Summary: Business Exit Strategy
We place so much importance (and focus) on starting a business, and then keeping it running.
Ashley Micciche will tell you it’s never too early to build value in your company with an eye on planning your business exit.
Words of Wisdom
Begin with the end in mind.
Planning from the start is true in exit planning. Ideally, start thinking about your exit when you start your business. Now, most people aren’t even thinking about that because they’re just trying to survive and get some money coming into the door. But once you have some success and your business is moving along and it’s growing, you want to think about it. — Ashley Micciche
Connect with Ashley Micciche
Transcript: Business Exit Strategy
Hello and welcome to the Women Conquer Business podcast. I’m your host, Jen McFarland. You know we spend a lot of time talking about how to start a business. How often do we think about how we’re going to exit our business? My guess, actually, [inaudible] will tell you that it is never too soon to start thinking about exit planning for your business. And that’s what we’re talking about today. All that and more, here on Women Conquer Business. [music]
Hello and welcome to the Women Conquer Business podcast featuring discussions with your host, Jen McFarland. Every week I discuss a different aspect of building a business while balancing it with an incredibly busy life. I share experiences, successes, and failures, and answer questions submitted by you, the listener. Thanks for tuning in. Let’s get started.
Ashley Micciche is the CEO of True North Retirement Advisors, an independent financial advisory firm managing $230 million in client assets and located just outside of Portland, Oregon. Ashely specializes in designing, building, and implementing custom designed exit plans to help her business owner clients secure their final and most important business decision, the exit from their business. She’s on a mission to transition 300 small business owners successfully into retirement in the next 10 years. Please welcome Ashley to the show.
So Ashley, how did you get into exit planning?
You know it’s actually kind of a roundabout way. I started my career as a generalist financial advisor. And pretty early on, in the first couple of years, I’ve discovered that I loved working with entrepreneurs and business owners in the 401k space. So I kind of [inaudible] an [itch?] in working with small businesses in doing their 401k consulting. And then in 2013, one of my clients, as a small business– he’s actually third-generation family-owned business. He died suddenly of a heart attack. And I kind of watched from afar what happened to his company, what happened to his employees, what happened to his family. Everything was just decimated because he never did anything to plan for his own exit whether it was prepared or in his case, out of the blue. So that was a real turning point for me because I realized that I’d never even talked to him about this. I’d never even talked to him about, “A. What happens if something happens to you? B. How do you want to exit your business?” And so that was kind of the catalyst to developing some more knowledge and getting the motivation to even more narrowly define what I was doing for clients and helping them with exiting their business.
Gosh, I think that’s really great. And the thing about the family is always so interesting, having been around so many small businesses and family-owned businesses.
Why do you think family dynamics are so often an issue when it comes to exiting business?
Gosh, that is such a good question, Jen. It’s always an issue. And actually, one of the questions that I always ask clients in the early stages of working with them is, “Are there family considerations?” And it is a trick question because there are always family considerations. And there’s a lot of landmines to avoid. And if you think about– you want your kids and your spouse to keep talking with you after you exit your business. So sometimes, a lot of times what ends up happening is you might have a child who’s active in the business. Maybe they maybe they’re capable of running the business. Maybe they’re not. Maybe they’ve been around for 10 years and they’re great employee, but they just don’t have the particular skill set of running the business. So we don’t want to set up family to fail. I think no business owner wants to see that happen. So there’s that issues as well, choosing the right successor, not just the person who you’ve identified as someone who wants to take over, but who is really best suited to take over ownership after you exit. That’s very important to– and it’s hard to be objective about that if it’s your own child. So there’s those issues of “Is this person who I’ve identified, who’s my child, oftentimes are they capable? Do they even want it?” And then there’s financial considerations as well. Because a lot of family, if you have a business that– maybe your business is worth $3 million, how are they going to pay you? Most insiders, especially children, just don’t have the money for that. So you can structure it in such a way, especially if you need to sell or if you need to exit with a certain dollar figure– that’s always challenging. And then there are the issues of fairness. So you might have one child who’s active in the business, who’s put sweat, equity into this business and maybe helped it grow. And then you have– let’s say you have two other children who are not active in the business, never been active. How do you, not necessarily equality, but how do you ensure fairness among all three of those children? And that’s probably the trickiest part of the entire family dynamic to navigate.
