Podcast

How to Establish Your Business Exit Plan―with Randy Long

By , July 26, 2021

Randy Long, CEO and Founder of Long Business Advisors and author of Bulletproof Your Exit, shares the importance of having a business exit plan in place.

One of the most important things to know when you enter any building is where the exit is. The same should be said for your business. It’s best to have a business exit plan in place because you never know what could happen and when you might need it. Joining host Meny Hoffman is Randy Long, CEO and Founder of Long Business Advisors (BraveHeart Business). He is also the author of The BraveHeart Exit: 7 Steps To Your Family Business Legacy and, more recently, Bulletproof Your Exit: How to Prepare Your Business and Your Family for a Successful Business Exit. Randy discusses why and how you should already be planning for contingencies for you and your company. It’s never too early to start, so tune in and find out what you should already be doing for your business.

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How to Establish Your Business Exit Plan―with Randy Long

Our guest is Randy LongRandy is the CEO of Long Business Advisors and the author of two books, The Braveheart Exit: 7 Steps to Your Family Business Legacy and Bulletproof Your Exit. His unique perspective, built on 30 plus years of experience as a Lawyer and a Wealth Manager, enables him to help business owners during the sensitive and crucial time of transitioning out of, and/or selling their business.

In our interview, Randy and I discuss the appropriate time to start creating an exit plan, the importance of scaling your business so that it can eventually function without you, and how to prepare for an exit that will bring you the results you’re looking for. Like Randy says, nobody knows exactly how they’ll exit their business, but we do know how to prepare for smooth transitions, and the sooner the better. Without further ado, here is my interview.

Randy, thank you so much for joining me on the Let’s Talk Business show.

It is so good to be here. Thank you for inviting me.

One of the beauties of this show is that when I find like-minded individuals, I have them on the show and at the end of the show, I always ask them, “Who else would be a great fit for the show?” They would say, “You know who I want to connect you with?” It’s all about broadening your network. You never know where these conversations lead. That’s why we call it Let’s Talk Business because everything starts with a good conversation. I’m happy that we got introduced by a former guest on the show. I always appreciate it when guests introduce me to other guests as well. Let’s get into the conversation with your background in Law and Wealth Management. Tell us a little bit about how you got into the BraveHeart Business Consulting Agency and what’s it all about.

When I was growing up, I worked for many entrepreneurs. I learned to appreciate who the people were and the risks that they took, and the lifestyle they had. The guys that signed the checks, it’s a different world than the rest of the world lives with. I enjoyed that. I decided I was going to serve those people in my career. The BraveHeart piece of it comes in for me to base on how I’ve seen the growth of America. I feel like one of the major pieces upon, which America grew was the entrepreneurs that came from all these other places in the world. They had the ability to go into business for themselves and they made the greatest economic engine in the world. I celebrate that. I love that part of it.

In my undergrad, I did a Business Finance degree with a focus on Personal Finance. After school, I went to work for a Wall Street firm for a couple of years. From there, I opened my shop, an investment advisory business in California. After a couple of years of practicing, I realized that I wasn’t as smart as I thought I was. There were a lot of things that I felt like I needed to know to be able to give a broader and deeper advice level to my clients and to serve them better. I went to law school. I actually went at night, so I could continue to work in my practice during the day. The law practice side grew out of the investment advisory side interestingly. I was the first person to own and run in California, both a law firm and an investment advisory firm. I ran that for 30 years. Half of the building was with different addresses, phone numbers, employees and professionals, was an investment advisory firm. The other half of it was a law firm with other lawyers and support people. I owned and worked in both, which is fairly rare.

Bulletproof Your Exit: How to Prepare Your Business and Your Family for a Successful Exit

Being a CEO of a brand-new marketing agency, I want to ask you about how the name BraveHeart came upon you.

First of all, a couple of points, I did a historical tour through Scotland and I had already seen the Braveheart movie, which I loved. My family background is Scot-Irish-English. I just did that tour. I fell in love with the story and the courage that this guy exhibit William Wallace. We were at a place in the desert in Las Vegas and we were having this discussion about branding. I was getting ready to write a book. I was trying to come up with a way to identify that we work with independent-minded, freedom, loving, all these kinds of things. Over dinner, we came up with the idea. Our first book was called The Braveheart Exit. My second book, of course, is Bulletproof Your Exit. The BraveHeart piece came out of that history, plus my love of the movie itself, together with the love of the business owner me, seeing them as brave.

