John Brown has been doing exit and succession planning for private businesses for over thirty years. He was the first to offer an organized training programs for what has become the private business exit planning industry. He’s the founder of the Business Enterprise Institute and he’s just released his new book Exit Planning: The Definitive Guide.
Today we’re going to talk about how you can leave your business in the manner you want, selling to who you want in the manner you want. This can only happen when you take time to plan leaving your business a few years before you actually start the process.
John will help us understand the steps that you need to take if you want to end your business career on a positive note. We’ll talk about the following issues and more:
- What the exit planning world is and why you should care.
- You’ll get an understanding that someday you will be leaving your business.
- Understanding that for a successful exit you should probably start planning five to ten years in advance.
- Some things you can do to grow the value of your business.
- Some thoughts on hiring professional managers who can make your business better.
Narrator: Welcome to the Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In the Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful.
Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: How are you today? This is Josh Patrick and, boy, am I excited about our guest today. Today, were going to speak with John Brown from the Business Enterprises Institute. John’s going to talk to us about the world of exit planning or how to leave your business in style.
Actually, he’s my first teacher in the world of exit planning. Over 20 years ago, I ran into his book in Barnes&Noble, picked it up and read it. I was fascinated by it and managed to talk my broker-dealer into bringing him in to speak. Since then, we’ve been working together. In my opinion, he is the most knowledgeable person on exit planning. He invented the industry. You’re in for a real treat today.
Let’s bring John on, not listen to me, and listen to him a bit.
Hey, John. How are you today?
John: I am great, Josh. It’s a pleasure to be here speaking with you.
Josh: Well, thanks so much. Let’s start out about this. Let’s talk about the history of exit planning. In 1990, you wrote your book How to Leave Your Businesses in Style which, by the way, I still give out to people. I still think it’s the best book written on exit planning.
John: Well, thank you.
Josh: Until my book comes out, of course. Let’s go back to 1990. What was exit planning like back then?
John: Well, exit planning, from my perspective, was really in its infancy. I probably started what we called exit planning in the mid-1980s. After about four or five years of doing more and more work as a lawyer – I had a law practice and we did a lot of exit planning or we started to do a lot of exit planning. As I’d help people, I did what most lawyers do when they don’t know anything about a topic – they write a book about it. That was the early version of How to Run your Business so You Can Leave It in Style. After about five years, I tried to locate all the copies of those books and burn them because we had a new version out that really reflected what I’d learned over the ensuing five years or so.
So, exit planning goes back at least 25 years, probably farther than that. We started calling it exit planning then. I don’t know of anybody else who started calling this planning for a business is to help them leave their business when they want, for the money they need and to the person they select as the successor. I don’t know that that was even much thought of before, 25 or 30 years ago.
Josh: What’s changed in the world? What was the biggest challenge that people were facing 25 years ago? Are they still the same challenges that are faced today?
John: Well, the challenges I think are the same. The biggest challenge owners have today and have always had is understanding that they are, first of all, going to be leaving their business at some point. Eventually, they realize that but they really don’t know what to do or who to work with that can help them create a strategy to leave the business in the best way possible. That’s the problem owners have always had.
Now, again, much before 30 years ago, they were so many really small businesses. What owner typically did is they either transferred them to their kids or they just shut them down. But today, the world has changed. There are a lot of good, strong, successful businesses out there. But we still are in a scenario where owners – since they have never sold a business or transferred a business before, they really don’t know what to do, when to start. They don’t know the basics of exit planning. So, that really hasn’t changed.
The other thing that hasn’t changed is that advisors don’t know how to help them. I mean, by and large, the typical business advisor that business owners retain now for their accounting, legal and financial work are not experts in helping that client develop a plan and execute the strategy under that plan to help owners leave the business on their terms and conditions. The problem is the same. There are solutions, however, today that just didn’t exist 25 years ago.
Josh: What kind of solutions exist today that weren’t available in 1990?
John: Well, the biggest thing—and of course this sounds like a very biased and selfish opinion, so let’s call it what it is, the biggest thing that changed is after I wrote the How to Run Your Business book, I started talking a lot around the country – thanks in part to people like you, and especially talked a lot to business owner groups. Often an owner would come up after my presentation and he would say, “John, gosh that was an interesting talk. Can you help me get out of my business here in Orlando, Florida or Detroit, Michigan” or wherever and I would say, “Well, no. I really can’t help you do that. You need to work with advisors in your own State.”
Well, the problem was is they didn’t know anybody in those States nor did probably any advisors in those States do any exit planning. So, I realized that for me to, I guess, fulfill the mission I created for myself and my company which is to help owners benefit from their lives’ work, we really needed to create a company that focused on training and supporting business advisors in exit planning for their clients, to develop a process and develop tools and provide support to business advisors that would then allow them to go out and work with business owners around the country and develop a written exit plan and actually implement that plan over time.