I mean I think so. I think fairness is so subjective. I mean is it fair to say that one of the ways to really avoid strife and problems is just through good communication and planning?
Yes. That can help. But I think no family is perfect. And it always seems when money is involved– when money is involved, it can kind of bring out some ugly monsters in people [laughter]. And also it can bring up some old childhood hurts, too, or maybe some insecurities about favoritism, whether that’s true or not. And so communications and consistently communicating is a crucial element of it. It’s not necessarily going to eliminate the family dynamic issues. What I have seen that actually a lot of businesses don’t consider– and I was talking to one of the premier exit planning advisors about this. And he said, “One of the best ways to eliminate the family issues is just to sell to a third-party. And you split the money evenly.” And so, sometimes there are things that can be done that you may not have thought about. But depending on how important fairness or equality or some of these other factors are, it may drive you in a different direction than what you originally considered, so.
Yeah. And that’s a really good point because money and family, it’s so tricky. It really is a landmine, for sure. Okay.
So how far in advance should someone plan their exit? Six months? Six years? What are we looking at [laughter]?
You know I always say “Begin with the end in mind.” I don’t know who– I need to look up because that’s not my own quote. I forget who originally said that. But it’s true in exit planning. Ideally [inaudible] start thinking about this when you start your business. Now, most people aren’t even thinking about that because they’re just trying to survive and get some money coming into the door. But once you have some success and your business is moving along and it’s growing, you definitely want to think about that. But planning from the get-go can be important especially as you’re bringing on additional people because some of the things that you do when you’re planning your exits– they can take years. So a good example that comes to mind is sometimes if your business is structured a certain way like if it’s a C corp or an S corp, that might work well for tax purposes while you’re working in your business. But as you start to think about exit planning, maybe you actually need to change how your business is structured and go from a C corp to an S corp or vice versa. And you can’t just change your business structure and then exit your business that year, so [laughter]. There are certain things that you would need to think about well in advance, and oftentimes, years and years in advance, especially if you’re going to gradually transfer ownership to an insider as well.
Sometimes, that can take 5, 10 years or even longer. So to do it right, you really would start as soon as possible because there are always things that you can do from valuing your business and just understanding what your goals are in those initial phases. But to exit successfully and to kind of pin down a timeframe, I would say minimum five years to have enough time to do things especially if you’re going to need to grow the business or you want to transfer to someone on the inside.
Yeah. That makes a lot of sense. When I first started my business, I worked with a business coach and was part of a group. And he worked a lot with people who did exit planning. And one of the things that I had not considered that apparently happens a lot is people don’t realize that they don’t have anything to sell. So just because you’re working really hard [laughter], that doesn’t always mean you have the type of value in your business that you can sell. And I think that that’s to your point of planning with the exit in mind is part of that.
So what are some of the things that business owners can do to grow the value of their business?
Yeah. That’s a good question. So lots of things. And one of the most common examples that I see because it’s such a pervasive issue is one of the main things you could do to grow the value is diversifying either your customer base or your revenue base. I talked to a business owner a few weeks back and she found out I did exit planning and then she was like, “Oh, oh.” She kind of jumped on that and started picking my brain [laughter]. And she had this particular– she has a couple of different businesses, but one of them has three customers. And so each of them– they’re kind of evenly split. So each of them makes up about a third of her revenue. That is not good for value. If any one of those customers go away, it’s incredibly risky. And so having a more diversified revenue customer base where any one customer doesn’t make up more than 10 or 15 percent of revenue would be a wise thing. And this happens in small businesses as well as large businesses too. I remember a few years ago– well, maybe two or three years ago.