I want to dive in a little bit more to the topic that you discussed in your books and when you work with your clients. Sometimes, entrepreneurs by nature, are hustling and they don’t want to think about exiting. You go into the details of why it’s important to think about the exit. I want to elaborate on that. We live in a world once upon a time, the past generation of business owners. They were working harder and the goal was to build some wealth and ultimately leave something for their kids and grandkids to come into the family-owned business that changed a lot in the tech business. Changed a lot now. We see a huge influx when they’re speaking about Amazon sellers, FBA sellers so to speak. Many of them are just building it to sell. We see a lot of change in that space. Talk to us a little bit more about the mindset of that and how much you are dealing with that on a day-to-day basis as you’re growing the company with that mindset of an exit.

First of all, sometimes we’ll work with startups too. The important part is that the earlier you focus on the exit, the better your outcomes tend to be. If you can do that at formation, that’s great. Knowing what your exit goals are, gives you some direction on how you build the company’s structure so you don’t make mistakes at the beginning, which will end up hampering you to get started well. As an example of that, we worked with a company that was a SaaS company, a startup. It was in its third year and going well but there was a conflict. There was a 50/50 ownership between the two owners. One of them was absent. AWOL, without leave, not doing much, not providing much. The other guy was working himself to death.

Doing all the sales, the software, he ran the software team. He was an animal. He came to see us in a super weak position because the way the shareholder agreement between them was drafted, was a nightmare for him to try to run the company and/or to try to get this guy out. Now, fortunately, this guy had a conscience because they brought us in. We talked to both of them, negotiated, created some performance options that he had to meet. He agreed to those and when he didn’t, it triggered the option for us to buy his interest out. That company is super growing and doing well. The owner is so excited not to have the dead weight of the original guy. Foundational pieces are important about all of this.

Thinking about your decision about an exit, one of the first and main decisions about an exit is not just when you want to exit but who and how you want to exit. In other words, is this the transition to the next generation? Is it a sale to the next generation? Is it a sale to an insider, an employee, a stakeholder or is it preparing for third-party sale? I always like to tell my clients that ideally, even though they may have a predetermined idea of where they want it to go and how they want it to go. I still like them to prepare the exit as though we’re going for a third-party sale. We want to be ready. I have one now that was supposed to be an inside sale that we’re pivoting to an outside third-party sale. All the work that we’ve done makes the company ready to go for a third-party sale. The due diligence, as you well know on a third-party sale, is substantially greater than it would be to a sale to an insider. Identifying who you want to sell to, preparing for it, as though it’s going to be a third-party sale anyway. Those are super important pieces.

The earlier you focus on the exit, the better your outcomes. Click To Tweet

The other thing is on the personal side because exits are always personal. Too often, in this exit planning world, the focus is narrow on how well do we do the sale. Did we prepare well? Did we sell well? How did we do? The backside of it has to do with the fact that these are real people and the sale impacts them in particular ways. One of the things we like to see is for them to understand upfront what their resources are. In other words, their net worth, their ability to live out of their portfolio after the sale and what their expenses are. For instance, they get paid by the company but once they sell, those things that were previously deductible to them, aren’t deductible anymore. They don’t get those benefits. They have to pay for this with out-of-pocket money. Doing the real work on understanding how much do we need to sell for in order to live this life that we intend to live after the sale.

We see way too many people who think they’ve sold well until after the sale occurred and realized they didn’t price in the amount of taxes, as well as they thought. They thought their expenses would go down but instead, they tend to go up by 35%, something like that. They didn’t see that coming. All of a sudden, what looked like a broad horizon for them to live and live well, became a lot more about watching the dollars that you have to spend because you underestimated the cost of living. The third thing that has to do with living out of a portfolio is different. It’s a different skillset or a different mindset than it is for the family to live out of a business that has revenues, income and benefits that aren’t there. It’s a different world. Trying to prepare the owners for that move and what it’s going to feel like, what it’s going to look like after the exit is important to do that before you approached the exit. I’ll put it that way. That gives us a good sense of where we need to go, how we need to get there and what our goals should be, because we may be underestimating.

