Podcast: Successful Exits Require Planning with John Brown
The most important part of your exit plan is exactly that: planning your exit. In this podcast, John Brown will tell you just how to have a successful exit through proper planning.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called The Value Advantage™ that helps in exit planning, value building and financial management.
About the Guest
John Brown, owner of Business Enterprise Institute (BEI), fell into the world of exit planning before there was even a term for the process. As an estate attorney in the 80’s, John was approached by clients wanting to exit their business without a clue how to do it. BEI was born from John’s realization of this unmet need in the marketplace. Now BEI educates, certifies and provides tools to Exit Planning Advisors who help owners create exit plans.
If you listen, you will learn:
- The three universal goals every owner needs to answer before exiting their business
- Goal vs reality in exit planning
- Importance of a written exit plan well before you want to exit your company
- Realizations owners have about their business in the exit process
- Definition and significance of transferable value
- The role a capable management team will play when planning for an exit
Ryan Tansom:Welcome to Life After Business the podcast where I bring you all the information you need to exit your company and explore what life can be like on the other side. This is Ryan Tansom your host and I hope you enjoy this episode.
[00:01:00]Welcome back to the Life After Business podcast, Ryan Tansom here. Today's guest's name is John Brown. John Brown is the original father of this exit planning industry that has been evolving over the last few decades. In the mid 80's he was approached when he was an attorney by a couple business owners that wanted to exit their business and they wanted to exit it, like, as in this week. And he realized that there were so many factors that needed to go into preparing a business and a business owner for transition.
[00:01:30]So John owns the Business Enterprise Institute which is referred to as BEI and John dives into his methodology that he helps train exit planners and the actual step by step process that they take in order to take a business owner through transition. And he starts by describing the three universal goals that every entrepreneur needs to answer before they can even start building a plan. And then we dive into the seven step process that is used in the exit planning process. And John gives some great examples and some numbers that actually make this applicable in a real life scenario.
[00:02:00]I hope you enjoy the interview with John Brown, he's got a ton of information that's very practical for you no matter where you are in the lifecycle of your business or in your stage of planning. This episode of Life After Business is sponsored by the Value Advantage. The Value Advantage is a platform delivered via peer groups and or one on one to help you build a valuable company that can thrive without you while putting an exit plan in place so you have the options to sell when you want to who you want for how much you want. You're able to manage the business by the numbers, work in the business as much or as little as you want and you fully understand how the business impacts your personal financials. If you want to know more, check out the show notes or the website.
Without further ado, here's John Brown.
John how you doing today?
John Brown:I'm doing great Ryan, glad to be on.
Thank you so much for coming on the show I'm really excited. You have built quite a company and you're an amazing thought leader in this industry and your couple books are fantastic. For our listeners I want to go back to the day that you decided to jump into exit planning and leave the estate planning world. Elaborate on that, would you?
[00:03:30]That takes us back a long, long time. It was probably back in the mid 1980's. I'd been practicing law in Denver Colorado. I'd co-founded the law firm that worked with business owners. We did estate planning for business owners and all the things you do, let lawyers do for business owners. But that was really our little niche. One day two brothers came in and sat down, I'd done their estate plans for them. They had owned a construction company, it had maybe 150 employees so back then that was a big construction company in Denver. They said, "Hey John, you did our estate planning for us, we're wondering if you could help us plan to leave our business." I thought, gee these guys are pretty young, they're only like in their late 40s. I said, "Well, think I can help you." Of course I had no idea of what to do. This whole thing of exit planning was something that we developed later on as a result of this conversation I had.
