Podcast: When To Start Exit Planning

By Mueller Financial Services, January 25, 2022

Business Financial Services / Podcast


Join Veronica Roshek, Retirement Income Certified Professional, and Sal DiTusa and for an in-depth discussion on exit planning for business owners.

As a business owner, you may be thinking you’re a long way out from needing to think about exit planning. So when should you begin to plan for your exit and how?

Listen Now:

For more information, please contact:

Veronica Roshek, Retirement Income Certified Professional®
Wealth Advisor

Episode Transcript:

[00:00:00] Ashley: Hi, I’m Ashley. And you’re listening to the Mueller Financial Services podcast, “Managing Your Wealth – Your Vision, Our Guidance. Today, we welcome two Mueller Financial Services’ professionals Sal DiTusa and Veronica Roshek for a discussion on exit planning for business owners. But before we begin, let’s find out more about our guests.

[00:00:28] Ashley: Sal is a Certified Exit Planning Advisor and has over 13 years of experience in the financial services industry. He has deep experience working with large multinational investment banking and financial services companies and works with business owners who seek to maximize the value of their business at the time of sale and minimize taxes.

[00:00:46] Ashley: Veronica Roshek is a Retirement Income Certified Professional with four years of experience working in the financial services industry along with a lifetime of experiences growing up as the daughter of a financial advisor. Veronica thrives on empowering business owners and individuals with tools to gain clarity and build direction for their financial picture. Through all of life’s transitions, she inspires action to work towards financial goals and plan for the unexpected.

[00:01:09] Ashley: Well, thank you, Sal and Veronica, so much for your time, and thanks for joining the podcast today. It would be great if we could start by getting some clarity about what exit planning really is. So, what is it?

[00:01:18] Sal: Yeah, I’ll take that one. Ashley. Thank you. Um, and at the heart of it, an exit plan asks and answers all the business, personal, financial, legal and tax questions involved in transitioning a privately owned business.

[00:01:31] Sal: It includes contingencies for things like illness, burnout, divorce and death. The purpose is to maximize the value of the business at the time of exit, minimize taxes and ensure the owner is able to accomplish what his or her personal financial goals are. So, so that’s what exit planning is. But what exit planning does is really align your personal financial plan with your business plan.

[00:01:56] Sal: And so what we’ll do in a typical exit plan is first have a discussion about your goals and what you’re trying to accomplish with your business asset. And then from there, we want to link the business to the personal, to the personal goal. So, we may take a look at a business and determine, you know, maybe it’s worth $10 million, while we go through your finite financial plan and determine you only need $6 million to accomplish your financial goals.

[00:02:25] Sal: Well, so the question is, what do we do with that other 4 million? Well, maybe there’s other gifting strategies or ways to move that outside of your taxable estate and maybe transfer it to kids who are looking to take over parts of the business. So, at the heart of it, the business, what the exit planning is, is really the way that you talk about transitioning the business. What it does is really identify the goals and where the assets are going to flow once the plan is complete or the exit is complete, I should say.

[00:02:56] Veronica: Right. There’s just a much bigger emphasis that’s really around the planning than there is around the action of an exit. Um, so when we’re thinking through, when to begin that exit planning process and what sort of business owners even need to consider something like an exit.

[00:03:18] Veronica: It’s really everyone needs to consider it and it really should be just tied into their personal plan. Like you mentioned, because a lot of times for business owners in general, the business is a huge part of their personal plan and so they’re just thinking of it that way, but then they’re not planning for that actual activity.

[00:03:37] Veronica: Like you typically think of with a personal financial plan when you’re really, you know, able to directly tie it to those exact goals. When really for business owners, we can do that whole process. You can take that plan for them, from the business’s perspective and tie it to them as people so that it’s, it’s easier to interpret those goals and bring it full picture to bring that vision together.

[00:04:06] Sal: That’s a good point for Veronica and I think I like your point too, you know, this idea of exit planning. I think that’s not a great name for it. Because it insinuates that we’re going to exit. And I think exit planning starts far, far before an exit is even on the table. And I think during the process as well, it’s important to help you identify what kind of business you have, because, you know, we work with all sorts of business owners here and deciding what kind of business they have helps lead you in different directions.