Let me ask you a couple of follow-up questions and dive deeper a little bit into the conversation. In your opinion, when is it too early to start thinking about an exit?

You should be thinking about your exit when you start the company, honestly. Apart from that, if you are already in it, things are set, you’ve been running the business for a while. The truth is nobody knows when they’re going to exit. Part of our work is what we call the proactive side and the contingency side. That is, I don’t know if my owners are going to exit their business by death, third-party sale, inside sale or whatever the case is. I’ve even had one that was injured and could never go back to work. The exits aren’t always planned.

We try to plan but we also want to plan for the contingency side of an exit. As early as you can get the work started, it makes a lot of sense. A lot of business owners are going to have one business in their life. They’re going to have one exit. No matter how the exit. They need to make sure the wealth they’ve created for their family inside of this business is realized for the family, either by virtue of a sale. Even if you were to die, you still want to take care of your family. You still want to have a plan in place if things don’t go as well as you planned. We have a lot of people come to us, that their plan to exit is 7 to 10 years.

I would say it’s more common for people to hire us within 2 to 3 years of when they think their exit is going to happen. We have some clients that we’ve worked with. We started doing exit planning in a transition for a fairly large company we work with that was being transferred from 2nd generation to 3rd generation management. We worked on that transition and did that. Did some acquisitions, built a new plant, did a bunch of things. I’m still working with that family 8.5 years later. Things are still going well and there’s still complexity and issues. Everybody else doesn’t grow that fast, obviously, but it’s a good thing to get council as early as you can get it. People that tend to pay for good counsel tend to do better in the long run across the board.

For somebody reading to this and saying, “I’ve never thought about it that way. I was hustling, building my company one step at a time. Now that I’m reading to this, I don’t know at which point I would want to sell,” what are the practical pointers of what people could start doing, managing or monitoring, whatever it is that will help them when they do decide to sell?

Business Exit Plan: Knowing your exit goals gives you some direction on how you build the company’s structure, so you don’t make mistakes at the beginning.

 

Sometimes, it has to do with the time when the owner thinks they want to be out. Other times, you have to marry the desire for an owner to get out earlier than he wants to be out. You need to start working towards that. The last thing you want to do is take on somebody who’s emotionally done. They’re not capable of making change because they want to be out. That is a bad place for an owner to get. We want them ahead of reaching that point because we want their head in the game for the changes that need to be made. That’s one part of it. What was the other?

What are the practical pointers if somebody wants to start planning or having those pieces in place when an exit comes upon or they want to make a decision? They shouldn’t say, “I don’t have my act together,” so to speak.

The business cycle comes into play there, too. We like when both the company and the business are in the ascendancy, especially the M&A cycle, which is where the flow of funds available for businesses to be bought out if you will. There is an ebb and flow of that M&A cycle, the funding available. I’ve lived through a number of these cycles in my career. Ideally, you sell in an upcycle of the economy, the M&A cycle and your business ascendancy. You don’t want to decide to sell when your business has just had its worst year. It’s a practical decision between what makes sense for the family and economically based on where we are on all of those cycles. Those things all come into play and they’re real.

Obviously, you work with a lot of those companies. Different companies that maybe are family-owned and operated. Maybe there are multiple generations in the company, multiple partners versus a standalone owner of a company.

First of all, let me just say that whenever we work with a family, it’s the business that always hires us. We’re not being hired by a particular family member. We’re being hired by the business. From the business, we come in from the top of the business and we look at all the major stakeholders in the company. We interviewed them all, what it is that they all want, what do they think should happen? We get everybody’s opinion and we start to try to focus on making a transition that works within the family that also keeps the family together because so far, in all of the transitions that we have done, the family comes out stronger, not weaker. We’re trying to look ahead and deal with conflicts that we can see that are going to occur at some point in the future because of the way the structure is done. Let’s say that there’s an owner, that’s got a son and a daughter. The son works in the business and the daughter doesn’t. The parents have done what they thought was right. They gave the business interest to the son and daughter, they gave other assets. That was okay when they started it.

I had one similar to this where we came in about seven years after that estate plan was done. When we got there, we realized that based on the plan they had in place, if the parents were to die, the son would be worth about 95% more than the daughter. That’s because the company grew exponentially. The estate planning didn’t keep up with it. When I explained that to the people and I said, “At Thanksgiving dinner, the year after you’re both deceased, your daughter and your son are having dinner together, are they both happy with the way things have turned out? The way you left things and prepared them?” The mother broke into tears. She just cried.