[00:05:00]So I said, "Yeah I think I can help you. When would you like to leave?" And they said, "Friday." I thought, well I think maybe there's an unmet need here in the marketplace. And so I came from a family of business owners and my dad and mom sold their business and they weren't successful in that exit. It didn't work out at all. I really thought this is something that I want to do, I mean estate planning was okay but it becomes pretty repetitive and you can't help owners and this is my thinking, estate planning attorneys would certainly disagree, but I couldn't help owners in estate planning as much as I could help them develop a plan based on what they want to achieve to some day leave their business. That was kind of the origin of all that. I know that's a long winded answer but that really drives our company BEI today. Our mission still is to help owners benefit from their lives' work. That's what we focus on every day.
[00:05:30]I love it 'cause I've had personal experiences with, you get a little bit of siloed advice if you're not looking at the whole picture. To go back to your one comment which is the unmet need. Obviously there is this time of Friday that they wanted to leave but as you are moving away from estate planning and into the exit planning what did you, how would you define that unmet need?
[00:06:00]Well back then I didn't even know what that need was or how unmet that was, I just knew that I really hadn't given any thought, I hadn't read anything about helping owners plan for the day when they leave their business. So I just went with the flow and started to work with business owners. Most of them came in for some business, legal need or an estate plan but I'd always ask them have you ever given any thought to some day leaving your business? Which is still a question we encourage our members to ask.
[00:06:30]There's one other quick story. So I think the next owner that I asked this question to after my experience with these two co-owners who wanted to leave on Friday. About six months later this really old guy came in, he must have been 60. Since I was probably 35 at the time, I thought he was ancient. I thought boy, if these two younger guys wanted to leave on Friday, this guy probably wants to leave today. So I said, "Frank, have you given any thought to you leaving your business some day?" And he said, "Yeah, I have." I said, "Well when would you like to leave?" And he said, "I'm never going to leave my business. I love it. They're going to have to drag me out by my heels from behind my desk after I drop dead." And I thought wow, this exit planning process really has a lot of potential now.
[00:07:30]The need that business owners have is very individual. Every owner is going to have their own set of we call them goals and aspirations but you could also describe it as a need perhaps. Everybody's going to have maybe some generally universal goals but precisely what they want to do and when they want to do it is going to be different for everybody. So in the world of exit planning from a professional standpoint now, it is so exciting, it's so challenging because everybody is different.
[00:08:00]In your book, Exit Planning: the Definitive Guide, which I absolutely loved. I think you from start to finish cover all of the things and you don't get to technical but you address everything to make the owner aware of all the moving pieces and parts but you start off the book with the three universal goals and you kind of touched on it just there. Can you explain what you mean by these universal goals? And how do they differ from person to person?
[00:08:30]When I first started developing exit planning I really realized that everybody has, every owner has three goals once the start to think about leaving a business. When do I want to leave the business and what does that mean? Do I want to leave on Friday? Maybe I want to leave business but not transfer ownership. What does that mean for an owner? How much money, how much income do I want for the rest of my life and probably my spouse's life after I leave the business? After I've lost control of the business. How much income am I going to want to have for as long as we live? And who do I want to transfer the business to?
It's how much, when and to whom. Those are the three universal goals I think every owner thinks about.
What's interesting it kind of correlates, I always when I'm talking to individuals and owners, if you got time, financial stability and energy, you can slice and dice it any way you want but can you almost dive one layer deeper into that and explain the how all of these are correlated and when you pull one lever you might have to give up some parts of the other ones? I know that you probably, I know you do describe a lot of it in your book, can you explain on the high level how there's things that are give and take in each of these?
[00:10:00]There's a couple of things Ryan I can think of. Couple ways of explaining it. One is fairly brief and the other one goes to the heart of what is exit planning in our minds. Let me start with the brief one. The first one is let's say a business owner comes in to an advisor, comes in and talks to you because you're an exit planning advisor. And they say, "Well you know Ryan, I like to leave my business in four years. I'd like to have $250,000 year of income for the rest of my life and my wife's life after I leave the business. And I want to transfer it to my son who's in his sixth year of undergrad at that University of Minnesota with a double French poetry and English literature major. And and I'm going to want him to come in and take over my construction company."
Ryan Tansom:That's quite the picture.
