The Entrepreneurial Mind

When we were in the process of selling our business our attorney did a wonderful job of preparing us for much of what was ahead of us. One of the things he mentioned more than once was that we should be prepared for seller's remorse.

There are two types of seller's remorse. One kind is the emotional feelings that you are doing the wrong thing. It is not really rational, it is just that fear, insecurity, and/or uncertainty play tricks on your mind. Think Brett Favre. I would bet that rationally he knows it is time to move on from the Green Bay Packers (this is an American football metaphor for those of you outside the US). But, all he knows is football and he probably had not spent much time planning for what comes after his career in the NFL. I can empathize with him. I had a lot of the same kind of pangs of doubt when we sold our company.

The other find of remorse is one that happens because the sale puts you into a situation that is no longer fun. You are still in the company you created, but you no longer own it and now work for a boss. From the NY Times:

"The person who became my boss was the man I was negotiating with when I was selling my company," said Mr. Asterino, 46. "You're trying to maximize the value of your company when you’re selling it -- and then when the transaction closes, that individual is your boss. It was very difficult."

I knew I could not be happy with this type of exit, so planned carefully to craft an exit in which I not only monetarily exited, but physically exited, as well. Not all entrepreneurs have this option, but if you do I would strongly suggest you take it.

(Thanks to Jennie Bowman for passing along the NY Times article).

Posted by Jeff Cornwall at 03:44 PM | Permalink | Comments (6)

There are certain lectures that stick out in my mind from my college days in the 1970s. Some of them seem kind of random, which is always a reminder to me as a professor that you never know what will stick with your students.

Any way, one lecture that has stayed with me was a lecture that an accounting professor gave us on sunk costs. He told us that money already spent on something is like water over the dam -- it is gone and should not be considered when making a decision on whether to stay with a project or not. We should only look forward in our analysis. Sunk costs are -- well, sunk.

While this was not a revolutionary concept, for some reason it was very eye-opening to me as a 19 year old in an accounting class and in my memory I can still hear his lecture on this concept even today. I always tried to remember this lesson in my business decisions.

For the entrepreneur there is the added element of emotion. We get attached to our ideas and hang on too long. We get our ego tied to a project and refuse to give up even though it is not logical to continue.

Sam Davidson wrote an essay at his blog on knowing when to quit that got me thinking about all of this. It is a great essay that all entrepreneurs and aspiring entrepreneurs should read.

And to Professor Dunnigan, my old accounting professor at UWSP, thanks for the lesson on sunk costs. It saved me a lot of wasted money and time over the years.

Posted by Jeff Cornwall at 06:56 AM | Permalink | Comments (3)

In my column this week at the Tennessean I talk about the exit process:

The formal process of selling a business usually starts with a letter of inquiry. The first time you get one, the temptation is to start counting all the money you think you are about to get.

But this stage is about as serious as a smile and a wink at a singles bar. About 90 percent of the time these inquiries go nowhere.

Posted by Jeff Cornwall at 06:49 AM | Permalink

You get a call from someone who says that they are interested in buying your company. Your heart races and you get a tingle of excitement. Could this be it? Is it your time to finally cash in?

Slow down! You have a long road ahead (or maybe a very short road to nowhere in most cases).

BizScoops has a very clear summary of the many steps in a typical deal process. It is a great framework to help an entrepreneur understand the process of selling the business.

It is a rocky road, even at its best. When we got prepared to start the process of selling our health care business, I was lucky enough to have an attorney who gave me a strong dose of reality about how many deals fail along the way. It helped keep me grounded in what can be one of the most emotional rides of your life.

It all usually starts with a letter of inquiry. The first time you get one, the temptation is to start counting all the money you are about to get. But, hold on to your hats. This stage is about as serious as a smile and a wink at a singles bar. Any company in an acquisition mode will be spreading these around all over the place trying to get a bite. About 90% of the time these inquiries go nowhere.