[00:04:38] Sal: So what I mean by that is really deciding is your business. What I would call a lifestyle business. Which means it creates a good current income for the client, but it really has no transferable value in the private marketplace. So for the client, this business creates good current income. So you think of these as like the, you know, Sal’s roofing’s of the world.

[00:05:01] Sal: They’re, you know, the Veronica’s painting companies of the world. Thing that provide you a good current income, but there’s really no transferrable value per se, once the business, once you decide to wind down the business, so that business owner, you know, you have to focus on ways to extract taxable and tax deferred assets out of the business during the life cycle of the business, because you know, you’re not going to be getting the big payday at the end of the transaction.

[00:05:27] Sal: Um, so we have those kinds of business owners and then we work with, what’s kind of called the value creation businesses, which are kind of the opposite of that. Where you’re creating value throughout the life cycle of the business in preparation for the big transaction or exit at the end. And don’t get me wrong in those business owners as well, we’re extracting taxable and tax deferred assets as well, but the focus is more on growing the asset for the eventual exit. And when working with business owners, you know, it’s important to remind yourself that as you mentioned, a big part of their assets are tied up in the business. So, it’s not uncommon to work with a client who may have $1 to $2 million, say of investible assets, but their net worth is $25-$30 million.

[00:06:12] Sal: Because it’s all wrapped up in the business. So, what we try to do in the exit plan, as well as diversify away from just having the business as your only asset, and if the business something happens there and ends up going to zero, we’ve extracted assets outside of the business so that everything isn’t 100% dependent on the business.

[00:06:31] Sal: So I think I like this idea of, of identifying, you know, is this, you know, a lifestyle business or a value creation business. And then the plan for those two types of businesses is a little bit different as well.

[00:06:44] Veronica: I totally agree with all of that idea of that separation of those two different styles of businesses.

[00:06:51] Veronica: And I think a lot of times too, with certain business owners that I’ve talked to anyway, is that they may be in that lifecycle style of, or just the lifestyle type of business or vice versa and then at some point along the line, that plan may shift a little bit or all of the sudden it becomes a family business and it wasn’t supposed to be one in the first place or it wasn’t going to potentially be a family business.

[00:07:17] Veronica: And then it becomes a family business because goals change. And so, again, back to that planning piece of all of this, no matter what direction the business goes, taking the time to sit down and plan for all the possibilities of what direction, what you want, uh, or what your goals could potentially be, and then finding that route for how to plan for them.

[00:07:41] Veronica: Cause a lot of times people get stuck in that mindset of, well, I’m not going to be able to grow my business into that valuation style of business and then maybe that step of just taking the time to sit down and plan all the way through it, especially if you’re doing it earlier on, that could be a good way to be able to transition, uh, and build something that you won’t be looking back on.

[00:08:06] Veronica: You know, being like, oh shoot. I wish I would have thought of this 20 years ago, I could have been planning for this a long time ago. And I think that that too, that word, that exit. We just sometimes get that miss connotation still, that, that means that we should be planning for it or making those decisions right around when we want to be planning that exit, just like for an individual right before they are going to start looking at retirement, which we hear that a lot too people on average, you know, start planning for retirement really soon before when really, if we plan the whole time, a lot longer, that lifespan, that would be a good way of being able to just really maximize whatever you want to get out of it.

[00:08:49] Sal: Absolutely. Veronica and I think you’re right. I mean, a properly constructed exit plan, really has no timetable to it. A properly constructed exit strategy really means you’re able to exit the strategy at your desire at any time.

[00:09:08] Sal: And under any circumstances, so a properly constructed exit plan, you know, allows you to field those offers, those unsolicited offers from the marketplace of people wanting to buy your business. It also has contingencies for death and disability. If something were to happen to you or you’re disabled and not able to run the business.