There's quite the picture. But that's maybe exaggerating quite a bit but you get the idea that these goals that people have, that owners have often conflict with one another and that's one reason that owners often don't move forward with the exit planning process because they don't see a way to resolve that difficulty so the way not to confront it is to ignore it entirely and not do anything which of course just delays and compounds the problem. So that's one way of answering it.
[00:12:00]The other way really gets to the exit planning process the way that my company BEI trains advisors to use when they work with business owners. And we start out with understanding what the owner's resources are. There's, I'll just be very brief on this in general, the resources we have, the financial resources owners have, are their personal investments, it's the value of their business and it's the cashflow capability of the business. We need to know what that is today as the basis for future planning. And we need to know it with accuracy. So we're not, we have a tendency not to rely on the owner, we want to work with a financial planner, we want to work with somebody who has valuation experience to give us an idea of the value of the business and probably the CPA to give us an idea of what the current and projected cashflow is.
So we're looking to advisors for that information always. And that's again one of the hallmarks of our exit planning is that we're going to develop a team of advisors that are going to be facilitated and coordinated by an exit planning trained advisor.
[00:12:30]As that's going on, we also then want to work with the owner's goals, the three universal goals. When do I want to leave? How much money do I want to have? To whom do I want to leave the business? And there are a whole set of other aspirational goals that we can talk about at some point. Like maintaining the culture of the business and the legacy and benefiting the community, the employees and those goals actually often drive the pace of the exit.
Ryan Tansom:Sorry go ahead.
[00:13:30]Just to finish this off and see how this then fits in to how we do the exit plan. Once we know what the owner has, once we know what the owner wants then we figure out is there a gap? To go back to my earlier example, somebody wants to leave in four years, they want $250,000 income, they want to transfer the business to family, we know based on the resources they have today that they need to grow the capital that they'll need for the owners to retire by let's say $2 million in four years. Well that then starts to determine how the exit plan can be designed. Because we know if the business is worth $3 million today, in four years it needs to be worth 5 million. We have to grow the value by $2 million over the following four years. How do we do that? That's the rest of the exit plan.
Got it. I think it's a, you're spot on 'cause you're starting with what really matters. Just our personal experience as I eluded to right before we started the call was because we had a lack of time, we had to make sacrifices on some of our goals where I had personally helped turn around the business and I had hired a lot of employees and a lot of these people were my friends and I didn't want to necessarily watch them all get fired. So selling to a local competitor's a struggle because it didn't line up with my aspirational goals of legacy and watching out for my employees but we had to do that because of our time sacrifice and our financial stability that my dad's main goal was. It was, explain how when you're balancing these aspirational, universal goals into the financial picture, how are you navigating the conversations with owners as they're trying to essentially get a snapshot of a reality.
The first thing that, again what BEI is, we don't represent business owners. We only work with business advisors, lawyers and CPAs and financial planners and M&A people and so on. And we provide training to them and support for them so that's the approach we take so what we do then is we have our advisors first of all ask a lot of questions. The president of BEI right now is Elizabeth Mower, she's an attorney and an has her MBA. And she really developed a lot of the questioning techniques to use. And so what the first thing we really do, and this sounds like an off course, but what we help the owner do through questioning is to help the owner understand what he or she really, really wants and or needs to achieve as a result of transitioning out of ownership.
[00:17:00]Most owners in my experience, don't even know how to thoroughly think through all of the issues. So the first thing that an exit planning advisor does is just to help them get a very sound and fundamental basis of what it is they really want and need. Because the conflicts that you so well just talked about, happen all the time. I want financial security but I don't want to let my management go who I understand is holding back the growth to company to some extent. So how do we deal with that? So you have conversations. You might bring in other advisors but essentially this is a decision the owner wants to make and the last thing I'll do is to say that exit planning from our perspective is owner centric. So it's not motivated if I'm an M&A advisor and I'm doing exit planning, the goal is not to sell the business to a third party. It's to see what the owner wants to do and then design and implement a plan that it achieves the owner's goals. The owner's goals will change as time goes on. They can evolve.