If the flirtation process of the inquiry moves ahead, next will often come some sort of letter of intent. This is kind of like a promise to go steady. Both parties agree that they are seriously interested in seeing if this can move ahead. Often there is a promise of exclusivity required, but most sellers try to avoid this to keep the buyer honest and hopefully drive up the selling price with a little good old competition. More often than not, the buyer prevails in this and the seller has to promise not to entertain other offers, at least for a little while. Somewhere in this stage the basic form of the deal starts to take place. There are confidentiality agreements that allow the buyer to get enough information to float a trial offer. Remember, the deal almost never gets better for the seller past this point, so this is where you need to negotiate hard. About 50% of the deals that get to the inquiry and deal formation stage fail to make it any further. (If you are keeping score, we are now down to 5% of those initial inquiries still being active).

Next comes due diligence. This is like the stage when he or she gets to meet your parents, find out what you really keep in your sock drawer, learn what you actually make and what you spend your money on, and decide which family you are going to spend Thanksgiving with each year. The buyer will want the right to go through all of your contracts, all of your personnel records, all of your corporate minutes, and do anything else they can possible think of to dig stuff up about your business. It is an intrusive process to say the least. At this point you will likely have to share with your employees and customers that you are thinking of selling, if you haven't told them already. And the worst part is that your employees and customers may get all concerned over nothing, as about 50% of deals fail during due diligence. (We are now down to about 2.5% of the deals still being alive at this point).

Finally, if you make it through due diligence, comes the closing preparation. This is kind of like the final preparation before going to the alter, including negotiating a prenuptial agreement. Remember the old saying "the devil is in the details"? This has never been more true than in the closing process of selling a business. This is where the lawyers from both sides kick into overtime, fighting over the specific terms of the sale. Of course at this point you are ready to say, just get it over with! But, those details that your lawyer wants you to focus on and pay attention to really matter. Why? Because the deal is not really over at closing. There are hold-backs of money, warranties, and sometimes earn-outs that all can lead to major problems post sale if you are not careful during preparation of the closing documents. When your attorney says to pay attention, be patient and listen, you better pay attention, be patient and listen. If the sale of your business is not handled properly, the next stage is litigation, where all of that money you made selling the business can still be at risk. (Another large chunk of deals can fail during the closing process, leaving only about 1-2% that make if from initial inquiry to a final closing).

The moral of this tale is to be realistic, be informed, and be prepared when you enter into the exit stage of your business. And remember that while falling in love is great, it is a long way to the altar.

Posted by Jeff Cornwall at 07:30 AM | Permalink

Mark Cuban has some wise advice for start-ups at his blog called Blog Maverick. His first three rules for start-ups all deal with the power of passion and commitment:

1. Don't start a company unless its an obsession and something you love.

2. If you have an exit strategy, its not an obsession.

3. Hire people who you think will love working there.

His commentary on exit strategies might stir a few feathers. I would say that to some degree he is right. If your only objective is a quick exit, you may end up being a unprepared if things don't go the way your plan predicts (Imagine that!!).

It also reminds me of the advice that I received early in my health care business start-up. Remember that when you run a race your goal is never the finish line. Good runners will tell you that you that to win you must give everything you have for the entire distance of the race. To accomplish this you should imagine that the finish is well past the finish line on the track.

Businesses rarely follow the script of the business plan, especially when it comes to exits. You may end up running a company for a lot longer than you had planned. Make sure it is a business that you are passionate about and that you can commit to for the indefinite future.

(Thanks to Jon Beckmann for passing this along).

Posted by Jeff Cornwall at 06:08 AM | Permalink

Jim Verdonik has an essay at The Business Journal on ten lessons for wise exit strategies that entrepreneurs can learn from this year's presidential race. A sample:

Campaigns and businesses can be bottomless pits. There's no sense throwing good money after bad. Funding a lost cause or even a decent business with limited upside potential usually doesn't make sense. Ask Mrs. Romney. Even multimillionaires have breaking points.

(Thanks to Bill Hobbs for passing this along).

Posted by Jeff Cornwall at 05:37 AM | Permalink

Although they have diminished greatly since the government closed the tax loop hole that had led to widespread abuse, Employee Stock Ownership Plans (ESOPs) are still an exit option for some companies.