[00:09:28] Sal: So, uh, a properly constructed exit plan, like I said, isn’t constrained by time and it covers all contingencies, all different exit strategies and, like I said, contingencies for death and disability as well. So, to me, the exit strategy or the exit plan, really, when you look at exit planning, really at the heart of it is good business strategy and good business planning.

[00:09:54] Sal: Um, really, because when, you know, we work with a lot of these startup companies and, you know, these are companies that go out to the marketplace to solicit investors. And when I work with them on that, I say, you know, you don’t have an exit strategy and here, if you’re going to go out and solicit money from other investors, they’re going to want to know how they’re getting their money back.

[00:10:15] Sal: You know, this business is your baby and you know, you want to grow this thing to them this is just an investment. And like any investment, they want to know how much the returns can be and when they’re getting their money back. So I.E. when you’re going to exit and when you’re going to generate liquidity for them.

[00:10:31] Sal: And so, you know, Exit strategy is really good business strategy and starts at the beginning with your overall business, business strategy. Uh, and so that’s the way I think of exit planning as well as it should really start as soon as the business starts. And when you look at components to the exit strategy, you know, we’re looking at things like buy, sell agreements, cross purchase agreements, things like this, that instantly.add value to your business. You know, I talk with business owners, quite a bit and, you know, it’s call it Sal’s construction company’s been in business for 20 years and their biggest customer is Veronica’s street maintenance company, and they buy a lot of concrete for all the street maintenance they do.

[00:11:18] Sal: And, um, oh, I’ve known Veronica for 20 years and we do all this business together. I’ll say, well, great. Well, is that, is that, um, client contractually obligated to you. Do you have that client under contract? Oh no, I don’t need to Veronica’s great. Um, we’ll never, uh, she comes to us for everything. We really don’t need a contract.

[00:11:38] Sal: Well but wait a second. If you want to show transferable value to someone who’s perspectively buying your business, you have been Veronica’s best, buddy and you guys have a handshake deal. That’s not going to fly. I guess what that’s worth in the private markets, it’s not really a lot. Now you start going out and getting your, your clients under contract.

[00:11:58] Sal: Um, now you can present that to, you know, someone looking to prospectively by your business as, okay here’s the cashflow streams that you’ll be buying into. And so just by the preliminary exit planning discussion, we go out and we have discussions like this, and right there, we’re instantly adding value to your business.

[00:12:17] Sal: The second you go out and get these clients, under contract the way I’m talking about, you just added value to your business and you really haven’t per se done anything to the business, but you’ve just kind of solidified, um, the way the businesses run. And so I think keeping that in perspective as well, that a lot of business owners just kind of gloss over and don’t think about much it’s really important.

[00:12:39] Veronica: Yeah. I really liked that point, Sal, I think all of those thoughts around all those aspects of the plan, and then also how to create that value in your business for those things that may be a little bit more on the intangible side is a really, really good point.

[00:12:54] Ashley: I think among advisors, professional firms, and business owners, you get a lot of different answers, right? When should business owners begin to plan for their exit?

[00:13:02] Sal: Yeah. And I think we kind of talked about that a little bit. I think, you know, the earlier the better, uh, there’s nothing I hate worse than a business owner comes to me and says, you know, I’m under LOI with someone buying my business. I need to start planning now. Well, you know, this should have been really thought about years ago.

[00:13:20] Sal: I mean, I’m doing, working an exit strategy now for a client. That’s, you know, his proposed that’s it it’s 10 years from now. And so we’re getting everything kind of set up with the business and, you know, selling a business. Isn’t something you just decided to do and go out and do it. It’s not like, you know, buying a toothbrush or something like that.

[00:13:39] Sal: Selling a business takes, you know, quite a bit of time. I’ve heard our CEO, Dave Nissen refer to a kind of as waxing the car. You know, when you want to go out and sell your car, you don’t just. I’m just like, Hey, you want to buy my car? You go out your wax it you vacuum it, you get the oil changed. Uh, you get it looking nice and pretty.

[00:13:57] Sal: So you can get top dollar for your car. And that’s the exact same thing you need to do with your business. You need to go through the books. You need to have a professional audit done by a reputable accounting firm. So you could get down to an adjusted EBITA. So that a perspective buyer knows exactly what they’re buying into.

