Today’s guest is Michael Coyle from Centerpoint Business Advisors. He is going to help us understand the options you have when it comes time to leave your business.
Michael has been in the business of selling and getting businesses ready to sell for years. He’s one of the people in this industry who is well respected and has been at it for his entire career.
He understands that in most cases before a business can be sold, it has to have work done it to make the business more attractive to potential buyers. This is called the exit planning business, and he’s one of the few people in this world who understand this.
Here are some of the things you’ll learn in today’s podcast episode:
- • Why you need to know what your personal objectives are before you start to sell your business.
- • The reasons you likely won’t have a happy result of leaving your business unless you start earlier enough.
- • Why I think you need to have an intermediary like Michael when it comes time to sell your business.
- • How to think about your business in the way it would be seen from your next owner’s point of view.
- • Why your next owner is more interested in your cash flow than you and what you can do about it.
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: Hey, this is Josh Patrick and you’re at The Sustainable Business.
Today, my guest is Michael Coyle from CenterPoint Business Advisors. I’ve known Michael for, gosh, 15 maybe 20 years. We’ve talked, over the years, a lot about what it takes to do a good transfer exit for your business in an appropriate manner.
Let’s bring Michael in right now and we’ll start the conversation.
Hey, Michael, how are you today?
Michael: Good day, Josh. How are you today?
Josh: I’m doing well. Thank you so much for spending some time with us today.
Tell me, if you’re talking to somebody who wants to sell their business, what’s the first thing that you start the conversation with them about?
Michael: I really start it out with talking about what their personal and individual objectives are and why they want to exit their business. I find that it’s not really about converting their business assets to cash. It’s really about meeting their lifetime objectives and their personal objectives.
Josh: Well, what do you mean by lifetime objectives?
Michael: Well, everybody has a business for reasons. One of the reasons they own a business is to build enough value and realize that value within your lifetime so that during your natural life that you support everything that you want to accomplish – to fund your lifestyle, to provide an estate for your heirs and whatever other philanthropic types of things that you want to address in your life.
Josh: What is the biggest impediment you see from people being able to leave their business, I like to say, “in the way they want, to whom they want, when they want.”
Michael: It’s really the lack of starting the process early enough. Many business owners only have an anecdotal understanding of the value of their business and they’re quite naive about the process in which you can convert those business assets into cash. Most business owners spend more time planning a family vacation than they do addressing the issues of the inevitable exit from their business and that can be a real detriment to their life post business.
Josh: Why do you think that’s true?
Michael: Well, it’s one of those topics that’s difficult to address. It seems to be complicated. It involves the conversation of mortality. It pulls at the owner’s perspective of how they fit within the community and within the business world. The idea about exiting that and changing their position in life can be uncomfortable for them. It’s a very easy thing to put off and to not address. Also, within the industry, that most professional advisors don’t have a process or set of tools to be able to simplify for business owners so it seems complicated and unobtainable so they just ignore it.
Josh: When you say tools, what kind of tools might you use?
Michael: Well, tools that are associated with quantifying the owner’s objectives with valuing their business and understanding how the business would be perceived in value by different types of buyers, assessing their personal welfare and other resources, and determining if there’s any gaps. And then addressing issues that are associated with really value drivers and value detractors within a business as seen in the eyes of the potential successor of the business and helping business owners address those.
Josh: My experience, when I go through this process with business owners, is almost none of them are financially able to leave their business because their business isn’t valuable. When you run across somebody like that, what do you tell them?
Michael: Well, I find that mostly in businesses that are smaller where the owner is the business and they have failed to build in sustainable and transferable value to a third party, value in a business is a simple formula. In some respects, it is that the sum cashflow variable times some multiplier equals value. Then, it seems like the third-grade class could calculate that for a business owner. But the subscripts on that, that cashflow needs to be transferable and sustainable in a transfer to a third party or even to a related party. It’s the ability to sustain and transfer that value which impacts the ability of a business to sell or sell at levels in which the owner needs.
