Exit Planning – Ingredients For An Effective Strategic Planning Session

Step 6 of the exit planning process (Action Plan) begins with assembling the key individuals for a strategic planning session.  These individuals could include the business owner(s), the family, management and professional advisor(s).

 

The objective of the initial strategic planning session is to identify at least 10 different strategies that will help accomplish the exit planning goals.  Subsequent meetings will be devoted to prioritizing and selecting the specific strategies to implement and to assign responsibilities.

How do you ensure meeting objectives will be achieved when, according to a Microsoft office survey of 38,000 people, 69% of people feel that meetings are not productive?

 

An effective meeting begins with sufficient planning and ends with proper follow-up.  A meeting Chair is also required to ensure the proper planning, execution and follow-up steps are implemented.

 

1.  Planning

Proper planning involves setting and distributing an agenda to all meeting participants in advance of the meeting.  The agenda provides an overview of the meeting objectives and topics that will be discussed at the meeting.  Timing for the meeting will also be highlighted, including the start time, end time and time allocation for each topic.

Key agenda items for an initial strategic exit planning session include:

• Restating the exit planning goals;
• Brainstorming obstacles that will prevent the achievement of these goals; and
• Brainstorming strategies that will overcome the obstacles and help meet the goals.

2.  Execution

Two important considerations for running an effective meeting include establishing meeting rules and ensuring active participation.

Meeting rules provide the structure and process for active participation.  Examples of meeting rules include: "one person will speak at a time", "all have a chance to be heard" and "only items on the agenda will be discussed".

In order to keep people engaged and ultimately reach a consensus on any decision, active participation by all attendees is required.  It is the meeting Chair’s role to encourage quiet individuals to share their thoughts and to ensure no one person monopolizes the discussion.

At the end of the meeting, the Chair should ask attendees for feedback on whether or not they felt that the meeting objectives were achieved.  This will help improve the effectiveness of future meetings.

3.  Follow-up

Following-up after the meeting is key to ensuring an effective strategic planning session.  This will remind attendees what was accomplished during the meeting and what action items are required before the next meeting.

Meeting minutes should be distributed to all attendees within 3 to 4 days.  The minutes will identify accomplishments made and detail the action items, responsibilities and due dates agreed upon during the meeting.

The meeting Chair will then follow-up with everyone to ensure they understand, and are working on, their assigned action items.  Agenda items for the next meeting should also be canvassed.

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It is unfortunate that more than two thirds of people surveyed feel that meetings are not productive.  Effective meetings take effort and a skilled meeting Chair is required to ensure all the ingredients of an effective strategic planning session are present.

Not All Valuation Reports Are Created Equal

The quality of a business valuation report depends upon the reasonableness of the underlying assumptions made by the valuator.  The valuator’s judgment (or lack thereof) in assessing and supporting the reasonableness of the underlying assumptions can have a significant impact on the reasonableness of the overall valuation conclusions. 

Differences in judgment among valuators will often result in different value conclusions for the same business entity as at the same valuation date.  In addition, various errors and omissions in a valuation report can lead to an erroneous value conclusion.  It is important for those relying on a business valuation report (e.g. business owners, management, accountants, lawyers and other professional advisors) to be aware of some of the more common errors and omissions made by valuators. 

According to "A Reviewer's Handbook to Business Valuation: Practical Guidance to the Use and Abuse of a Business Appraisal" [1], the 12 most common errors and omissions found in tax court appraisals include:

1. Failure to comply with applicable professional standards (e.g. the CICBV in Canada);
2. Overstatement of valuation credentials (or inadequate listing of credentials);
3. Too much involvement by the attorney;
4. Misapplication of the standard of value;
5. Misapplication of the valuation date (most commonly, the inclusion of hindsight);
6. Failure to identify the correct business interest to value;
7. Bias and/or lack of independence;
8. Incomplete or incorrect sources of data;
9. Pure reliance on case law;
10. Failure to make a site visit or conduct management interviews;
11. Failure to create a replicable analysis; and
12. Inadequate explanation or support for the valuation analysis and conclusions.

Ironically, business appraisals can also suffer from too much information and analysis. According to Hood and Lee:

"The court’s first objection to appraisals is an overarching concern that there are diminishing returns in extensive numerical analyses in the appraisal process and that, no matter how the appraisal is fashioned, it has many areas for subjective determination along the way, which culminates in a subjective opinion."