[00:17:30]Okay so you struck a chord with me that I'm very passionate about. Which is it is owner centric. What I struggled with when we had our advisors in front of us and none of them were exit planners because I know the industry's evolving so fast, but how do you, if you're these advisors, 'cause I'm seeing all these advisors getting certifications in the marketplace and I think it's just going to end up confusing the business owners and our listeners even more because there are, there's the base fact that these advisors only get paid the way they get paid. I might go get my exit planning certification but I still only make money if I sell the business. Or I only make money if I bill hours or do audits. How do you reconcile all that through your training of these advisors?
Our training is much, much more intensive and involved than any other training professional advisors and can get regarding exit planning, I believe, in the world. As a result of that through the usually hundreds of hours of training, it's usually a minimum of 120 to 150 hours of training just to understand the exit planning processes and the software that can be used to help create exit plans and things like that. As a result of being able to create, our members can create a written exit plan that lays out the owner's goals and aspirations, the resources they have, the gap, how they're going to grow business value and cashflow, how they're going to protect the business from business risk, how they're going to minimize income taxes upon a transfer of the business, how they're going to either sell it to a third party, sell it to an ESOP, sell it to management team or co-owner or give to the kids and what happens if they die too soon in all of this process.
[00:19:30]All of that needs a written exit plan, it's going to involve typically six to 10 advisors that need to be facilitated and coordinated by the trained exit planning advisor. All of that planning and all that implementation as evidenced through a written plan containing their recommendations of all these different advisors, our member charges a fee for.
Ryan Tansom:Got it.
[00:20:00]And that fee is enough money for the, and every advisor charges the way they want to. We have a fee schedule they can at least look at or a fee estimator I should say, not a fee schedule. So that fee that they charge for that is enough money so that if that's all they do, they're happy.
Ryan Tansom:Got it. So they're not quote unquote working for free to ultimately push them down the road to do whatever it is that is good for them.
[00:21:00]That's right. And hopefully it's good for the client as well but and that's one of the two obvious problems is that if I'm an advisor and the only way to make money is by doing Y, I'm going to find a way for your business owner to do Y. That's one thing. But the other problem that it raises is that all you're going to do business owner is Y. All these other opportunities, different exit paths, different strategies involving different professions, I'm not going to write, go into that because I probably don't know anything about it. And secondly it detracts from my ability to make money off of selling you Y. So it's a very narrow scope. I think it ends up being in disservice to the business owner.
[00:21:30]If a business owner goes through one of these plans or if they're doing a correctly, just for our listeners, what kind of time are they looking at as far as doing the planning, executing the planning and working on the transition plan that they have? What are the biggest misperceptions or the epiphanies that they have as they work that do you think?
[00:22:30]Well the first, the planning would begin with understanding the very first parts. Almost like fact gathering. What are your resources? What do you want to accomplish? What's the gap? That gives us the base of knowledge, fact based knowledge of how to then design the exit plan. It could be that the owner says, "You know this sounds great Ryan but all I, what I've got to do right now is I've got to find a way to keep my key employees in the company so that they don't leave and go to a competitor." Or, "I want to start transferring ownership to my daughter because she is key to company and if I don't do that she's going to leave." The exit plan might be fairly narrow in what we're doing initially. It might be just to solve that one major urgent issue the owner has. In our lingo we call that, it's basically a component plan. It's some parts of the overall exit plan process that are just going to addressed first. So that's one way of looking at it.
[00:23:30]And then we can add other components. Maybe the estate planning, the business continuity planning at a later date because we'll have the base knowledge of what do you want? What do you have? And what's the gap? But that, if it's going to be a more complete exit plan where we're looking all the different steps not third step of growing and preserving value and minimizing taxes as well as the exit path and so on. Usually the planning process takes three to six months to get everything done. It can be done more quickly, it can take longer. A lot of the delay is often caused by just getting the initial information and things like that. Once we have that information it can go fairly quickly if the owner has a pretty good idea of what she wants to accomplish. It can go three to six months.