Josh: I’ll give you an example. For example, let’s say I have a business that has an EBITDA which is earnings before taxes, depreciation and amortization of $200,000 a year and the owner is living on $125,000 a year. That would probably have a value, before taxes and fees, of somewhere between $600,000 and a million bucks which is a nice little operating business. That owner is going to walk away, after taxes and fees, with I don’t’ know, say, $450,000 to $700,000. If you’re living on $125,000 a year, that’s not enough.
Michael: They either need to stay with the business longer and to diversify their wealth so that they have more personal resources. Take chips off the table. They need to make the business a more passive investment where they hire management and allow them to take some more time off the table or they just continue to run it for a period of time and then liquidate it.
Josh: When I look at the 6 million businesses in this country that have employees, I would say that more of those businesses probably fall into that group than the people that you’re able to sell and they can ride off into the sunset.
Michael: Yes. I agree with that. There are a number of headwinds that business owners are going to face or they’re facing now and they’ll continue to face just based upon the demographics of the owners of businesses and the new generations of business owners that want different types of attributes in businesses than what traditional businesses are delivering now. That, based upon the number of baby boomers who are business owners in their retirement rate – they’re aging out of their businesses and that the generations behind them that want to be business owners, there are a fewer buyers in the market than there are sellers which creates a significant headwind.
On top of that, there are many businesses that operate today based upon, what I would say is, sort of old technology kinds of businesses where they’re very heavily focused on bricks and mortar. There are no automated systems. They haven’t built evergreen revenue flows and very dependent upon the owner. Whereas new age buyers or millenium-type buyers want businesses that have more new age features to them that are more virtual businesses, less bricks and mortar, using technology and systems, and it’s transportable. Many of the features of existing businesses are just frankly not attractive to the current buyers.
Josh: Yeah, that seems to be very true, I would say.
I know this is not the people that you work with, mostly. But tell me, who are the type of clients that you can help successfully exit their business and they’ll be able to ride off into the sunset? I mean, what are their businesses worth? What type of businesses are they?
Michael: Well, they’re all different types of businesses. I’ve transferred 105 businesses in the time that I have been doing this. They’ve ranged from resort hotel operations to manufacturing firms, law firms, professional service firms, veterinary practices. There’s a whole variety of things.
I tend to focus on businesses that have, what I’ll call is, an enterprise value between a million and $20 million. I don’t focus really on main street-oriented businesses like retail businesses. I don’t focus on little market businesses. I focus on that sort of business part kind of business where it’s a privately-owned company. It’s either owned by one person or a handful of people and they’ve reached certain levels of success. But that $1- to $20-million enterprise value customer often is underserved by professional advisors when it comes to exit planning. I find that there’s a lot of businesses in there. They have value. They’re confused about how to convert that value into cash for them.
Josh: Yeah, that would make a lot of sense. I also think that that $1- to $20 million range you’re talking about, really, is probably broken into two groups as far as making your life easy or a little bit more difficult. And then, the $1 to $3-million value business, they’re going to need stuff besides the business to go to ride it off into the sunset. Once you get over $3 million in value, there’s a reasonable chance that they could ride off into the sunset.
Michael: That is true. And that time helps.
I’ll use an example, it’s that one of the recent businesses that I sold actually was four different businesses. They were auto franchise repair facilities that the owner had that for 30 some odd years, 30-plus years. I first met that gentleman nine years ago. He had had some health issues. He knew that he wasn’t going to be there forever but he was confused about how to orchestrate an exit from his business. I helped him sort that out, nine years ago, figure out what he had, what he didn’t have, and what the gaps that he had. One of the gaps that he had is that he needed to diversify his wealth. He needed to take more chips off the table year after year so that when it came time for him to sell the business, he could get full fair market value for it but still have enough diversified resources that he wasn’t 100% dependent upon the sale of the businesses.