Although the above noted errors and omissions are based on a review of tax court rulings in the United States, they are very likely equally applicable to valuation reports prepared in Canada.

When you retain a CBV, you will likely have an opportunity to review the report in draft form before it is finalized.  Make sure to consider these potential errors and omissions when reviewing the draft report and question the valuator where you suspect an error has been made before the report is finalized.

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[1]    Published by Wiley, authored by L. Paul Hood Jr. and Timothy R. Lee  
           http://ca.wiley.com/WileyCDA/WileyTitle/productCd-0470603402.html

An Exit Planning Tool - The Sellability Score

Are you thinking about selling your business, but you’re not really sure where to start?  Do you have an exit strategy in place?

Selling a business is not as easy as selling a house.  With a house you know what you’re selling - 3 bedrooms, 2 bathrooms, a great view, in a popular location.  There are probably several similar homes in the local neighbourhood that you can look to for comparison and you can always call on the expertise of your local real estate agent when considering a potential sale price.

When selling your business, it’s difficult to gauge exactly what you are selling.  You may ask yourself: is my company valuable?  Is my business sellable?  The Sellability Score can assist you in answering these questions.  

The Sellability Score is an online tool developed by best selling author John Warrillow, whose work includes "Built to Sell: How to Create A Business That Can Thrive Without You".

Your company's Sellability Score reveals how "sellable" your business is and predicts the likelihood that you will command a premium over industry average multiples when you’re ready to sell.

In just 13 minutes, this absolutely free and confidential self-assessment tool will score your business in a number of key areas and tell you just how sellable your business is.

How does it work?

You simply complete a brief online questionnaire to receive an immediate Sellability Score of between 1 and 100 for your business.  You will also receive a 26 page report full of charts and graphs that will give you insights into how buyers evaluate your business.

The report contains more detailed information on the eight key attributes of a sellable business and why these factors are so important.  It will help you pin point the areas in your business that need improvement in order to maximize the value of your company.

The Sellabilty Score report will provide you with valuable information, including:

• whether your business is ‘easy’ or ‘hard’ to sell;
• how to improve the sellability of your business; and
• the questions you need to be asking before you sell your business.
 

You may not be considering selling your business at this point; however completing the Sellability Score can help you to plan your exit strategy effectively.  It can also help you grow your business in such a way that, when the time comes to sell, the business’ value is maximized to its full potential.

The Sellability Score questionnaire can be taken at the following link:

http://www.sellabilityscore.com/vsp/jason-kwiatkowski

Verbal Valuations For Planning Purposes

"Knowing the value of your business is just good business. It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."  [1]

  

There is often an immediate need to retain an independent expert Chartered Business Valuator (CBV) to prepare a business valuation report.  Previously, I have discussed the different situations CBVs are retained to prepare an independent business valuation report.

Valuation reports prepared by a CBV must adhere to the professional standards of the Canadian Institute of Chartered Business Valuators (CICBV).  For example, CICBV Practice Standard 110 – Report Disclosure Standards and Recommendations sets out the report disclosure requirements for the three different types of valuation reports (i.e. Calculation, Estimate and Comprehensive).  For further reference please visit

http://cicbv.ca/practice-standards/.

Standard 110 defines a valuation report as "any written communication containing a conclusion as to the value of shares, assets or an interest in a business, prepared by a valuator acting independently."  A written communication includes a report, schedules, letter or email.

According to Standard 110 "the valuation report shall provide sufficient information to allow the reader to understand how the valuator arrived at the conclusion expressed."  As a result, the valuation report (depending on the type of report) may contain the following sections: i) Introduction; ii) Definitions; iii) Scope of Review; iv) Company Background; v) Industry and Economic Discussion; vi) Valuation Approaches; vii) Description of the Valuation Calculations; viii) Key Assumptions; ix) Restrictions; and x) Conclusions. To prepare a written valuation report, additional time is spent by the valuator ensuring these report disclosure standards are met.

In certain situations a business owner may not require a written report.  A verbal communication of value may be sufficient where an indication of value is required for planning purposes.  Examples include: i) benchmarking for wealth management or value enhancement; ii) planning the eventual sale of the business (internal or external); (iii) preliminary assessment of a potential target business to acquire; and iv) insurance coverage purposes (e.g. key person, buy-sell, etc.).