The Wall Street Journal profiles a small business that wanted to pursue this option, but got sticker shock when looking at the cost of setting one up:

Mr. Nikolich was ready to start easing out of Tech Image, the technology public-relations firm he had founded nearly 15 years earlier. He didn't want to sell to a much larger PR company, however, because he was concerned the new owner would slash his work force. And he wanted to stay involved in the business....

Given those criteria, employee ownership felt like the right path.... But he quickly learned that the cost of setting up an employee stock-ownership plan could top $100,000 -- more than his 17-person company could handle.

Because of the abuse of ESOPs in the past, the regulatory hurdles have become quite high for small companies. Too bad, as many more small businesses might pursue this option for their employees if it was economically feasible.

Posted by Jeff Cornwall at 08:19 AM | Permalink | Comments (3)

If you have spent any time in Nashville you have probably heard of the Bluebird Cafe, the iconic music club founded by Amy Kurland back in 1982.

After twenty-five years, Amy decided it was time to exit her business. From the Tennessean:

Amy Kurland, who started The Bluebird in 1982 as a gourmet restaurant, is selling the now-legendary club to the Nashville Songwriters Association International. The group promises not to change a thing.

"I wanted to retire, but I didn't want The Bluebird to go away,"' said Kurland, 52.

Amy could have sold the club for a lot more money than she did. But, money was not the only kind of wealth that Amy created in her business. She measured her success as much in terms of her ability to create a venue to help launch the careers of struggling songwriters and musicians as she did by the income and wealth that her business generated for her.

Instead of selling to the highest bidder, she sold to a group that would forever keep her vision alive. That is clearly the act of a good entrepreneur.

The list of now famous artists who got their start at Bluebird is unprecedented in the music industry: Faith Hill, Trisha Yearwood, Garth Brooks, Josh Turner.... the list goes on and on.

My first experience with the Bluebird Cafe came while I was being recruited to work at Belmont University. The Dean took me to the Bluebird to give me a taste of what Nashville had to offer. Immediately I was taken back to my college days in the 1970s. Ann and I loved to listen to coffeehouse musicians -- singer songwriters just like the Bluebird hosted night after night. (A note of trivia: I tried my hand as a coffeehouse musician a time or two in those days). I was hooked.

We now get season passes every year to go to Bluebird on the Mountain. Bluebird teamed with Vanderbilt University to offer a monthly Bluebird songwriters night under the stars on top of the nob (that is what we call big hills that are not quite mountains here in Tennessee) where Vanderbilt has their observatory. It runs from spring through fall.

Thanks, Amy. Thanks for having the courage to start Bluebird, and thanks for having the courage to insure it will stay the Bluebird now that you are moving on in your life.

Posted by Jeff Cornwall at 07:24 AM | Permalink | Comments (1)

Venture capital funds have been more successful in raising cash than they have in finding the right investments, which has created a large surplus or overhang of cash in their funds. This is consistent with the capital markets in general.

An article in Fortune Small Business argues that this makes it a good time to think about selling your business. The law of supply and demand tells us that excess cash creates a seller's market.

[N]ow is a particularly good time to sell a business. The economy is, by many measures, in its best shape since the dot-com bubble burst in 2001. Banks are aggressively lending money for all kinds of acquisitions. Increasingly, corporate America views the purchase of small firms as a shortcut to growth and innovation. As a result, a small-business feeding frenzy is in progress. According to FactSet Mergerstat, there were 8,115 small-company acquisitions (deals valued at $100 million or less) in 2005, almost a 20% increase from 2002.

The FSB article goes on to offer four good pieces of advice for anyone thinking about selling.

1. Staging a Business for Sale

Think about all you go through before you sell your house. You add some paint, spruce up the yard, declutter the living room, clear out your closets, and clean, clean, clean. The same logic applies to your business. But in the case of selling a business, curb appeal is much less important than income statement appeal. Business valuation is based on mostly one thing: what the buyer believes your future cash flow will be. The higher you can get your free cash flow and the more growth it looks like it can have in that cash flow, the higher the selling price.