We populated his team of advisors and brought in a financial advisor for him to start an investment program. That worked out great. When it came to the time that he was ready to sell, he had prepared his businesses for sale. He structured a deal to his long-time managers to buy out the businesses. He owned the underlying real estate in each of the four locations. And so, we converted each one of those things into triple-net leases for the businesses that were fully market level arms length transactions that provided him an ongoing stream of income from that. Plus, the income that he was getting from the sale of the business and then the income that he had accumulated from diversifying his wealth. He will never run out of money.
Josh: You see, what you did is what I think is one of the more brilliant things of selling your business. I have this little tool called The Four Boxes of Financial Independence. What I find is that typically business owners need more than their business. The retirement plan is one. You clicked on the other one which is rental real estate. I don’t know about you but I have often found that, from a cashflow point of view in retirement, rental real estate is worth more than the business.
Michael: It can be. It’s an asset that has collateral unlike the goodwill associated with your business that is fragile and doesn’t have a lot of collateral. It’s a much more secure asset. It’s also an asset that you can use leverage against easily.
Josh: The other thing that you did was you helped your owner do what I call pre-funding their retirement, meaning that a lot of times business owners, while they’re running their business, have excess cashflow and almost never do they use that excess cashflow effectively.
Michael: That is true. But they don’t have enough points of use of it. They use it for one thing and that is the retained earnings, the fund growth and the company. They don’t take the chips off the table. They acquire assets within the company that may or may not be fully productive.
I’ve run across companies that are in, say, the construction industry where, let’s say that, they were in the dirt digging business – excavating and site work. They have 20 employees but they have 50 pieces of equipment that they’ve accumulated over a period of time. Well, there’s an asset utilization issue there. The owner, based upon what their perspective is, acquired a lot of equipment that wasn’t being fully utilized. And then when they come to exit the business, they want the next person to come in and jump into the water with them up to their neck with 50 pieces of equipment and only 20 people to operate it. There’s an imbalance there.
If you get it early enough, you can change those behaviors and they can look at alternative types of things like leasing and renting equipment when they need it as opposed to owning it. They can take that excess cash that would otherwise have gone to owning that piece of equipment and diversify that into other holdings, whether that’s investment holdings or [inaudible 00:12:35] real estate.
Josh: Yeah, I think that both of those can be good holdings.
When you first engage with a business owner, what’s the percent that they need to do something to fix their situation so they can afford to leave their business?
Michael: Virtually, all of them have to do something. The amount of time they have to do it and then the amount of appetite they have to do it varies greatly. But virtually everybody needs to do something.
Josh: That’s my experience also is that when it’s time for you to sell your business or you want to start thinking about your business, if you want to do it in the next five years or three years, what do you tell somebody?
Michael: Well, they need to at least be fully funding their retirement program to the maximum ability of the tax code during that period of time. They need to focus on the value drivers and the value detractors associated with the business. They need to make the business operate without dependence on the owner.
Josh: You have just hit several of what I call the pillars of a sustainable business. My definition, by the way, of a sustainable business is a business that somebody else would want to own.
Michael: That’s a business that has sustainable value. It has systems that can run without the owner. It has predictable revenue. It has a written growth plan. It has a management team in place to be able to implement that plan and they understand what that plan is. That the management team has bonus and incentives and compensation plans that are aligned with growing the value of the business. There’s a lot of things that can be addressed to help a business owner build sustainable and transferable value.
Josh: What do you think is the biggest challenge you face when you actually get a business owner into the sales process?
Michael: Well, it’s not really the sale process. It’s really the pre-sale planning process, I would say. The biggest challenge, there’s plenty of people that want to go through it.
Let’s say, out of 10 people that I talk to, that seven of them are willing to go through a planning process. Three of them, it just doesn’t align with their internal genetics. They just don’t do planning. They react to whatever is on the table that particular day. For those three people, I’ll never get out of the gate with, so I focus on that remaining seven.
Out of that seven, the people that enter the process, I would say probably two of those people never make it to the end because when they get down into the data collection and the actual planning process, it’s difficult for them to do their part of it. They end up either delaying or exiting the process. And so, out of 10 people, five of them make it through it.