The scope of work, analysis and conclusions will be the same under both the verbal communication and the written report.  Under a verbal communication, however, no valuation report is prepared. The benefits to a business owner of receiving a verbal communication include:

1. Still getting the expertise of a professional valuator;


2. Not as expensive as no valuation report is prepared; and


3. Can choose to have a valuation report at a later date.

The downside to receiving a verbal communication is that there will be no take-away for the business owner as the valuator is precluded from distributing any materials whatsoever, including the valuation schedules.

Verbal valuations, however, can be very useful in planning situations where the business owner wants the expertise of a professional valuator but does not require a written report and does not want to incur the cost of having the valuator prepare a written report.

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1.  Source: RBC Business Succession Planning: Your Essential Road Map.

Growth - What To Do When It Flat Lines

Growth is a key value driver for most businesses.  A good growth story with plans for future growth is very appealing to potential purchasers.  Many successful businesses, however, reach a point where their growth starts to slow as the company matures.

Demonstrating how a business is likely to grow in the future is one of the keys to driving a premium price for the company when it comes time to sell.  Showing a potential purchaser that the business has achieved past growth plans will increase the credibility of a current growth plan.

The Ansoff Matrix is one tool business owners can use to develop a growth plan.  The following four growth strategies are considered:

1. Sell existing products to existing customers (market penetration) 
2. Sell new products to existing customers (product development) 
3. Sell existing products to new markets (market development) 
4. Sell new products to new markets (diversification) 

Figuring out how to sell existing and new products/services to existing customers (i.e. the first two options) often provides the lowest risk options for growth.  The best customers are the ones who know and like the business the most and are often pleased to find out that the business is offering something they need.

Existing Products to Existing Customers (Market Penetration)

Consider a hardware store with a key cutter hidden off in the corner.  Despite the huge mark-up on cutting keys, sales are very low because nobody can see the key cutter.  By moving the key cutter up front behind the cash register customers begin to see the cutter and realize that the hardware store cuts keys.  Not surprisingly, many more keys are sold to existing customers, which increases the overall revenue per customer.

To figure out how to sell existing products to existing customers, a list with the existing customers’ names down one side of the paper and the products and/or services across the top should be prepared.  Cross-referencing the customer list with the product/service list will help identify opportunities to sell existing customers more of the existing products.

New Products to Existing Customers (Product Development)

Consider a BMW dealership whose typical client is an affluent family man in his forties.  After saturating the market for wealthy forty-something men, the dealership decided to think of the customer as the financially successful family rather than only the patriarch.

Instead of trying to sell more BMWs into a market of diminishing returns, the owner bought a Chrysler dealership so he could sell minivans to the spouses of his BMW buyers – a new product to the existing customer.

Existing and loyal customers trust and respect the business and its representatives. Identifying and meeting a separate or supplemental need for those customers will result in sales growth and value enhancement, provided the products/services can be delivered profitably.  If they cannot be provided profitably it may be more beneficial to consider investing in market development (existing products to new markets) rather than product development.

If you are building a business to sell one day and are curious to see how your growth stacks up, take the 13 minute Sellability Score questionnaire:

http://www.sellabilityscore.com/vsp/jason-kwiatkowski

Exit Planning Step 6 - Action Plan

"A goal without an action plan is a daydream."

               Nathaniel Branden, practicing psychotherapist, corporate consultant, and author

The final step in the exit planning process involves creating the action plan for the business owner and the business.  The action plan moves the business owner from the planning phase to the implementation phase and deals with the following basic questions:

1. What tasks need to be done and when?
2. Who will do it?
3. Who will ensure it is done?

Developing the action plan is a process that will take time but it is a critical step because this will determine what initiatives (short-term and long-term) will be implemented to ensure that the exit planning goals are met.  This process begins with assembling the key individuals (e.g. business owner, family, management team, professional advisors) for a strategic planning session.