2. Getting the Right Price

Again, just like selling your house, setting the right price at the beginning is crucial. Bidding wars are very rare events. The only direction the price will go is down once negotiations begin. So work hard to make sure you have the right price in mind from the beginning. And for goodness sakes, bring in experts -- never do this by yourself or with attorneys who have little experience in selling a business. You may pay a hefty fee to M&A experts, but it is usually worth every penny.

3. Do Your Homework

The FSB article rightly points our that you need to know ahead of time what they will discover in due diligence. And be prepared for the emotional ride of a life time. Half of all deals that get to due diligence never make it through to the sale.

4. Buyer's Bag of Tricks

The devil is in the details in a business sale. Listen to your M&A attorney when she tells you that some minor wording is important. The buyer will likely try many tricks to reduce their risk and devalue the deal, often in ways that a non-expert would never even see coming. Don't get ahead of yourself. Half the deals that get near closing also fail.

Posted by Jeff Cornwall at 07:29 AM | Permalink | Comments (1)

Kauffman's eVenturing site just posted a new collection of articles and tools related to exit planning.

Let me frame all of the excellent technical information available at this site in the context of the reality of the sale process. It is a rocky road, even at its best. When we got prepared to start the process I was lucky enough to have an attorney who gave me a strong dose of reality about how many deals fail along the way. It helped keep me grounded in what can be one of the most emotional rides of your life.

It all usually starts with a letter of inquiry. The first time you get one, the temptation is to start counting all the money you are about to get. But, hold on to your hats. This stage is about as serious as a smile and a wink at a singles bar. Any company in an acquisition mode will be spreading these around all over the place trying to get a bite. About 90% of the time these inquiries go nowhere.

If the flirtation process of the inquiry moves ahead, next will often come some sort of letter of intent. This is kind of like a promise to go steady. Both parties agree that they are seriously interested in seeing if this can move ahead. Often there is a promise of exclusivity required, but most sellers try to avoid this to keep the buyer honest and hopefully drive up the selling price with a little good old competition. More often than not, the buyer prevails in this and the seller has to promise not to entertain other offers, at least for a little while. Somewhere in this stage the basic form of the deal starts to take place. There are confidentiality agreements that allow the buyer to get enough information to float a trial offer. Remember, the deal almost never gets better for the seller past this point, so this is where you need to negotiate hard. About 50% of the deals that get to the inquiry and deal formation stage fail to make it any further. (If you are keeping score, we are now down to 5% of those initial inquiries still being active).

Next comes due diligence. This is like the stage when he or she gets to meet your parents, find out what you really keep in your sock drawer, learn what you actually make and what you spend your money on, and decide which family you are going to spend Thanksgiving with each year. The buyer will want the right to go through all of your contracts, all of your personnel records, all of your corporate minutes, and do anything else they can possible think of to dig stuff up about your business. It is an intrusive process to say the least. At this point you will likely have to share with your employees and customers that you are thinking of selling, if you haven't told them already. And the worst part is that your employees and customers may get all concerned over nothing, as about 50% of deals fail during due diligence. (We are now down to about 2.5% of the deals still being alive at this point).

Finally, if you make it through due diligence, comes the closing preparation. This is kind of like the final preparation before going to the alter, including negotiating a prenuptial agreement. Remember the old saying "the devil is in the details"? This has never been more true than in the closing process of selling a business. This is where the lawyers from both sides kick into overtime, fighting over the specific terms of the sale. Of course at this point you are ready to say, just get it over with! But, those details that your lawyer wants you to focus on and pay attention to really matter. Why? Because the deal is not really over at closing. There are hold-backs of money, warranties, and sometimes earn-outs that all can lead to major problems post sale if you are not careful during preparation of the closing documents. When your attorney says to pay attention, be patient and listen, you better pay attention, be patient and listen. If the sale of your business is not handled properly, the next stage is litigation, where all of that money you made selling the business can still be at risk. (Another large chunk of deals can fail during the closing process, leaving only about 1-2% that make if from initial inquiry to a final closing).

