Transcript
Good afternoon everyone. I’m Scott Savage from SJS Investment Services. I’m the Founder of SJS. Welcome to today’s webinar on “Your Business Exit: Monetizing Your Life’s Work”. We are really thrilled you could join us today. We’re going to talk about monetizing your life’s work from a business owner’s perspective, what to think about and what to plan for based on some experiences I’ve had - a few ideas we hope to be helpful as you contemplate potentially your exit or what you’ve got up to in selling your business.
I’m gonna share my screen here with you today and get started. So again, “Your Business Exit: Monetizing Your Life’s Work”. We want to be helpful today as you think about what you’re doing and get out ahead of what will probably be the single most important financial transaction of your life. So we will jump right into it here.
Here’s what we are going to cover today. Just a little bit of how we want to start thinking about the exit and the planning. Some of the family dynamics - we all are part of families and often times business transactions put the “fun” in dysfunctional, so we are going to talk about that a little bit. Get into the mind’s side of the financial nitty-gritty. We are going to talk about the heart side as well. As you put your team together - what we are calling the Dream Team - to help you navigate the process. And there is going to be the heart side, your emotions that are a really big part of this process. And then we will give you a little peak as to what comes next after a transaction based on some of our experiences. And we will wrap it all up. Really excited to be here.
Given the world of compliance that we live in, and it’s a very important part of who we are here at SJS, the proverbial disclosure of what we are going to talk about today are just some shared experiences. There are not necessarily any guarantees or anything that you want to necessarily rely on in this presentation in and of itself. We are here to just provide some guidance, ideas, and thoughts. Of course you ought to consult your own tax professionals, legal professionals, and advisors to help you through your process. So we appreciate you understanding that (see Important Disclosure Information at the end of this Transcript).
This is a big deal. The goal of today is to get inside the mind side of preparing for a transaction and for the heart side, and do this on your terms. This is really an important first part of today’s conversation. There’s really two ways to do this. First, you can do this from the perspective of today-forward - making incremental decisions to plan for an exit. I want to challenge you to think a little different when it comes to preparing to sell a business. I would challenge you to think of it from the future-back - so in your mind’s eye, getting down the road say 5 years when you want a transaction to happen, and really getting a clear picture in your mind of what you want that day to be like, what you want to feel like, who’s there, what is that ideal future state. And then we can from there do the planning back to today so that all the steps can happen to get you to that ideal state. If nothing else happens today, that notion of starting with the future and working your way back is to me a really great way to think about preparing your business for sale. So future-back.
Again you want to start with the end in mind. Anyone in the movie business will tell you that for most major motion pictures, the final scene is shot first. I learned that a number of years ago. And then the movie builds toward that final shot. We want you to think about the future and bring it back. And have plenty of options. There are a lot of different ways to go about monetizing or exiting a business. There are pros and cons to each - we will talk about them. To me, it’s really important that you have a really crystal clear idea of what those non-negotiables are in your mind. If you aren’t clear on them, no one else is going to be clear on them. So you have to be really clear yourself, and communicate to your advisors on exactly what the non-negotiables are, and the things you are flexible about.
Fast fact here: 3 in 5 businesses do not have a written business succession plan.[1] As hard as we all work in our businesses, it sure makes a lot of sense to slow down in order to speed up, which is what I think about this process. You have to slow down in order to speed up to make this exit the way you want it to be. So let’s not be one of the 3 in 5 who don’t have a written business succession plan.[1] Let’s be one of the 2 in 5. It can be one page, but write it down.
Managing family dynamics - what a big topic this is. We all have families. That notion of communicating on an ongoing basis well ahead of time. I can’t tell you how many times a person has sold a business and picked up a phone to call their kids to say, “Guess what - we just sold our business to a strategic buyer or a private equity buyer.” One of the kids says, “Gee, I thought we would get a shot at buying the business.” There is often no communication. Starting early is important.
The other piece of this: often bringing in an outside advisor or consultant is often really important, because some of us are not as good at communicating as we maybe think we are. In my own case, I’m building a 100-year business, but I do have 4 adult children, 2 of them in the business and 2 of them not. I have hired a firm to consult with me and my kids to make sure we are communicating in a way that everyone is heard and can have their opinions. Even though we are not preparing to sell the business, this business will have a succession within my family. We have absolutely hired an advisor to help us, even though that is what I do for a living. It’s very difficult to have that objectivity with your own organization. I’m putting my money where my mouth is, so to speak. I’m suggesting you have a professional’s help, and I’ve done the same thing - a very important part of the process.