So, that’s the biggest change. It is what BEI has become – or Business Enterprise Institute. What we have become over the last 12 to 15 years and especially in the last three to five years, is we have created a very time efficient and cost effective process for advisors to use with their business-owning clients that will enable the business owner to leave the business, when they want, for the money they need, transferring it to their chosen successor as well as perhaps achieving a host of other values-based goals that owner may have.
Josh: So, before a business owner sells a business, how much time in advance should they start doing something to get themselves ready?
John: Well, after I answer that question, Josh, probably every business owner on the line will promptly hang up. However, having prefaced it with that, the average length of time, from when we begin the planning process to the time they’re out of the business and have achieved all of their goals is at least five years and more likely closer to 10 years.
Now, that’s not universally true. There are a few businesses, maybe 5% of the businesses that could successfully leave their business, that can be sold to an outside third party for lots of cash today, so that process may only last a year or so. But that’s a small minority of good businesses that can actually leave that quickly.
Josh: Why does it take a business owner five to ten years to get their business ready?
John: There’s a number of different reasons but I would say the biggest reason today is that owners simply need more capital to invest today to maintain their current lifestyle than they needed ten years ago or even eight years ago – to have that much capital to maintain their lifestyle.
What has happened in part is that the world has changed outside of the owner’s business. We call those changes headwinds and we do a lot of work with owners about that. But the biggest element or the biggest headwind is the low rate of investment return on investments. In past years, really the period from 1975 to probably 2000 when most of our clients and owners were developing the businesses and growing their companies and things like that, the average 10-year bond, for example, yielded 6.5%. The S&P 500 grew, per year in that time period, almost 17% a year.
Today, what’s happening – and everybody knows that—I know that the 10-year bond rate is around 2%. It’s less than a third of what it has been historically. And the return and the growth in the stock market, dividends included, is around 3% or 4% a year – far less than it has been historically. So, owners are under this misperception that $3 million let’s say of investments will maintain their lifestyle of $200,000 a year perhaps that they were living on when in reality it might produce less than half of that. That’s a big issue so as a consequence, it simply takes longer to grow enough value in the business and receive enough cashflow from the business and invest it outside of the company to maintain the lifestyle they now have as owners in a successful business.
Josh: What are some of the things that an owner should be doing to grow value in their business? Now, you might not think about it as being a normal thing you would do.
John: That’s a great question. There’s a couple-of things. I talk about this a lot in my new book. But the two things I would mention that really fall in line with that are these – first of all, owners need to change their role and relationship in the business, from what it is today.
There’s a famous management consultant and writer of management theories and concepts by the name of Peter Drucker – probably the best known management consultant in the history of management. He made a point in which he said that, “If entrepreneurial owners, which are basically the owners that we typically deal with, don’t understand that they need to change their role within the business and their relationship to the business, they will stunt the growth of the business and may even kill it.” So, what happens—we might explain as maybe the operation of the Peter Principle. But businesses grow to a point where just the owner alone cannot grow the business any farther. They’ve run out of ability, concept, experience, knowledge or whatever it is but they cannot continue the business forward by themselves. They have to change what they’re doing. They can no longer be the hub of the wheel in the business. They have to become one of the spokes. So, we talk a lot about that.
The second big concept that owners don’t really think about is the importance of their management team. If a company does not have an owner who adopts the right relationship to his/her business and doesn’t have a management team that I call “next level” management, it’s very hard to grow the business to the level it needs to be to allow an owner to exit with financial security. By next level, I mean, most businesses today are growing at a relatively moderate pace. They might even be stagnant. The amount of growth that’s necessary may be a 200% or 300% or 400% amount of growth that’s necessary.
Well, the only way to get that, in five to ten years, is to have a management team that is capable of breaking out of the mold they’re in and looking at next-level concepts which might be as simple as hiring management that is now working for companies that are four to ten times as large as your client’s company or a business owner’s business because those management-level people will tend to know what has to happen to grow a business to that level. They will have contacts, vendors, customers, employees, management tools and techniques at the level our company needs to move to in order to allow the owner to leave.
So, it’s really management and ownership changes that are central to allowing the business to expand to the level it needs to be.
Josh: You know, you just brought up a point I want to really emphasize, John, is that when you hire that next manager, it can’t be an MBA from General Motors or Procter&Gamble. It has to be someone who has worked in a company four to ten times bigger – not 2000 times bigger.
Josh: I can tell you, from my own personal experience, I tried hiring some of these big company folks and they always worked out terribly. You’re right on with that four to ten number. So, if you’re doing $5 million that means you can hire someone from a company that does $20 million to $50 million – not $500 million.