The moral of this tale is to be realistic, be informed, and be prepared when you enter into the exit stage of your business. And remember that while falling in love is great, it is a long way to the alter.

Posted by Jeff Cornwall at 07:16 AM | Permalink | Comments (1)

The next decade may see an unprecedented transfer of business ownership. As reported in StartupJournal, the first baby boomer entrepreneurs turn 60 this year and many are looking to retire. The story takes an interesting perspective on exit planning. It is not just about the business and financial planning. A sixty year old today will likely live at least another twenty years, so these entrepreneurs need to think about planning their lives, as well.

Already having a doctorate (thanks to Jimmy Carter's horrible management of the economy when I was getting my MBA in the late 1970s), my next step in life after we sold our business was relatively easy to decide. I say relatively, because my adrenalin was still pumping when we sold our business and I was ready to jump into another deal. Thanks to my wife. I slowed down and thought about my life and what I should do next.

Exit planning needs to focus a great deal on what you are going to do after you go through the exit.

Posted by Jeff Cornwall at 05:28 AM | Permalink

What does a buyer really "buy" when they buy your business? Is it your assets? Your reputation? Your team? Your customer base? The answer to all of these is yes, and no. The only reason any of these have value is if they will continue to create cash flow profits for the years to come for the new owner. After all, what good are a building, machines, or customers if they do not generate profits?

As we know, accountants have come up with about 17 different measures of profits (another full employment ploy on their part, no doubt). The one that matters here is EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). That is the best measure of cash profits of a going concern for most businesses. Using EBITDA makes comparing businesses possible as it controls for financing, corporate form and accounting practices related to assets which all can vary.

So what does a buyer look do with EBITDA? In the simplest sense they use a multiple of EBITDA to give the business a value. The higher the multiple, the stronger they expect earnings to be going into the future. In most cases, the multiple they use on EBITDA ranges from 3 - 8. Now that is a huge swing in possible values. A company with EBITDA of $1 million could be worth anywhere between $3 million and $8 million!

The multiple varies based on any number of factors. The Christman Group LLC (a firm that specializes in exit planning for entrepreneurs) offers their top ten factors that have an impact on the size of multiple you can expect when your sell your business:

Number 10: Industry Outlook

If the outlook for the industry is bright, the price goes up. Buyers look hard at the outlook for a company's gross margins, future growth projections, international economic factors, etc.

Number 9: Depth of Management and of the Sales Team

If an owner wears all of the hats, including generating most of the sales, the price will go down. A strong and experienced management team to operate the business is key value driver.

Number 8: Customer Base

If a company has limited customer concentration with no single customer representing more that 5-10% of revenues the price goes up. If the customer base is made up of “blue chip” companies, the price goes up too.

Number 7: A Good Story to Tell

Telling a company's story is critical in helping the buyer recognize the full value of a business. An extensive confidential offering memorandum that describes the business operation, the marketing and sales programs, its organizational structure, its facilities and equipment, its financial performance, and provides a financial analysis including a believable 5 year financial forecast.

Number 6: Stage of Industry Consolidation

If a company's industry is experiencing consolidating with the big companies getting bigger through acquisition, prices for smaller companies will rise.

Number 5: Company Track Record

If a company can show a track record of consistently growing profits and sales, buyers will pay more.

Number 4: Type of Business

A manufacturing company with a proprietary product will sell for more than a job-shop manufacturer. A distributor that adds value by offering installation, repair, and/or engineering/design will sell for more money than a non-value-added distributor. A service company with a special expertise will sell for more than a similar service company without this expertise.

Number 3: Revenue Size

The larger a company's revenues, generally the higher the price. A business with $25 million of annual sales will sell for more than a company with $5 million in sales.

Number 2: Market Position

A company that dominates its market or has a unique niche in the market will sell for a premium over other companies that do not dominate their markets.

Number 1: Having Multiple Buyers

When there are multiple buyers bidding on a business, the price of the business will exceed the price paid for a business that is sold without competitive bids.