[00:14:16] Sal: Uh, and this is all very important, you know, going into the transaction, this isn’t things you want to be thinking about six months before you’re thinking of selling your business, does it, these are the types of things. You know, we evaluate, you know, years before the business is transacted. So to me, when do you start exit planning?

[00:14:34] Sal: If you haven’t started yet? It’s, you’re behind the eight ball. In my opinion,

[00:14:38] Veronica: I think that sometimes people have. Misconception that it needs to be well, when I have X number of dollars in the bank or X amount in revenue, or this many employees, or this many benefits or all of these things that they just think are these arbitrary reasons for why you would want to start this exit planning process, which really should just be a part of the plan in the beginning.

[00:15:02] Veronica: Uh, one really good example of that is that if you were trying to go out and raise capital for a startup business. One that is just getting off the ground. If you try to go get investors to work with you, they want to know what your exit plan is before you even start the business. They’re not going to hand over money until you actually have that full plan written down so that you can actually, so that they know what their value is in that, because there is value built into that, right from the very get go. And I want to go back to Sal point earlier, too about, you know, our two companies working together on this handshake deal and, uh, if you frame it differently where it’s not that handshake deal from the beginning, and you’re not trying to go backwards and get your ducks in a row after the fact, if you’re able to get your ducks in a row, as you go.

[00:15:57] Veronica: Then if all of a sudden you have those unexpected occurrences happen to like all of a sudden, you know, something horrible happens and there’s a disability event or, uh, someone that’s in ownership passes away. You want to have those structures in place and those things to take care of the families. But you also want to make sure that the business is taken care of because a lot of times, for, especially for business owners, you know, your business ss something you care about, you’re living and breathing it. And so those, those employees, those clients, the products you’re putting out, you truly believe in all of those things. So, it’s not just about taking care of, your, your co your partner in the business or your family alone. There’s all of these pieces that really work together.

[00:16:53] Veronica: And so. It’s something that you want to think about again, really right in the beginning and in that plan, it can involve it. Doesn’t have to be the same plan day one, as it is in year 25, that plan is going to evolve and grow and change and become more sophisticated in time. And there’s all sorts of strategies to be able to create more value as you go.

[00:17:19] Veronica: So that not only are you making money in on an annual basis and, you know, supply in the business and supplying your own income. But so it’s worth even more money in the long run.

[00:17:34] Sal: Good point, good point, Veronica. And I think you kinda touched on something there may be inadvertently, but you know, the question was kind of, when do you start exit planning?

[00:17:43] Sal: I think we talked about that, but what I get to from business owners in the marketplace is okay, so I want to do this. How do I do that. Because, you know, you go to your attorney and you say, okay, I’m thinking about exit planning. You’re going to get a whole different response from him. You go to your accountant, you’re going to get a whole different response from him.

[00:18:02] Sal: You go to your insurance guy, he’s got a whole different idea of exit planning. And so the way I personally positioned myself and Veronica works with me on this is as a Certified Exit Planning Advisor I really positioned myself in the of the relationship and kind of quarterback the relationship. And so this happened, this works a lot better with business owners, because as I mentioned, he’s going out to all his professional service providers.

[00:18:27] Sal: He’s getting different answers from each. And what that does is cause paralysis in the business owner, because he doesn’t know what to do. He’s getting different answers on what he should do next from everyone it’s too much for him or for them. And they end up kind of bogging down and doing nothing. Which is the last thing we want.

[00:18:43] Sal: So the way I usually work this relationship and how I do this is I work as the quarterback of the exit planning strategy. And then I know what team members I need to bring in. Uh, to kind of accomplish the goal for that part of the plan. So if it’s an evaluation that’s needed, I know our accounting folks that we need to reach out to get involved.

[00:19:06] Sal: If it’s, you know, if we’re earlier in the exit planning process, we need a lawyer involved. Right? Well, that’s most likely going to be an estate planning attorney as we get closer to the exit. Well, you don’t need the estate planning attorney anymore. You need a transaction attorney. So, working with someone who understands the different team members needed, and when to trade different team members, uh, for other members of the team is really important.