[00:24:30]But then even as we're doing this, this exit plan, which again is a roadmap. The owner now knows who has to do what by when to accomplish the owner's goals. So there's dozens and dozens of action steps all with deadlines and what advisor is going to do what by when type of thing. That's what this exit plan is. We know what has to happen. Well the second part then is making it happen. That might be six months to a year if the business is ready to be sold, it has the value and the owner's ready to leave. That could happen as fast as six months or a year. Most businesses are not ready to be exited even though the owner may be ready to leave. That might take five or 10 years. I like to tell for most inside transfers, which is selling to anybody other than a third party who has cash, it's a multi year implementation process and transfer of ownership over time process. But the bottom line is is the plan is designed to achieve the owner's goals.
What is some of the biggest, if an owner is going through this 'cause it's probably the first time he's ever or she's ever looked at the whole picture in one conversation. What are some of the biggest epiphanies that people have that you see?
[00:25:30]That a good question. It's so individualized. I think one of the big realizations that owners have is that the business is not worth nearly as much as they thought it was. Or they're not going to be able to sell it o an outside third party and get as much cash net after taxes and all their other expenses as they had thought they were. As a result that can prevent them from engaging in the planning process soon enough.
[00:26:00]The other big epiphany at the outset of the planning process is owners don't realize how much capital they're going to, investment capital they're going to need to replace the stream of income they were receiving as a successful business owner. I actually write a lot of about this, I've got a blog, I've got three blogs that I write and podcasts that I give. A lot of what I'm doing right now is talking about this.
[00:27:00]Let me give you quick example of an article I just wrote. Business owner has a business, it's worth let's say $2.5 million and so to get the business to be worth $2.5 million the EBITDA, the earnings before interest taxes, depreciation, amortization or the cashflow or maybe the pretax profits, there's a number of different ways to look at, that would be roughly 500 to $600,000 a year. Plus most owners with a business that valuable are taking 250 to $400,000 a year out of the business in terms of compensation and perks. That's a pretty typical business. So the owner right now is getting somewhere between $750,000 and a million dollars a year. They may not be taking all of that out of the company, they may to leave a lot of the EBITDA in the company to grow it but it's available to them.
[00:28:00]Now the owner sells the business. Let's just assume for simplicity there's no other assets that the owner has. This I 100% the owner's assets which I realize is not 100% accurate. Now the owner sells his business or her business for $2.5 million and they pay $500,000 in capital gains taxes and costs of sale and so on which would probably be, it actually probably be a higher number than that. But the owner nets $2 million. Well I believe Ryan you are a financial planner. Is that correct?
Ryan Tansom:Yep, that's part of our business.
John Brown:So you have a owner who says I now have $2 million, this money has to last for the rest of my life and my wife's life, we're both age 60 and in good health. What kind of withdrawal rate Ryan, would you suggest they consider?
Ryan Tansom:They got 80 grand coming out there at a 4% withdrawal.
[00:28:30]Yeah, and that's right in the ballpark of everything I'm hearing from all of our financial advisors. You had an owner who was taking out $250 to 400,000 in compensation, had another $500,000 available and now Ryan, you're telling him he can rely on $80,000 for the rest of his life?
Ryan Tansom:Yeah, right. Those boats and the cars and the cabins and all that fun stuff and the trips ...
John Brown:Well that my definition of an epiphany.
I think we had our own unfortunate epiphany when my dad and I, when I was saying to you, when we're not able to participate in that rollout because it was like, oh my gosh, we've got the business that's worth nothing but we were, we had some really cool stuff. We had some good lifestyle but we didn't have the sustainable pie chart that kicks off cash to maintain that.