Posted by Jeff Cornwall at 08:24 AM | Permalink | TrackBacks (6)

I have been kind of rough on us baby boomers over the past couple of weeks. It seems that we are not planning our family business succession very well. Also, some of us are looking to entrepreneurship as a quick fix for our poor retirement planning.

However, a recent survey on small business and retirement planning conducted by the NFIB cuts us a little slack in all of this. It finds that most baby boomer entrepreneurs have given considerable thought to their retirement. Interestingly, nearly half (46%) intend to never fully retire.

Posted by Jeff Cornwall at 06:04 AM | Permalink

Last month I wrote a post about baby boomers looking to entrepreneurship as a magic wand to fix their lack of retirement planning.

Well now a study reported in Inc.com seems to show that baby boomers who are already entrepreneurs and have created family businesses are not much better at planning:

Accounting firm Kreischer Miller surveyed 3,000 family-owned businesses and found that almost all expect to keep ownership and management within the family through the generations. However, only half have a formal plan in place to identify and train family members to take the reins once founders retire. Many families neglect to train, mentor, and groom future family executives. What's more, only one-third have non-family members on their board of directors, an arrangement which often ensures that the best qualified family members are chosen to lead.

Posted by Jeff Cornwall at 06:37 AM | Permalink

We hear all of the horror stories about lottery winners who end up broke and miserable. Large windfalls of money can be difficult to manage if we are not prepared. I see some entrepreneurs face similar challenges as their businesses suddenly create drastic increases in monthly cash to the owner or windfalls of wealth from a sale.

I met with a former student who is facing the possibility of winning one of life's lotteries with his business. A sudden opportunity is creating the possibility of significant profits over a very short time. But, he seems to have his head on straight. He is already planning to use this influx of capital to help build his business.

So why are some people better able to handle situations like this? I believe most of them were brought up with an understanding of how to manage money. I also believe that they were raised with values that were not as materialistic as others. To them money is not the end, but rather a by-product of working hard and living a good life.

Scott Burns (free registration required for this site) suggests that we look to a popular book, Getting Rich in America, for some answers on how to put wealth in its proper perspective.

Here are the eight rules from that book and my thoughts on them (for what they are worth):

1. Think of America as the land of choices.

Each choice we make can affect our character. What kind of business we do we choose to start? Who do we choose as our business partners? How will we treat our customers and our suppliers? How will running our business have an impact on our family? Virtues are simply habits we form by doing what is right.

2. Take the power of compound interest seriously.

Start saving when you are young. A dollar saved when you are twenty will be worth so much more when you retire than a dollar you save when you are fifty. As I wrote about recently, many baby boomers did not learn that lesson and are trying now to make up for lost time.

3. Resist temptation.

As may father always says, "Pigs get fat and hogs get slaughtered." Don't spend money until you have it, and don't waste it on things that cost a lot but have very little value. Be frugal.

4. Get a good education.

If you are an entrepreneur, learning about the process of entrepreneurship will almost double your odds of success. But beyond that and more importantly, a good education will make you a more interesting person and a better citizen.

5. Get married and stay married.

Amen.

6. Take care of yourself.

I began to have some health issues as our business grew very rapidly and we began to look at options to sell. Stress takes its toll on you. My brother says I aged in entrepreneur years during that time, which he says are about like dog years.

7. Take prudent risks.

Successful entrepreneurs are not gamblers, but they will take risks that are well thought through and well planned for.

8. Strive for balance.

If you follow rule #5 you will only be married once. You only have one chance to be a good parent. Good friends take work.

You can and you should be so much more than an entrepreneur in your life.

Posted by Jeff Cornwall at 06:04 AM | Permalink

Where there is an action there is an equal and opposite reaction.

The action in this case was Sarbanes-Oxley and its onerous reporting requirements for small public companies, which basically killed the small IPOs in the US. The reaction, as predicted at this site earlier, was an increase in mergers and acquisitions as an alternative exit strategy for equity investors in start-up deals. Red Herring reports that M&A activity is up 23% for techie businesses.