People often think that this is all one big financial model, and that selling the business is just all about the money. A wise man used to tell me that it may not be about the money, but it might be about the amount of money. The money side, the mind side, is important. You want to make sure the company passes to those you want it to. However, there is an important component of “Do I have the amount of money I need or I want in order to retire?” We do that in a very detailed way, gathering all of the information that is available and loading it into a software program that can kind of help us simulate the future to the best of our abilities. We plug in all those knowns and then simulate the financial future for the client so that they can understand what are the financial essentials that they have to have in this transaction in order to take care of themselves and their families. And then often it becomes beyond that “What’s my legacy going to be? I have enough money for me, I have enough money for my kids and my grandkids. Beyond that, let’s have a legacy conversation to talk about how I want to make my own little dent in the universe, as Steve Jobs is famously quoted often?”[2]
One of the things we find in this process is some people suffer from what we call “Magical Thinking”. “Magical Thinking” is just not taking the time, or just assuming that if I have a million dollars then I’ll be fine. Well, a million dollars isn’t what is used to be, so we want to make sure that we transcend any “Magical Thinking” and that the financial outcomes that you are assuming are within the realm of possible as we simulate the future. That frankly starts to inform the way that you preserve and protect. When you monetize your life’s work, it’s all then about preserving and protecting - or diversifying your wealth - in the future. Very important points here.
There is a lot of work that needs to go in the front on the financial side of things so that there are no surprises when you get to the end. No one likes surprises, especially if they are negative surprises.
One of these bullet points talks about valuation. Depending on the company, the valuation can be a very formal one by someone who is very adept at doing valuations. Sometimes, it can be as simple as, “Within my industry, what is the range of multiples of cash flow just to give me a sense of what the value of this business might be?”
Taxes are another big component. I think of taxes as a foreign language, and they change constantly. They can be a big part of you structure a transaction. They can swing wildly in how much money you have to pay in taxes based on the way the transaction is structured. That is a very critical part of a transaction as you are weighing the pros and cons of the different ways to exit a business. Everyone likes to talk about retiring, and that means different things to different people.
The Dream Team - this is what I call the most important non-family team you will assemble in your life. There are some best practices for you to think about, because a lot of business people have an attorney, they have someone who does their taxes, and they think, “Well, I’ll just use this team who knows me and - probably most importantly - I’m comfortable with. I don’t have to bear my soul on what I’m uncomfortable with or what I’m afraid of.” But often, that can be a mistake. Your local attorney or your tax-prep person may not have the skill or experience of multiple transactions that are really important.
Making sure that team, financial advisors, depending on the size of the transaction that might be investment bankers, or maybe not that formal. Having that financial advisor, that quarterback that can help lead the process. Certainly an attorney that has a lot of experience in transactions. Tax expert. Depending on the industry and the size of the transaction and complexity involved, there may be environmental attorneys involved. There might be intellectual property expertise required. No two transactions are alike. That’s where the financial advisor can really help you cover that waterfront of making sure that you have the right people on the team playing in the right roles and having the experience to bring that to bear for you. This can take some time and some effort.
Interviewing multiple people is something we really encourage people to do. It’s amazing what you can learn preparing for a transaction by talking to 3, 4, 5 transaction attorneys. Just that process itself can help you with things you didn’t think of or questions to ask. Don’t be afraid to interview multiple attorneys and financial advisors. You are looking for that fit, that experience, that expertise, that teamwork. We say this group has to check their egos at the door and be there for you. If you don’t feel like this person will fit as part of a team, don’t hire them. The Dream Team is a really important of this process as you head down the road.
Now we are going to flip to the heart side of the transaction. This is something that is a surprise to a lot of people that I have worked with over the years. I really try to get them ready for the emotions, the way they are going to feel through this process, because depending on the complexity, the time, and the transition process to family, private, or strategic buyer, there are a myriad of ups and downs that will inevitably happen in a sale process. I just think it’s really important to let someone know that you are just trying to get ahead of those feelings, so that when they happen, they are not a surprise or a shock. One of the big things that people are surprised to hear is that in their minds at the closing table there is going to be a bunch of stuff I sign and there will be a bunch of money to put in the bank and I’m going to feel great. Honestly, the truth is that like most Olympic gold medal winners, they win the gold medal, they have the award ceremony, and they get up the next morning feeling very down, very depressed, very let down. That preparation in your mind, the excitement of getting to the closing table of the transaction, is often more energizing and exciting than what actually happens. Kind of like the little kid who is so excited for Christmas that as December goes along and Christmas day comes, they are a little let down. It’s a very similar experience for clients of mine who have exited their business and monetized their life’s work.
