Exiting a Business Starts at the Beginning
Forming a Plan, Finding a Successor are Key Elements
When it comes to starting a business, it might surprise some that thinking of your exit should be a top priority.
Fail to Plan, Plan to Fail
Once a business gets in full swing, it’s sometimes difficult to step back and think of the future when you’re knee-deep in the present.
That was the message from Jamie Gerdsen, president, Apollo Heating, Cooling & Plumbing, Cincinnati, during an IE3 audio presentation on exit strategies.
“Exit strategies are important because owners get so enthralled in the daily operation of the business that they forget how to make the business a valuable asset they can sell or transfer down the road,” Gerdsen said. “The reality is, things change. The competition in your market might change, or government intervention may cause the industry to change, but you always have to be prepared to have an exit strategy.”
Gerdsen said his philosophical belief is that it’s never too early to think about an exit, whether it’s looking at the long-term implications, making a mid-term deal, or considering a potential short sale, depending upon circumstances.
“The time frames can vary based on situations, but you have to align a strategic plan and think about where you want to be in the next seven to 10 years,” he said. “Start early and often, and it’s something you can probably revisit on a yearly basis, ensuring you’re aligned to your overall strategy on where you want to take the business.”
Making the Right Move
Reaching outside your business for advice and help is key, Gerdsen said. The help of attorneys, tax lawyers, certified public accountants, and more can be very useful. Before taking over his business from his father, Gerdsen said he went to a year-long class to learn the different ways secession is structured. One of the more important things he learned is how to properly value a business.
“We went through a CPA firm where people who are certified in valuations of businesses come in and perform an evaluation,” Gerdsen said. “They want to see financial and cash-flow statements, they’re going to want to look at your bank records, and they’ll want to interview you about your business so they can understand how your business runs.
“In my experience, all small businesses run off a similar platform. They’re going to look at your business and benchmark your company in some relationship to how the rest of the market is doing and how you operate. … They’re going to look at the whole ball of wax and come up with a number designated through a formula that’s defendable to the Internal Revenue Service (IRS), because when you go to sell a business, the IRS wants to know why you didn’t sell it for more. You need to be able to justify its value based on certain variables.”
The IRS plays an important role because tax implications are always changing, Gerdsen said. He notes the evaluation is important because many things can change what the end capital you get from that equity event is.
Mainly, though, having an exit strategy entails figuring out what you want to do with the business after you move on. Do you want to sell to a third party, to an employee, or pass it on to a family member?
Selling to a third party would gain the most money, Gerdsen said, with an employee or family member likely to receive some sort of discount. Selling to a third party also makes it easier to completely break away from the business, if that’s the end goal.
“Let’s say, today, I’ve decided I want a family member to own the business,” Gerdsen said. “My evaluation is probably going to be friendlier than if I go to a third party. The real question is, what’s the value of having an evaluation done if you don’t know who your buyer is yet. Just to have a number, fundamentally, I’d spend my time, talent, and capital to figure out how to make the business run better, because at the end of the day, that’s going to give me more value for the business downstream.”
HVAC consultant Frank Besednjak said he meets more than a thousand contractors each year through his travels. One consistent thing he sees is that many companies, especially the smaller ones, not only don’t have exit strategies, but they don’t have goals.
“I don’t think they’re reluctant, I think they just don’t think about it. They’re so busy trying to take care of the day-to-day issues that they forget about their long-term needs,” Besednjak said. “They’re so worried about the next installation, the next bid, that they totally forget about why they started their own business. Whenever someone starts their own business, they’re looking forward to retiring, owning a boat on a lake, and whatever else they dream about. But once they get involved in the business, it becomes overwhelming and they totally forget why they started. Someone needs to remind them.”
Keith Hilligoss, president, Air Solutions Heating & Cooling Inc., Sand Springs, Okla., chuckled a bit when talking about an exit strategy, noting he’s only 42 years old. That said, though, it’s something that comes up for him quite often, especially in the Air Conditioning Contractors of America (ACCA) MIX group he’s a part of, where he’s the young guy.
“I’m kind of the baby in the group, so I listen to them talk about transition,” Hilligoss said. “Regarding my company, we’re not prepared; that would probably be a good way to put it. I have a 19-year-old son that’s going to heating and air conditioning school and I would hope one day he would take over the company. I’m hoping the exit strategy will be he buys me out and pays me for a while after I finally decide to retire.”
While Hilligoss has his son and Gerdsen purchased his company from his father, others will seek out current employees or target purchasers from outside the company. The most important thing, though, is having someone, anyone, in mind.
“You should start thinking about who your successor is right now,” Gerdsen said. “You should start thinking about replacements, or create a depth chart for your management team. The reality is, if you say you want to sell your business in five years, it’ll likely take longer than that. It probably took me seven or eight years to get ready to buy my business from my dad. I had to sit down with him on a regular basis, as he mentored me on how to run the business. … You’re probably going to have a better succession process if you find someone internally or find a family member to buy it. It’s going to be more of a win for you and a win for them.”
Step Away from the Business
Forming an exit strategy boils down to being able to come to terms that you will not be connected to the business anymore.
Gerdsen said during the exit procedure, it’s important to take a step back and stop acting like you’re the smartest person in the room. The consultants involved have likely gone through the process many times and are well versed in the process, he said.
“It’s OK to make mistakes, but it’s not OK to not ask questions,” Gerdsen said. “So I would go out and try to figure out who’s done it and who’s done it well. Most people are willing to talk about it in an open format.
“And be clear about what you want to accomplish at the end of the day,” he said. “If you can do a live plan and figure out what you want to do in seven to 10 years, the acquisition event, or the sale event, is not all that tough.”
Besednjak said if you have an exit strategy, your daily routines and goals will be adjusted and modified to reach the goal of exiting the business.
“In other words, your odds of being successful are much higher if you have an exit strategy plan,” Besednjak said. “Otherwise, if you have no plan to do anything other than work, that’s all that’s going to happen.”
As everyone knows, life changes often occur sporadically. That’s why it’s equally important to not only build your exit strategy from the start, but also to evaluate it on a regular basis.
“It’s a lot easier to build an exit plan at the beginning than after all the complications of things that happen during the business cycle,” Hilligoss said. “As you start to grow, it gets way more complex than it was at the very beginning. A company should start with the exit in mind, that should be the beginning of an HVAC company instead of a decision made after you’ve doubled, tripled, or quadrupled the size of the company. So many things change after that point in time. I think it’s easier to begin with the end in mind.”
Publication date: 7/15/2013