IT service companies saw a large jump in transaction activity, rising 50 percent during the first half of the year. Acquisitions in the service sector are considered to be a leading indicator of IT investment. Valuations in the sector went up 37.5 percent....

The reaction to the reaction is a sharp increase in VC investments during the same quarter. VCs are flush with cash and looking for deals that can provide a large, relatively quick return. If they cannot get them from IPOs, M&As work just as well. Higher valuations for these acquisitions seem to have the VCs licking their chops.

Do not expect this current pattern of exit through acquisition to end any time soon. Sarbanes-Oxley is here to stay without any changes for smaller firms. The accounting industry is gearing up a public relations campaign to illustrate how important it is to keep a close eye on even the smallest public company.

Also, it is important to keep in minds that Sarbanes-Oxley created a new agency (imagine that) called the Public Company Accounting Oversight Board (PCAOB). The PCAOB board is appointed by the five members of the Security and Exchange Commission. In addition to being a clear constitutional problem this also assures that the lawyers and accountants who control the SEC will keep Sarbanes-Oxley a cash cow for their brothers and sisters in the big private law and accountings firms.

Posted by Jeff Cornwall at 06:28 AM | Permalink

A recent study issued by the outplacement firm Challenger, Gray, & Christmas has been making the rounds the past couple of weeks in the newspaper business sections. The study reports that baby boomers are looking in large numbers to make entrepreneurship part of their retirement plans.

One of the reasons stated by boomers for choosing this path relates to a lack of retirement planning. It seems many in my generation lived it up from the 1960s through the 1990s and have little wealth to show for their efforts. Many seemed to carry the "live for today" mentality throughout their entire working lives.

However, the problem with viewing entrepreneurship as the Holy Grail for their sunset years is that it may not help them achieve wealth.

Many are choosing a self-employment, consulting route to entrepreneurship. They gained significant expertise within some specific area, and they become a "free agent" selling their service to a variety of clients. While this can create an income flow, it is not a business model that generally creates a path to wealth.

There is often nothing to "sell" when the boomer entrepreneur really wants or needs to retire. A consulting business is tied to the activity of the owner and has no residual value that someone will be able to buy. A business has value to a buyer if it creates on-going cash flow into the future. If the boomer entrepreneur/consultant retires, the cash flow from his/her consulting activities ends.

There seems to be a myth that entrepreneurship and self-employment are secret paths to wealth. If these boomers didn't prepare in their working years, they can start a business when they reach retirement age and it will magically create wealth. It just doesn't work that way.

Wealth takes time, effort and careful planning to build, whether it be through a job or through your own business. Creating wealth from an entrepreneurial venture is something that has to be engineered into the business model. That is why many experts recommend having your exit plan in mind from the very beginning of the business.

You need be able to build a business that will generate cash flow into the future long after you leave the scene. That is what has value to a buyer more than anything else. They don't care about assets or reputation unless these things can continue to generate income after they buy your business.

Posted by Jeff Cornwall at 05:33 AM | Permalink

StartupJournal highlights two entrepreneurs, Barbara Meade and Carla Cohen, who thought they had their exit plan in place for their bookstore.

"As they reached their mid-60s, they wanted to make sure their business would thrive into the future. Since neither had children interested in taking over the store, four years ago they hired a younger entrepreneur, Danny Gainsburg, with the understanding he would eventually buy them out."

But, their plans soon came unraveled as their employees rebelled against the transition. There story is an informative case study on the challenges of the exit process.

I remind entrepreneurs to keep a few things in mind regarding exits:

- The first offer is rarely the one that works. Don't get too excited and don't spend the money until it is actually in the bank. Half of all business sales that actually make it to closing actually complete the sale, and a very large percentage fail long before that point.

- Staff will always get anxious during an exit no matter how well it is planned. The process is disruptive and can become quite chaotic. Keep it as quiet and low key as you can for as long as you can. Avoid making a highly visible long term transition.

- Twenty years can be short-term for exit planning. Don't wait twenty years to start your planning like the entrepreneurs did in the StartupJournal profile.

