love the analogy you just provided, because we can all wrap our heads around that. If you wait to sell your home after you’ve renovated the bathroom and kitchen, you’re likely going to get good value from that. But, on the other side of the coin, if you lived in your house for 10+ years with that kitchen and bathroom, why did you wait so long? Now you don’t get to enjoy those improvements.
The number that business owners should really care about is the enterprise value of their business, I call this the owner’s metric. All of the things that I might suggest in this episode are things that are going to impact the owners metrics – helping to create economic value, which hopefully makes the business more enjoyable to run.
The big takeaway I want everyone to hear is: Don’t do exit planning only when you’re exiting. It’s too late. It’s kind of like renovating the kitchen when you’re selling the house.
#1: Start With Asset Protection
One of the first things business owners can start with is asset protection. Do you see your business as an asset, or do you see it as a job? If you see it as a job, it may have different characteristics. If you see your business as an asset, what do you want to do with assets? You want to protect their value, and grow their value.
Related: Episode 131 – How to Protect Your Assets
This is where we start having contingency planning discussions. If you are the 100% owner of your business and you are no longer able to serve, what will happen to your business? It’s extreme to think about, but of course it happens.
You may have heard about the concept of the Five D’s:
- Death
- Divorce
- Disease
- Disability
- Disruption/Disaster
COVID was an extreme example of something that a business owner couldn’t control, but it had an impact on all of our business. So, when there’s an element of something out of our control that affects our business value, what will happen? It can spiral downward very quickly. And if the company has to go up for sale – a fire sale or liquidation sale – it’s certainly not going to sell at a premium. So we’d put some protections in place.
That’s just one example, and there are solutions around ownership that can be put into place.
#2: Do a Risk Assessment
There are other risks that we’ll want to take a look at, too.
For example, relating to suppliers:
- Do you have any supplier concentration risks?
- Are there other risks with supplier relationships that need to be addressed?
I’ll give you an example. An online business that has put all their marketing eggs in one basket at Facebook. Well, if Facebook turns off the online business’ campaigns – so they no longer have Facebook ads driving new customers to the business – where do they go from there? That’s a very real example of a disruption, which is a risk owners need to address proactively.
Another risk is employee risk. Owners should determine:
- Which employees are crucial to the success of your business?
- If those employees leave, would it be detrimental to your company?
The owner might be the number one employee on that list. In many cases, a company cannot exist without the owner’s active participation.
All of these things contribute to risk.
On the topic of contingency planning, let’s say one of those Five D’s happens and the owner can’t serve in their business. Would that then trigger the contingency plan? Or is the concept more about maximizing the value of the business by tailoring it to run without the owner?
Being Proactive Pays Off
It’s both, but it depends on the organization.
I have a client with about $5 million in revenue, and he’s very present day-to-day. He has a Controller and Director of Operations, as he’s setting his sights to be a larger company one day, but the reality is that as of right now, he has to be involved in the daily business activity. I’ve been talking with him about how a buy-sell agreement could be structured in the future.
I have another client whose sister-in-law works in the business, and she’s setting up a buy-sell agreement with her sister-in-law. So, if something does happen to the owner, the company will be in her sister’s control, funded through an insurance policy.
The earlier we work on these things, the better off the business will be.
How to Make a Transition More Approachable and Positive
Of course there are serial entrepreneurs who have gone through multiple transitions over the course of their careers. But, for most business owners, they’ve worked in their business their entire lives, so a transition is scary. They have no idea what to do. Where to start. So, how do you help? Is there some kind of playbook they can follow?
Well, that’s why I wrote The Business Transition Handbook. Each chapter is a pitfall to avoid in this process.
I was very purposeful when writing the book, and I had the intention of answering: If I’m the entrepreneur reading this book, what are the things I want to try to do or avoid doing? I also laid it out so that we work on certain things upfront, like personal readiness. After all, it’s necessary to be open-minded when beginning a business transition plan. I recommend leaning on these ideals…
#1: Embrace Transition as a Starting Line
Transition is a good, natural thing. It’s going to create value in your company. So why wouldn’t you do it? We just need to know what to do.
One of the assessments in The Business Transition Handbook is a personal readiness assessment. It’s also available on my website. It seeks to answer a couple key questions related to the emotion behind a business transition. After all, we’re human, and these emotions are always present – not just at the end of the transition process.
#2: Be Clear About What You Prefer
Your transition is defined by you and by the buyer and what’s right for you. So owners must be clear about what they prefer, and build that into the deal. This can make a big impact when it comes to the exit, and the owner’s feeling around it. I want to create an exit with no regrets.
That makes a lot of sense, thank you. Alright, so we’re just about out of time. Laurie, I’d like to thank you for being on The Agent of Wealth Podcast today. You provided some valuable insight into business transitions. How best can our listeners reach out to you to learn more about what you do?
The best way is to go to my website, thebusinesstransitionsherpa.com. From there, your listeners can find more information on my podcast, book, and a new course that I’m launching called Endgame Entrepreneurship Online Masterclass. Great, we’ll link to those resources in the show notes. Thanks again, Laurie. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.