Strategic planning sessions should be limited to 2 or 3 hours to avoid information overload, frustration and inefficiency.  The meeting chair will also distribute an agenda to participants beforehand.  Agenda items for the initial strategic planning session will include:

• Goals - restating the goals and objectives (from Step 1)
• Challenges - brainstorm obstacles that will prevent the business owner from achieving these goals
• Strategies - brainstorm strategies that will help overcome the challenges and help meet the goals
 

As many challenges and potential strategies as possible should be identified in this brainstorming session - aim for at least 20 challenges and 10 strategies at this stage.  Each strategy will be linked to one or more challenges.

Each strategy can then be rated in terms of timing (immediate, short-term, long-term) and priority (low, medium, high).  The top 3 to 6 strategies should be selected to form the basis for the action plan.  Ideally a consensus will be reached after much discussion regarding the pros, cons and other issues surrounding each strategy.  2 or 3 strategic planning sessions may be required to accomplish this.

Exit planning strategies could include: prepare a business plan, prepare a contingency plan (update the will and obtain adequate insurance coverage), prepare tax and estate plans, implement value enhancement initiatives, identify a successor, etc.

Specific tasks will then be identified for each of the selected strategies and an individual will be assigned responsibility for ensuring that action items are implemented.  This process can be overwhelming and should be simplified ("KISS") by breaking each strategy down into manageable pieces that will be easier to accomplish.  This will build momentum for the implementation of the entire action plan.

Some of the strategies can be implemented by the business owner and/or management directly.  Others may require the involvement of professional advisors with specialized expertise. 

  

Regular meetings (e.g. quarterly) should be scheduled with the entire team to hold individuals accountable for their responsibilities by reporting back on progress made and next steps.  Having an outside consultant chair the meetings will keep the team focused and accountable for getting tasks done efficiently and on time, ultimately ensuring results are consistent with goals and expectations.

Don’t let your goals remain a daydream - turn them into reality with an effective action plan!

In the coming weeks, we will discuss some of the specific exit planning strategies and value enhancement initiatives in more detail as well as how to ensure an effective strategic planning session.

Exit Planning Step 5 - Net Proceeds Analysis

The exit plan is progressing.  We have identified the goals under Step 1, determined the financial needs upon exit under Step 2, assessed the current value of the business under Step 3 and selected the relevant exit option(s) under Step 4.

The net proceeds analysis involves determining how much the business owner will "pocket" from the sale of the business after settling all liabilities, income taxes and other obligations such as sales commissions and professional fees.  Some business owners may not appreciate that the actual net cash received upon sale can be significantly lower than the agreed upon sale price.  This analysis should be conducted for the relevant exit option(s) and under various assumptions regarding the value of the business.

A good starting point is to estimate the net proceeds assuming a sale price equal to the current value of the business determined under Step 3.  Certain assumptions with respect to sales commissions and professional fees will be required.  

Does the resulting net proceeds meet the financial needs determined under Step 2?  If yes, then great, we are on track!  If no, then further analysis and action is needed.  Specifically, the sale price that provides net proceeds equal to the financial needs must be determined and the value enhancement initiatives that will increase the value of the business to that level must be identified and implemented.

It is vital to conduct this analysis 3 to 5 years before the intended exit in order to allow sufficient time to implement the value enhancement initiatives that will enable the business owner to meet the financial needs and achieve the goals.

Whereas the seller is interested in net proceeds, buyers are generally interested in a company’s enterprise value (i.e. value of the operations attributable to both debt and equity holders).  In order to reconcile the two, enterprise value is increased by the company’s redundant (i.e. non-operating) assets and decreased by the interest-bearing debt outstanding, closing costs and taxes to be paid on the transaction.  Redundant assets are not required to generate operating cash flows and generally not sold as part of the business operations.  Examples include excess cash, marketable securities, real estate and related party loans. 

With respect to transaction structure, the business owner may prefer a share sale to realize the benefit of the capital gains exemption.  A purchaser, however, may prefer to purchase assets to avoid undisclosed liabilities or to take advantage of the tax benefits from "stepping-up" the cost base of certain depreciable assets.  Transaction structure is often a key agenda item in negotiations between the buyer and seller.  As such, the seller should understand the implications of both an asset sale and a share sale.

A Chartered Accountant, Certified Financial Planner or tax lawyer can assist with calculating the net proceeds under various scenarios, including: different exit options, different sale prices, and different transaction structures.

Next week we discuss the final step in the exit planning process: developing and implementing the action plan.