We like to talk about feelings, and we just want people to know to be ready for them and to have a plan for what you are going to do after the sale. Not just hope, hope things will work out. Hope is not a plan. We think spending time on what’s next is a really healthy thing to do ahead of time.
Speaking of what comes next, I recently read a book by David Brooks called The Second Mountain. I think it’s as good of a read for someone who is getting ready to make that transition. Generally speaking, people spend their entire life or many years building this business. Early in their career they are climbing what David Brooks calls the first mountain. They are climbing, doing all the things that everyone else does, working hard and making sacrifices. They get to the mountaintop, in this case we are talking about getting to that monetization of this life’s work. They get to the mountaintop, sell the business, transition it to their kids, and they wake up the next day and think, “Is that it? Is that what my life is supposed to be about?” David Brooks argues that no, it isn’t. There is a second mountain that’s out there for you that is very different than the first mountain. It’s almost a step-by-step process of helping you understand what your second mountain might be. I won’t do the spoiler’s alert, because it’s a great read and I suggest you read David’s book.[3] The second mountain is much different than the first mountain. I’ll leave it at that.
The whole notion of starting future-back. If you can get 5 years out, if you can get a 5-year head start on this process. Sometimes people don’t have the luxury of time. They might see a window of opportunity. We are in a period of time when private equity is very active in the financial markets. As of 2020, the amount of private equity invested globally is about 7x what it was in 2005.[4] The US makes up about half of the private equity investments in the world these days.[4] There are a lot of private equity firms, and they are chasing companies like yours, so sometimes you don’t have the luxury of this time. You have to compress this process because there may be a too-good-to-be-true offer or someone is going to pay you a multiple that maybe you couldn’t have gotten two years ago, or you may not get 2 years from now.
A cautionary tale on private equity, because a lot of people want to talk about private equity: I have been around a lot of private equity transactions, and certainly private equity can bring money to the table, financial acumen to the table. Many of them tout they bring other qualities to the transaction. In my experience, most private equity firms - beyond the money - they are not adding too much value. If things don’t go as planned after the closing, really their only lever is to change leadership. So if you sell to private equity, if you stay on for a period of time, in my experience that time after the transaction leading your business with a private equity partner can be a much different experience that what it was when it was just you. That doesn’t make it bad necessarily, but I often get the question, “If I have the option between a strategic buyer and a financial / private equity buyer at roughly the same valuation, which would you choose? Which is better for all of my employees who are going to require or need this company to continue to make their living?” Generally speaking - this is not advice - my experience is that the strategic buyer probably has a better shot of maintaining the culture that you have built and growing the business and taking care of your employee base on the margin better than private equity. That is not always the case, but that is a question that I often get.
To wrap things up a little bit, to summarize: future-back - to get in your mind’s eye what you want to do, look like, feel like when you’ve sold your business, and to whom. Work backwards to all the things that you need to do to achieve that vision. And then enjoy the process. Probably for most people, selling a business is a once-in-a-lifetime activity, and if you have a good vision, good plan for how to achieve that vision, understand the financial impact of that decision, and assemble that Dream Team to help you get there and not make any of those big mistakes that you worry about when you lay awake at night staring at the ceiling. Be ready for the emotions inevitably that are going to happen in this process. Get excited for getting to the second mountain and moving on with your life. You are not your business. When you exit that business, finding that second mountain can be a gratifying and energizing time of your life.
I hope today was helpful. I hope that you maybe learned a little bit. I planted a few seeds for you to think about: maybe the future-back, maybe the second mountain, maybe the Dream Team. I encourage you if you have time to read the ebook that I wrote on this topic that we just covered. We are more than happy to answer any questions that you may have. So thanks for being with us today, and we look forward to doing this again soon. Take care.
Important Disclosure Information & Sources:
[1] “Nationwide Survey Finds Majority of Business Owners Don’t Have a Succession Plan”. Nationwide, 07-Feb-2017, prnewswire.com.
[2] “5 memorable quotes from Steve Jobs“. John D. Sutter, 06-Oct-2011, cnn.com.
[3] The Second Mountain: The Quest for a Moral Life. David Brooks, 2019, Random House.
[4] “2021 Preqin Global Private Equity & Venture Capital Report“. Preqin, 04-Feb-2021, preqin.com.
This material is for informational purposes only and does not constitute a complete description of our investment services or performance.
Statements contained in this material that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
SJS offers investment advisory services only in states where we are registered, have completed a notice filing or where an exemption or exclusion from such notice filing exists. SJS Investment Services does not provide legal or tax advice. Please contact your legal or tax professionals for specific advice.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.