[00:30:00]That's right. And that's, there's lots of reasons for that. One is the fact that generally speaking, bond rates are very low, the stock market over the last 15 or 20 years actually hasn't grown very much. Right now it's growing but six or seven years ago was growing in the wrong direction. So you take the, not the stagnant economy but the economy that's unlikely to grow very rapidly for a long time and you contrast that then with the multiples one can achieve when you sell a closely held business versus what the stock market is doing. And you have this huge disparity in income.
[00:31:00]So what's necessary to bridge that gap is for owners to start working right now, even if they're not thinking of leaving the business for five or 10 years and really understand what their lifestyle is that they want to have after they leave the business. Which for most owners and again in our experience is to just simply maintain what they're doing now, if they have a nice lifestyle now, most owners want to maintain that lifestyle so we have to understand what that is, we have to understand how much capital we're going to need from the business, both in the sale proceeds as well as cashflow and other things and look at what our personal investments are and we're going to have to design and execute a transition plan, an exit plan to accomplish this goal of accumulating sufficient capital, whatever that is. And it's different for every person. That's what takes, as I mentioned earlier, often five or 10 years.
[00:31:30]I think you got to the core of it perfectly. One of the things that we struggle with when we had the six yearsish that we were trying to figure out how to make our company worth more money. I think that if you can elaborate on how, 'cause there's these value drivers, in our practice we used John Warlow's value building system where there's knowing why the business is going to be worth something to someone else. And it's not just driving revenue and reducing cost because there's a lot of different factors that actually make your business worth something to bridge that gap. To be aware of those things, can you elaborate on some of the tools or the understanding in your practice on how they can understand what those are?
[00:32:30]Sure. We have something we call value drivers and we glean those value drivers from working with private equity funds and asking those people what do you look for when you're considering the per acquisition of a closely held business? So those value drivers, I think we have a lot of detail on them, but they're basically the same wherever you go. It's things like recurring cashflow, increasing cashflow, great systems and operations, a great management team and there's a variety of other value drivers.
In our system our members ask questions to ferret out which value drivers are stronger and which value drivers may need work and again our members aren't experts on this, they call on business consultants and other people as part of the team to help determine what that is. 'Cause they typically aren't going to have a great understanding themselves. No more than the owner.
[00:34:00]But if I, we back up from value drivers into what I think are the two biggest factors that either allow a business to grow rapidly or stagnate the business. It is the owner's role in the business and the capability of the management team. What we have a concept that we call transferrable value. What that means is that when you want to transfer ownership, I don't care to whom or to what, you'll get more value for your business if the business, if you the owner can leave the business today with minimal disruption to its future cashflow. That is our definition of transferable value. That the owner no longer is essential or meaningful to the ongoing operation and production of cashflow of the company.
For many businesses the owner at some point who was instrumental in starting the business and helping it grow but they've reached the Peter principle, they can't grow it any more by themselves even though they're working harder than ever. They're not letting go of the reins of authority and they're not delegating enough. So that's one issue that we work with.
[00:35:00]The other is the management team frankly. We see businesses all of the time where there was good growth for five or 10 or maybe even 15 years and then the business has more or less stagnated. Once we do the, start the exit plan we realize, hey this business is gotta grow by 30% a year for the next four years to reach our goal. We can't have a business that's growing at 3% a year, what's going to have to change? Well the owner may have to change his or her role. But the management team we look at very closely in exit planning and we'll bring in experts if we need to, we have tools to evaluate this.
[00:35:30]What is their capability? Can we bring in somebody to train them to and educate them and support them to help grow the business? Or do we need to bring in a different management team? Maybe not fire the people who were working for the owner but move them into a less critical role 'cause the only way you can grow the business I'm convinced, most businesses unless you invented something, is that management has to able to grow the business at the rate the exit plan tells us it has to grow. And the owner has to cooperate in that process by changing his or her role. So we look a lot at that.