[00:19:31] Sal: So I think how you do it is extremely important and how you do it is finding someone, a quarterback, the whole process for you instead of you going out and trying to piecemeal this with what did my attorney tell me? Oh, well now I need to find a transaction attorney or, oh, well what should the what’s the investment banker?

[00:19:50] Sal: Do I need to find an investment banker? Work with someone who can quarterback and has all these connections, either in-house or industry connections, um, that they can put this puzzle together for you. Uh, I think that’s the most valuable part that I personally bring to the table, when working with business owners and what, the way we do it here is really act as the quarterback and coordinate all this for you.

[00:20:15] Sal: Because if not, like I said, what the business owner usually ends up doing is nothing.

[00:20:21] Veronica: Yeah, that’s I think you hit the nail on the head for people that I’ll be listening in here. And that really is that the, how is the hard part, but don’t let that stop you from starting. Just, just find a good team member and Sal, and I, we would be happy to help with that process here because a lot of times, another common misconception I think is that for example, you’ll have that valuation done or you’ll have a buy-sell agreement.

[00:20:50] Veronica: Or you have, uh, some sort of family agreement all set up and you’re like, yeah, I’m good. I have my exit plan. Well, there’s actually all of these things that go into it. Uh, and all of these different areas where you’re working, you are working with different types of attorneys, not just one, and a CPA and then, uh, find a good financial planner.

[00:21:15] Veronica: And then there’s insurance pieces tied into that. And so really this plan and the reason we keep referring it to it that way is because there’s a lot of intricate pieces that can fit into that. And it’s customizable. It’s not just this, we can’t just walk you through the here’s the one steps one through 10 on how.

[00:21:34] Veronica: Your own exit plan set up because it’s going to be customized specific to your business and what stage you’re in and what your goals are and what needs to be protected.

[00:21:45] Sal: Absolutely, absolutely. Well put Veronica and, you know, I think we’ve talked about kind of when, uh, to start exit planning, kind of how we’re going to do that, but like, what is it that we’re going to do?

[00:21:56] Sal: You know, and I think I get that from a lot of business owners in the market place. And as I talked about kind of coordinating and correlating the personal with the business financial plan, one thing that we do quite a bit of is going to take a look at your business and we evaluate, uh, what I call the four Cs and they’re all forms of capital.

[00:22:18] Sal: So it’s human capital, structural capital, customer capital, and social capital. And so go into your business and evaluate these different sources. And what we’re trying to do there is find ways to increase your multiple. Because when you look at evaluation, that’s really where the game is played as increasing the multiple.

[00:22:39] Sal: And so, for example, if we look at your customer capital, we might take a look at your client base and see that, you know, 80% of your clients come from your top three customers. Well guess what kind of transferable value that has. Not as much as a company that, you know, 80% of their business comes from 200 different customers and they’re repetitive customers that buy frequently from you.

[00:23:05] Sal: So we want to make sure that you don’t have heavy customer concentration issues. We also will take a look at your human capital and say, okay, maybe there’s some gaps in management and some training that needs to be done for the next generation to take this business over. I do this all the time with family transition businesses where, you know, dad’s in his mid to late sixties wanting to transition his business to a son or daughter.

[00:23:30] Sal: And, uh, that person really has no professional training in actually how to keep the books. How to actually market this business, how to grow this. So we might identify that as a weakness, and that might be part of the exit planning process. Okay. We need to grow this person over the next five years to take over this business.

[00:23:51] Sal: So we’ll evaluate that, um, you know, structural capital, we’ll take a look at, you know, your building facilities. You know, one that we’ve worked on, we work with a lot of doctors, for example, And one thing and the doctor, and healthcare industry, that’s important for these folks and these, um, healthcare groups is do they have their own surgical center?