Josh: So that’s a great point. Let’s get to your new book. What is it? What’s it about? Why another book?
John: Well, the new book is really necessary, I thought, to reflect the experiences that we’ve had, especially in the last five years. BEI is a member network. The members are other advisors. They’re lawyers. They’re CPAs. They’re financial advisors, M&A advisors, insurance advisors and so on that we train in this exit planning process to not only do the planning but also the implementation for an owner.
Well, the way they do this planning and implementation is by creating a written exit plan – so I emphasize that word written. If you don’t have something in writing you’re going to involve a number of different professionals as well as the owner, maybe the management team, maybe the owner’s family, over an extended time period. It will never get done unless there’s a written plan that assigns responsibility, deadlines and so on.
Our members now do thousands of these plans a year. We support them. We know what a lot of these plans actually consist of because we work with them to develop the plan. So, we have what is—this sounds incredibly immodest but we have assembled a vast amount of practical knowledge of what the heck works for owners, to get them from where they’re at today to where they want and need to be. That knowledge, used in the exit planning process, is what I have incorporated into my new book.
Josh: Okay, so can we be specific about what that actually is?
John: Sure. So what that would be, for example—
This will give you a good idea, Joshua, of how maybe my thinking has changed based upon what our members have done. For years, when I was doing exit planning, for me, it was to understand when an owner wanted to leave his/her business, what that meant to them, how much money they needed for the rest of their life for themselves and their spouse after they left the business, and who they wanted to transfer the business to. We called those and still call those the universal exit objectives. My first book is based a lot on accomplishing those goals.
When I was a practicing attorney and even for a while afterwards, sometimes advisors or others would come up to me and they would say, “John, how about these softer goals that owners had?” I said, “Well, you know, these touchy, feely goals, they’re not for me. That’s not what owners want.” Well, you know, I look back on that and that was one of my flashing insights of absolute stupidity on my part. And now I know, through working with a lot of our advisor-members who are in tune with business owners, who are working with them every day and from what I’ve observed is that it’s the softer goals that.
In the book, I call values-based goals that really drive an owner’s exit. They have to have financial security. They’re always going to want to have a certain person they want to transfer the business to. And they’re going to have a deadline when they want to leave. But it’s things like maintaining the culture or the legacy of the company. It’s things like helping benefit some or all of the employees that have helped them build the business. It’s things like making sure the company will stay in the community when the owner sells it so that the jobs are preserved in the community. It’s maintaining family harmony whether it be selling the business to other family members or not. So, it’s the softer goals that once owners realize that they can design a plan to capture and attain those goals along with these other goals. That’s actually what usually causes them to begin the planning process. Until then, they hesitate and procrastinate.
Josh: That’s interesting.
John: Here’s one example, so a lot of the things I’ve learned over the last several years have caused me actually to become more humble in a lot of ways. You might call it group knowledge, the fact that all of these advisors are contributing to the body of exit planning knowledge which, again, 15 or 20 or 25 years ago simply didn’t exist. Now, at least in BEI, that exists. I think advisors out there who are—let’s say a lone wolf attorney or a CPA or financial advisor who are trying to help their client in all good faith develop a way to leave their business, they’re missing the boat because one advisor cannot do it alone. It needs a team of experienced advisors to lead and facilitate what we call our exit planning advisor to understand what the owner wants and needs and actually accomplish those goals.
Josh: Well, that’s very cool. Unfortunately, we’re almost out of time and we haven’t even gotten to one of the things which I think you really a world expert at, which is how do you transfer a business internally. I’m thinking that I might want to have you back at some time in the future and we’ll just talk about that topic all by its little self. But in the mean time, someone’s listening and they want to become an exit planner or they just want to learn more about Business Enterprise Institute or who John Brown is and why they should talk to you, how would they find you?
John: The easiest thing is to our website for business advisors. It’s exitplanningforadvisors.com.
Josh: So, John, thanks so much.
Go and buy John’s new book. Is it available yet?
John: It’s going to be available, generally speaking, on January 1. They can pre-order however by, again, going to exitplanningforadvisors.com.
Josh: I can tell you that I’ve used John’s first book as a textbook and I give it out to anybody who’s thinking about selling their business. My assumption is I’ll probably be doing with this book also.
John, thanks so much for visiting with us today. I hope to see you soon.
John: Josh, thanks much. I appreciate it.
Narrator: You’ve been listening to the Sustainable Business Podcast where we ask the question, “What would it take for your business to still be around 100 years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802‑846‑1264 ext 2 or visit us on our website at www.askjoshpatrick.com, or you can send Josh an e-mail at email@example.com.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.