- Involve your accountants and lawyers throughout the process. It will be expensive, but it is worth the costs given the risks of making any missteps.

- Integrate the needs of your important stakeholders into your planning. But, in the end remember that it is your business you are exiting.

For more tips on exit planning see my earlier post on this topic.

Posted by Jeff Cornwall at 05:53 AM | Permalink | Comments (2) | TrackBacks (1)

All who work with entrepreneurs nag them about the need for an exit plan. Some are too busy. Others find the process too overwhelming. Still others are in denial.

Inc.com cites a study just released by PricewaterhouseCoopers that reveals how many entrepreneurs really don't have any exit plan in place or even in mind.

"In its survey of 364 CEOs of fast growing, privately-held companies called the 'Trendsetter Barometer,' PricewaterhouseCoopers found that 65% of the respondents said they planned to leave their company within 10 years. When asked about their exit plan, a majority of the respondents (51%) thought they would leave via a sale to another company. A measly 3% minority said they were counting on an IPO payoff. The survey's finding that CEOS have exit plans is hardly surprising: the fact that 43% of the respondents said they had done little or no succession planning is."

The findings did not surprise me. In fairness, fighting the daily battles that is entrepreneurship can cause many to slide exit planning way down the to-do list. When you are up to your behind in alligators it is hard to remember that you are there to drain the swamp. But, exit planning is important for every entrepreneur. I hope as more entrepreneurs are educated in the process of building successful ventures that we will see more pay attention to this ultimate goal for any private venture. Every entrepreneur must exit at some time--one way or the other.

Posted by Jeff Cornwall at 07:53 AM | Permalink

Entrepreneur.com has a great article on selling a business. They offer several suggestions and a few issues to be aware of as you enter into this potentially exciting, always stressful and often frustrating time for you and your business. As I tell me students, I had a full head of hair before we began the process that finally resulted in the sale of our business (see picture on this blog site to see the humor in this joke!). We went way down the road toward a sale twice before it finally occurred on the third attempt.

Here are the main suggestions that David Worrell offers in this article:

1- "It's never too early to start thinking about selling. 'The day you start building a business is the day you should start designing your exit,' says Minor, who has counseled thousands of business owners through the process."

I tell folks that if you are planning to sell your business in five to ten years, you should consider this short-term planning when it comes to an exit. Decisions you make today can have a huge impact on the options for selling your business and the price you get for its sale years from now.

2- "A business will fetch the best price only when buyers believe they can take advantage of significant future growth potential."

Most businesses are valued based on some multiple of current cash flow. The size of the multiple is, in part, on growth potential for the business. The more future growth that is anticipated from the business, the higher the multiple and therefore your price.

3- "(H)aving a Plan B is a vital step in the sale process....Having a strong and visible alternative makes any acquirer sit up and take notice."

As my father, the wise entrepreneur, always reminded me, "Never sit down to negotiate unless you are willing to walk away from the table".

4- "A strong team, clear policies and procedures, and a broad customer base are the underpinnings of value. The business should not just run without you, but be positioned to grow without you."

Most entrepreneurs want to leave their business sometime soon after a sale. And most of those who do not think they will want to leave, end up leaving fairly soon after the sale any way.

5- "While you've been focused on selling the company, who's been making sure the company stays focused on selling your product?... Many deals have been quashed when financial results from the last month or the last quarter are off target. Even if the buyer doesn't walk away, the price is likely to take a last-minute tumble."

Also, the majority of deals never make it to closing and as many as half that do get to closing, actually never close. Since you may end up keeping your business much longer than you anticipated, make sure it is running well.

6- "The amount of disclosure that buyers require can be mind-boggling. Putting it all together in a reasonable fashion is just one reason to consider hiring outside help. An intermediary, such as a business broker or an investment banker, can relieve you of some of the work while also keeping the buyer engaged."

Selling your business is not a time to cut corners in costs. It is a complex process that can come back to haunt you long after any sale due to the warranties that you will have to provide. Hire good help!

Posted by Jeff Cornwall at 05:52 AM | Permalink