American Express used to be the exclusive cardholder of Costco memberships. So if you had a Costco membership, they only did those through American Express cards. So if you shop at Costco, you either had to use your Costco AmEx or you had to use debit card or paycheck. And so Costco decided– I forget who they went with, but they decided to end that contract with American Express, and it was a hit to American Express because that Costco relationship represented a huge portion of their revenues. I wanted to say it was like maybe 20% or something. I could be wrong. So it’s not just small businesses that can be susceptible to this. It can be damaging for larger businesses too. So no matter what your business or what your industry is if you have a handful of clients or if you have a client that makes up more than 10 or 15 percent of your total revenue, that should be a red flag to go out and try to get additional relationships to diversify that. And then the other thing is the revenue base as well. And what I mean by that is I use a dental practice quite a bit when I use these examples because I think most people kind of understand the model there. But one of the things that’s interesting about dental practices is that if it’s dependent on insurance reimbursements as far as their revenue is concerned, that’s going to be less attractive than fee-for-service practices where you have patients who are paying in cash. So one of the ways like let’s say you had a dental practice, you could increase the value of your practice just by incentivizing. You don’t necessarily have to increase or grow your revenue, you just have to kind of change where that comes from and diversify that revenue base. So that’s a good one that I think again can take some time because it does take time to acquire new clients to– maybe you have to try two or three different ways of diversification in your revenue before you kind of find one that works. So that’s just one example. But there are obviously lots of things that business owners can do to grow the value of their business.
I mean, I think that that’s great. I mean, I think those are good tips just for anybody. I mean, I think we all need to diversify our offerings and make sure that we– I mean, I got a little butterflies when you talked about the company with three clients, that they’d feel a little nervous [laughter].
I know [laughter].
And I’m a consultant, and I struggle with the exit question myself because I don’t think I really have anything to exit. So my exit strategy right now is investments and retirement and finances that way because I’m a consultant, and in so many ways, I’m the business, and I might not really have anything to sell.
Yeah. And that’s the common problem. There’s a guy that I know, and last summer, he just decided he was done. I mean, he kind of waited until the end. He got burned out and he literally walked away. He just left the office one last time, [walked up?], and never went back. And thankfully, he had other assets, other investments. He actually owned the business where he operated out of, so he was able to then lease that out to a different business. So sometimes in certain industries especially where the business revolves around you and, like you said, you are the business, that’s very challenging because no matter if you’re selling– if you have no employees, obviously, there’s no internal succession there, but another– that goes back to growing the value of the business. Another thing you would want to do to make this a viable that lasts beyond you would be to build that next generation management or leadership. And that might be one or two, but sort of grooming them to replace yourself. And the more you can replace yourself over time, the more likely you’re going to have some sort of sellable business or a business that is worth something beyond you.
I think that that’s great. And I think too, it would be good for people who, maybe are like, “I can walk away and that’s fine,” but they need to have some planning and finances planned out as well. If you’re not going to sell the business, if you’re exiting a different way, I think that there’s still planning that needs to go into that. So I don’t know. But make sure you have some retirement. Have something planned if you’re not going to sell your business if you don’t have an exit strategy or a succession plan.
Yeah. And actually, that plays right into the– so we take clients through a five-step process in exiting their business. It starts with valuing your business, and then we establish the timeline for the exit and the goals, which we’ve already talked about with identifying a successor. But the third step is discovering your gap. So if your business is worth X, what you do is, you actually combine that with all your other resources. So your investment portfolio, maybe you have rental properties or real estate. So you look at that and you say, “Okay. When I combine all of my resources together, do I have enough to transition into the next phase of my life, or do I have a gap?” So it’s okay if the gap is big, we just need to know how big the gap is, and if a gap exists because even if there are things that makes it challenging for you to change in your business– so let’s say that there’s maybe not a viable option, or at least one that you want to pursue to try to sell your business. But there are other things you can do on the personal side, maybe to still close that gap. And this happens a lot. So a business owner might think that their business is worth a million dollars. But maybe when they actually value it, it’s worth half that. And they’ve been operating on that assumption for so long, that they haven’t really planned– most business owners, most of their net worth, a lot of times, is tied up in the value of their business. And all too often I see people where they’re not doing the necessary planning. They’re not saving retirement like a 401k or they’re just not building those other aspects of their financial life because they’re plowing everything back into the business. And if there’s nothing to sell there at the end of the day, then you’re kind of stuck in this rat race of, “How do I get off now? I can’t because I don’t have any money.”