[00:24:12] Sal: So we’ve worked with a lot of doctor groups and doing a cost analysis of, okay, what is it going to cost to build our own surgical center? What’s the potential ROI on that. And, you know, in one case these, these work together. So in this example, I’m thinking of, they were using the structural capital of building this new operating room for their healthcare practice as a way to address their human capital, because what they found out is they weren’t able to attract the human capital they wanted without the structural capital that those humans were looking for. Uh, and so by addressing the structural capital side that allowed them to attract the talent they wanted on the human capital side.

[00:24:52] Sal: And so it’s looking at all these different components to the business. Um, that’ll play into part of the plan as well. So that’s just kind of part of what we do as well in the exit planning process.

[00:25:06] Veronica: That’s a really great point. I, the different types of capital are so important and that’s how a lot of times, when a business is maybe initially valued for the first time and it gets into the multiples of what sorts of capital is already in existence.

[00:25:23] Veronica: And then you can take those tangible pieces. And you can take where you want to go and you can really start to build it out. Like you’re talking about, you can start to build it out to become what you want it to it’ll help the business thrive where it is in general. It’s not only going to help you in the end game, that’s going to help you along that path.

[00:25:42] Veronica: But then it’s also going to be able to create some clarity for you around how to get there.

[00:25:50] Sal: Absolutely.

[00:25:51] Ashley: Something that both of you are saying a lot is that there needs to be planning initiated. What types of things should business owners be planning for when they are thinking about an exit from their business a long time from now?

[00:26:02] Veronica: Well, we’ve really touched on this a lot too, because we’re talking about business planning in a sense from the very beginning, no matter what sort of lifecycle your business is in right now, or if you’re even thinking of starting a business that hasn’t even come into existence yet. And then thinking through all of the pieces of what’s going to build out that business model and being able to just intentionally from the rent front end, look at.

[00:26:38] Veronica: What are the valuable pieces of this business? What do we want to do with them in the long run? How are we going to protect them and how are we going to really maximize them and create multiples of the value that we really want to be able to create for the company and in the long run, it’s just like another.

[00:26:59] Veronica: It’s just like another whole aspect of your business. Like you would look at a profit and loss sheet or something, some other piece of your business and try to figure out what sorts of revenue producing activities or, um, where all the expenses are going and trying to figure out how to best put those aspects of your business together so that they continue to be more successful as time goes on.

[00:27:27] Veronica: This would just be another piece of that puzzle and something you would continually address as time goes on so that you keep building on it. Um, and when, when we think about planning for an exit closer to when an exit is going to happen, you don’t get to look at all of those pieces anymore as, as much, because a lot of it’s already built, it’s already set.

[00:27:51] Veronica: So the most important thing is to just start. Uh, and so wherever you are at the biggest thing is to take action and to take action. Uh, you just, you need to start working with, uh, a good, trusted professional who can help you start initiating those steps and help guide you on the path for where to start so that you can keep growing whatever it is, uh, that you’re trying to build for your own exit.

[00:28:24] Sal: I think, I think Veronica hit the hammer on the head, or I’m sorry, nail on the head with the word action. It’s 100% action. Um, we take a very action oriented approach to our exit planning process. So we identify who’s doing what, what the timeframe is to have that completed by, and that we have a strategic roadmap built out to accomplish what our end goals are and the timeframes.

[00:28:51] Sal: That’s exactly right. Veronica hit it. Take action and take it, you know, immediately.

[00:28:58] Ashley: Lots of great information to consider for business owners that may be thinking they’re a long way out from needing to think about exit planning. Thank you both for joining me on this episode.

[00:29:07] Ashley: And thank you for listening. If you’re interested to learning more about Exit Planning or more about Mueller financial services in general, visit Mueller financial solutions.com, where you will find more information about the firm services and team members. You can also follow the firm on LinkedIn at Mueller financial services, Inc. For more firm updates, insights, and upcoming events.

PKF Mueller and Mueller financial services Inc. Are separate entities. Securities offered through LPL financial member, FINRA slash SIPC investment advice offered through IHT wealth management or registered investment advisor. IHT wealth management and Mueller financial services Inc. are separate entities from LPL financial PKF Mueller and LPL financial are separate unaffiliated entities.

The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision.

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