[00:36:00]When I think it's so important just even knowing what you just said because there is, the alternative that I've heard so many times in the past, is go back to your example of I need an extra $2 million for my company to maintain my situation. Well I'm just going to keep my business for the next two years and then I've got more money than I would've been offered today. Your alternative is just to keep it for an X amount of years, accumulate the cash and now you've just ran the scenario but there's actually a way to drive the value instead of just staying as is. I think there's just knowing that there's a way out.
Yeah, and I think that a good point. I think that is the thinking of a lot of owners. And I'd break that down into maybe a couple of different ways. One is to do exactly that, just keep going. The other would be, I'm not sure I want to leave my business right away, I'm content to continue to own it but I could get a lot more, we suggest this to owners, you could enjoy your business a lot more if you would bring in a capable management team that you still oversee, that you still are the strategic thinker in many ways and make sure that the mission of the business, the values of the business and the direction of the business continue as you would want it to go but you're not in control of a lot of the details. And I think that's what tires business owners out. They get tired of doing the same thing for 15 or 20 years. And we have a way to say, hey you don't have to do that.
[00:38:00]You can bring in a management team that has more experience, we call it next level management. This might be a management team, if you have a $10 million company, that you recruit from a $50 million company and maybe in the same competitive sector or not but they're going to have ideas, contacts, relationships that the smaller company will never have. And they can take this business to the next level. Course that then brings in the whole issue of how do we motivate them? How do we keep them? Is it with stock? Is it with cash? Is it some combination? But that's what exit planning is all about. Now it really gets fun for the owner.
[00:38:30]I love what you said and I completely agree 'cause that's what actually was part of things that changed our business around. I think the way that you and people in the industry are starting to break this down which I think is fantastic is if it's five years that you need to grow at 30% and you've an idea of how much you're going to increase your business, it's one stock that you're moving the needle. 'Cause I think the challenge is when you don't realize that you're trying to drive that end value, all you're looking at is cashflow.
[00:39:00]So for us we had an $80,000 controller that was not intelligent. And we had, I was in the middle of ripping and replacing our accounting package and we had a lot of inventory, a lot of SKUs, a lot of different moving parts and you quickly realize how incapable they are. But to go hire a $150,000 CFO and pay 50 grand for a recruiting fee and then also replace. We've probably added quarter million dollars to the payroll just in finance and so to look where that return comes from is so important because otherwise why would you go hire the next level management team?
[00:40:00]Absolutely. Peter Drucker who's the most well known and most respect management consultant probably in the history of management consulting, is a very, very wise guy. I was reading one of his books and he made this statement that it's important for entrepreneurial business owners, our clients to hire top flight management before you can afford them. Which is just what you told me you did. And his point and it's to both of our points is you've got to do this. You have to make this change. If you're not going to change and you're management team is not going to change and you're not growing at the pace you have to grow at, what are you going to do?
[00:40:30]When you get what you pay for. Sounds really, it's people, but you do get what you pay for. When I was building out the IT services, I was given a budget by the one and only my father of how we wanted to go about doing this because we were diversifying our service et cetera. And it was like 75 grand to hire a CIO for helping me build out the IT service. Well guess what? You can't hire a CIO at that. And so went two years lost opportunity and a bunch of expenses before we finally went to a recruiting firm and got an absolute rockstar and lo and behold three months later we won the Minnesota Wilds IT Services. There's, you can see the benefit but man did that hurt when we went and wrote that check.
Yeah, but it's, and what a written exit plan will do, had you had one, is you would know how much next year does this, does the revenue have to increase, does the profitability have to increase? How are we going to do that? Well we're going to bring in a management team, this would be the solution you guys did. And we're going to create an incentive package that provides the management team, maybe it's a salesperson, head of the sales department, whatever, with the amount, with a bonus either in cash or stock that will motivate this person to reach the level of performance and exceed it hopefully, the company has to have by the end of this next year. And we will do that for each of the next several years until we've achieved the value we need to achieve.