Yeah. I think it just must be very devastating when you realize it’s not worth what you thought it was because owning a business is hard. It’s not easy. And I’m really glad to hear you talk about diversifying your resources. Before I left my corporate job to start my business, I went to a financial planner and I laid all the cards out on the table. And I was like, “Can I do this? What’s going to happen? How long do I I have before I need to really focus on retirement and things like that. And so I had a whole plan for entry, right? But I think it’s possibly even more important to have a plan for exit.
And so with that, do you have any final thoughts for our audience?
Yes. I would say my– so interesting story comes to mind. So when my husband and I bought our house, this was early on in our life together. And it was a stretch financially to buy our house. And so when it came time to clean our gutters that fall– and we’re in Oregon too. So our gutters get full of leaves and mud and dead birds and all kinds of gross things.
Oh, dead birds. Fun.
Yes. Yes [laughter]. It’s delightful. You’ve never dug a dead bird out of your gutter [laughter]?
No, but I’ve never really looked for it, so [laughter].
Oh, you know. You know when you find a dead bird. Trust me [laughter]. But there is leaves and mud and all kinds of stuff. So anyways, so my husband gets up on the ladder and I’m down below and I’m holding this bucket of sludge. And he’s just dumping stuff down. And so we get to the front of our garage where [inaudible] we had these big flower pots. And so he moves one of this flower pot. And as he’s doing it, he just freezes. And I look over at him and he is just thrown out his back. He can’t even move. And so he eases his way down to the ground and he’s lying there right in the driveway. But there’s this big storm coming. So I’m like, “I don’t know what to do. We have to finish cleaning the gutters because every time prior to this it was just overflowing and it was not good.” So I’m like, “Are you okay there? Should I just keep going [laughter]?” So he’s laying there in the driveway and he’s tortured. And actually, after that– so I finished cleaning the gutters and then I helped him hobble inside. And he laid on the couch. He ended up missing work. He was on his lane every waking minute. He’s like on his back on the couch for like two weeks.
And so my point is is that a lot of times a lot of things– there are things that are– it’s very tempting. You want to do them on your own. But you’re better off hiring an expert. And there are things that we might only do occasionally or things that we do every day. But someone is only going to exit their business once, and no one gets good at that. So whether you hire your CPA to help you with that, I think it’s so important for business owners who are serious about this and wanting to exit their business and do it successfully to have somebody who can help you and to have an expert to guide you in that process. So that’s what I would like to impart on your audiences is take the time to hire an expert. And it all starts with having a better understanding for what your business is worth and what your goals are.
I couldn’t agree more.
How can people get a hold of you?
So if you go to truenorthra.com/valuemybusiness, I actually have a free evaluation checklist there that, with eight pieces of information, you can find out what your business is worth in five minutes. So that’s the starting point if you want to better understand what you need to do in order to exit successfully. And the great thing is is a lot of us– we’re just curious. We want to know what our business is worth. And the database that we subscribe to has 55 million different businesses in their database. And so it’s a robust way for business owners to find out what their business is worth. And with just eight pieces of basic information that you probably already have at your fingertips, you can figure out what the heck [laughter] your business is worth.
Wow. I think that that’s fantastic. Thank you, Ashley, for being on the show.
Thank you so much, Jen. This was great.
Today’s episode with Ashley gave me a lot to think about. If you enjoyed the show, please share it with a friend. Next week, I’m going to talk about how to add more value to your business, not in the financial realm which is not my area of expertise but in digital marketing and processes which are my expertise. You’re not going to want to miss it. [music]
Thank you for listening to the Women Conquer Business podcast. You can find us online at www.jenmcfarland.com/podcast. You can also connect with Jen on social media at Jen S. McFarland on Facebook, Twitter, or LinkedIn. The show is produced in Portland, Oregon by Jen McFarland Consulting. Women Conquer Business is available on iTunes, Google Podcasts, Spotify, and many other podcast apps.