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Sunday, 29 September 2013 22:00

Q&A: John Brown, Business Enterprise Institute

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John Brown John Brown COURTESY PHOTO

Of the roughly 35 business owners who attended a recent seminar in Grand Rapids, only one had an exit plan for how he would eventually leave his company. The result epitomizes how few business owners actually plan out their eventual departure from their businesses, said John Brown, an author and founder of the Denver-based Business Enterprise Institute, a network of professionals that advises clients on business, estate and succession planning. Exit or succession planning is a process that needs to begin years in advance, he said. “The more time you give yourself to do this, the more options and opportunities you have. The less time, the fewer options and the less money you are going to get,” said Brown, who was in town this month to speak at a seminar hosted by M&A firm The Charter Group. He later spoke with MiBiz.

Is succession planning something that business owners simply forget to do when they start or buy a company?

The main reason for not doing any planning is that they feel as though there are other, more pressing business concerns. They think exit planning is important, and they’ll get to it when they can, but right now they feel as though they can’t. When people start the business, they’re just hoping to keep the doors open for the next week and the next month. So all of their time and effort and attention is going to initially be on survival and growing the business. But at some point, and it’s usually age-related, they will start to think about someday not having that business. Until that time arrives, it’s almost impossible for owners to really spend time or effort or money on doing what’s necessary to leave the business in style.

When they start that process, what’s the first thing business owners should do?

Decide their exit objective and their exit goals. The first is: When do I want to leave my business? Is it Friday? Is it 10 years? Whatever it is, they need to figure that out. Secondly, (if they are retiring), they need to figure out how much money they want to live on for the rest of their lives after they leave the business. The third thing is: Who do I want to transfer the business to? Until we have goals, we can’t do any planning because we don’t have targets.

How many business owners actually have an exit plan?

It’s very unusual. They recognize the need, but they don’t start the planning process. The typical business owner doesn’t think that far in advance. It’s rare to see.

So what happens when they want to get out of the business and they haven’t planned out what path to take?

Unless they have somehow grown the value to a point where they can sell the business and have enough cash, they eventually are in a position where they either close up the shop because they can’t sell it, or they become burned out if they stay in the business because they can’t sell it for enough money.

What’s your advice for somebody who is in business and is approaching the point in the next year or so where they want to retire or sell the firm and do something else?

First, they need to realize that they probably do not have enough value in their business to be able to transfer it and get enough to retire and maintain the income they have today from the business. So they need to plan out their exit, and a very important part of that is to grow what I call transferrable value. That’s value that somebody else would recognize the business has without the owner operating it. Secondly, they have to do income tax planning to minimize the tax consequences, which in Michigan are roughly 30 percent, and there are ways you can minimize that.

How long does it take to build that transferrable value?

I realize no owner wants to hear this, but it realistically takes five to 10 years to grow value sufficiently for most owners to be able to leave their business. That’s certainly not true for all owners, but most owners who are facing this issue for the first time, it’s going to take that long. So the longer they wait to start the planning process, the longer it is until they can leave.

What are some of the most common mistakes business owners make when planning their eventual departure from the business?

They don’t start implementing a strategy to grow business value. They are always busy working in the business, not on the business, and so they never formalize a plan and execute it. And execution is huge to actually leave the business through growing value, through grooming successors, through developing more cash flow and all of the things that need to be done.

What happens when it comes time to sell the business?

They can’t sell it to a third party and, because there is not enough value, they end up selling it to a management-level person or a key employer or maybe a child, and they sell it for very little money down and a promissory note. And the chances of the new owner being able to maintain the cash flow and pay off the promissory note are very slim, in my experience. Probably less than 10 or 15 percent of the time does that work, so you have the business owner who is no longer an owner and does not have enough money to maintain the lifestyle that he or she wants.

— Interview conducted and condensed by Mark Sanchez.

Read 4185 times Last modified on Monday, 30 September 2013 13:37

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