All of this internal planning for growth and protecting the business, all of that is going to center around what business owner you have to accomplish to leave the business on your terms.
So then how do you reverse back in industry variables, market variables et cetera? If you go back to your, the example we've been using of 30% a year for five years. What if you're in the video rental business? How do you adjust the asset gap with the market and the business and the capabilities and the financials of the funding behind, the capital structure behind the business like banking et cetera? How do you align all those things?
I don't think the exit planner does that. 'Cause we just aren't going to have the industry knowledge to do that. We would say that's something the owner and the owner's management team has to figure out. Because somebody who's a lawyer in an exit planning for example, or financial planner who does exit planning, we're not going to know the details of any particular business. We will know the process that has to be used. We can line out the steps that have to occur and when they have to occur and who's going to be in charge of it. All of those things you ask, those would all be ownership or management questions. It may be that we bring in a management consultant who would have knowledge and be part of the team.
Ryan Tansom:Or leverage the trade association or something. 'Cause every industry's got benchmarks of how fast it's growing et cetera. So you can, and that's really the job of being an owner.
Right. And benchmarking is good. It's going to tell you what you have to do, it's not going to tell how to do it. And again so we have a lot of business consultants who are BEI members and because that's how they can see that as their contribution and they can be really important. And a lot of really well-managed companies that are growing quickly use business consultants in sort of a niche area to help them with the IT or to help them with a new operating system that incorporates certain aspects of the business that they don't quite know how to do that.
It's in the long run, it's a lot less expensive to, as you're right, to go out and hire this, what we call, this next level of professionals. It might be your CPA, it might be your lawyer, it might be your CFO. But you gotta really have the right people if you're going to drive the business forward as fast as it's gotta go.
[00:44:30]Well John I know, I'm conscious of time here and I'm assuming you and I could go on for a long, long time. So let's, if there's one thing you want to reemphasize on all the topics we covered, would there be one thing you want to reiterate for our listeners?
[00:45:00]What I would comment on is we just finished our 2016 business owners surveys and we haven't completed the report, we just got the survey results and it indicates that 80% of owners would like to leave the business within the next 10 years. About 50 or 60% of those would like to leave in three to 10 years and about a third would like to leave within the next three years. So owners of conscious of this. But also ask a question, if you could leave the business today and have financial security, would you leave the business? 75% said yes.
Ryan Tansom:Oh my gosh.
Yeah. This we had, we interviewed several hundred, we had several hundred responses in this survey. So the margin of error is I think a plus or minus 6%. So what this tells me is that owners are thinking about leaving, almost all of us want to leave in the next 10 years and most of us would leave right now if we had financial security. And the other interesting statistic is that 80% of the owners realized that the best way for them to leave the business on their terms was by understanding all the steps that they need to do to plan and then to act, which we would call an exit plan. But only 17% have done so.
[00:47:00]If owners want to leave the business on their terms they have to basically take the next step which is to contact somebody who has, is familiar and experienced in this whole exit planning process and your point Ryan, everybody can call themselves an exit planner today so talk to your current advisors, business owners, see who they would recommend. Do research online, talk to Ryan and you will. But do your research. Find out the people have the best process and the most experience and the most tools to help you business owner exit the business when you want, for the money you need and to the person you choose.
Ryan Tansom:John, thank you so much for coming on. If there's a way that our listeners can get in touch with you, what would it be?
[00:47:30]Well the first thing I would suggest is to just go to our website, exitplanning.com and take a look at the resources available, get a better understanding of what exit planning is. We have newsletters, we have whitepapers, we have books, we have, you can contact various BEI members. We'll have a BEI member wherever you are business owner in the United States or Canada most likely. And go from there. But don't delay, I think time is marching on and most business owners aren't.
Ryan Tansom:John thanks so much for coming on.
John Brown:Thank you Ryan it was a pleasure.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.