I have to tell you that I first got involved in the business transfer world as a broker. I did third-party sales and that’s all I did. I was quite successful at it. But the sorry statistic about small businesses, that only about one in five that actually get offered for sale to a third party actually sell. That’s for businesses with about a million or less in value. That number only goes up to 25% or 30% for businesses with a $10- or $20-million value, and only up to 50% for businesses that have a $50-million value. The success rate on people actually accomplishing what they want to do is really quite low.
I found that by adding exit planning and pre-sale planning and valuation and preparation services that the success rate in that, certainly, is over 80%. I would say that I’m virtually at 100% in terms of taking an owner from beginning to successful end. I only know of two scenarios where I wasn’t fully successful. One was, the owner went bankrupt in the process. The other one was the owner died.
Josh: What you’re saying– and by the way, this is my experience also, is that if you don’t do a significant amount of pre-sale planning and pre-sale changing, you’re likely not going to transfer your business and you’re likely to have a really unhappy result.
Michael: That’s right. The probability goes down exponentially with the lack of planning. The tough part about that, in my observations, is that 50% to 75% of an individual business owner’s net worth is tied up in their business. They’re putting half of their net worth at risk by not doing pre-sale planning.
Josh: Your brethren in the investment banking world or business broker world, they seem to be universally unaware of the pre-sale planning part. Why do you think that’s true?
Michael: Well, I think that on the lower end, on the business broker side of it, is that the business brokerage industry was born out of the real estate industry. And so, they borrowed a lot of the same processes and lexicons associated with a transactionally-oriented business. And that they see themselves in the sale business or in the asset conversion business where they’re converting illiquid assets into cash, and that they have not embraced that this is really about the owner and not about the transaction.
And that, for many business brokers, they don’t have the skills or the tools to be able to effectively do the kind of consulting and hand holding that bring them into a variety of different spaces in the owner’s world. On the merger and acquisition market, when you get into the middle market area, that many of those people came out of the financing and banking world. They, too, have a transactional focus. They look at maximizing the value on the table in a third-party sale and not really on how they meet the owner’s objectives.
Josh: Michael, you’re kind of a rare duck in this world in that you actually do what business owners need. You’re certainly very capable about this. I encourage folks who are listening, who are thinking about selling their business, to have a conversation with Michael. How would somebody know if somebody is competent in helping them successfully leave their business?
Well, one is that they have to look at the individual’s track record. In doing that, check references, find out the depth of their experience and find out what kind of professional training and designations that they’ve earned over their lifetime to be able to help business owners.
There is also the interpersonal aspect of it is that they have to feel comfortable with this person and that they have to build a trusting relationship with them so that they can explore all of the uncomfortable aspects associated with the topics associated with exiting a business. That can get down into intimate family related issues. It can get down into the owner’s understanding of how they fit in the community and the business community after retirement. It can get down into their financial planning and their lack of resources or the misdirection of resources, and their own mortality and estate planning. A business owner and an intermediary or an exit planning advisor need to develop a kind of trusting bond that allows the business owner to share those things openly.
Josh: Michael, unfortunately, we are out of time. I know that folks listening are going to want to get in contact with you. How would they go about doing that?
Michael: Well, the best way is probably just to visit my website. My contact information is on there. My company is CenterPoint Business Advisors. The website is cpointadvisors.com. That’s the letter C and the word “point” and advisors with an O. com. I service clients throughout New England with enterprise values between a million and 20 million.
Josh: Cool. Michael, thanks so much for your time today. I really appreciate it.
I also have an offer for you. I have a one-hour fee audio CD. It’s about whether you can afford to retire from your business. To get this, it’s really easy. You just take out your smartphone – please don’t do this if you’re driving. When you stop driving, take out your smartphone and text the word RETIRE1– that’s RETIRE1 to 44222. That’s RETIRE1 to 44222.
This is Josh Patrick. You’re at the Sustainable Business. Thanks so much for spending some time with me. I hope to see you back here really soon.
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 firstname.lastname@example.org.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.