She said, “I would never do that to our daughter.” I said, “I know you wouldn’t do it intentionally but that’s what planning is all about. Thinking through the family issues to make sure conflicts don’t unnecessarily arise.” Unfortunately, I’m a lawyer as a background, too. I don’t want to beat the lawyers up too bad. Too often, whenever lawyers are brought in and everybody gets a lawyer and everybody goes to their corner and the conflict occurs. The money and emotions rise. It gets expensive. Nobody’s happy. Everybody’s at war when they’re finished. I despise that outcome. We like to come in before there are any lawyers in play to organize and negotiate within the families, and then help prepare to transition in a way that is meaningful and works for the family overall.

It’s these assumptions that people make that get them in trouble. Click To Tweet

Not equality because equality is seldom right. In a distribution, let’s say of an estate, it’s more what is right based on the contributions of the kids. As an example, a kid that works inside of the business and the other kid that doesn’t work in the business. Should they both equally inherit? When one has given their career to the business and the other one is a doctor in San Francisco or something. I see crazy things like this. We don’t want the kid that’s been running the business for the last 20 or 30 years to end up working for the kids that have never worked in the business. That happens. If there are three kids and everything’s left equally, all of a sudden, the kids are now working for their siblings. I’ve seen this stuff over and over again. It’s getting ahead of that. When it’s a family transition, you have to look ahead. Not just in the transition itself, to work for the business side but also to make sure that the family stays intact and everybody wins.

What would you say is the most pivotal moment when somebody decides to sell and they’re planning to exit and they find out at that point, they’re not ready either they don’t have what the buyer wants or they’re not prepared to take themselves out of the business? What are the things that I think our readers would appreciate knowing, based on your real-life experience, arriving at that destination with people and think, “We’ve got to wait, there is an issue?”

One of the early ones that come up from my perspective is the time when the business owner realizes what their business is worth from a qualified evaluate market or whether it’s an M&A firm or an appraiser that knows the market value business very well. Too often, business owners think that businesses are sold on average. I see this a lot. My industry trades at four times EBITDA and so my business is worth X. I did a talk one time at Genius Network about how I could take that same set of circumstances and use it over three different scenarios and arrive at massively different valuations. As an example and this is a simple one.

If the owner has the same EBITDA as another guy but the one owner runs the company. He is the man and everything is going through him and to him. That company is not worth as much money as a company that is run solely by a professional management team when the business owner is just the chairman of the board but doesn’t work in the day-to-day businesses. That is a simple example but multiple differentiation pieces that helps determine what a company is worth relative to its peers. I don’t like averages. That’s one mistake business owners tend to make.

What was the second one? You were saying another thing that business owners tend to make a mistake.

Business owner’s mistakes are preparing for their exit. Sometimes if it’s going to be an inside sale, they will assume that either a child or a key employee wants the business. You’d be surprised how many times the business owner has been delaying his preparation for exit. He thinks it’s going to be an easy exit because his son or his key employee is going to buy him out. Honestly, more often than not, the people don’t want it. Too often, it’s these assumptions that people make that get them in trouble. They assume that their businesses are worth X or that this company that is in their industry that has maybe a strategic buyer possibly wants to buy them. They have in their head that they’re going to just offer it to them because they reached out to them at some point in the past. They think that they’ve got an automatic buyer but that goes bad. A lot of times, when there’s only one buyer at the table and they know it, you tend to get grinded down on price and time until the business owner’s worn out and wants to dump it. Running controlled auctions for third-party sales is an important thing. Nine times out of ten, that’s the way it should be done.

Speaking on that topic, let’s dive in a little bit more and understanding. There’s something that I speak a lot about on the show. My readers have heard it many times. The difference between growing and scaling a company. One of the main factors differences is when you’re scaling, you are basically creating processes and systems for the business to run without you. How much is that a factor when it comes to selling?

Business Exit Plan: Understanding what your company is worth and why it’s worth what it is, that’s the key part.

 

It is a massive factor. Any person or process that’s prohibits growth is in the way. In the world in which we live, if you’re not updating your technology and your processes, documenting things, building the team out to be able to accomplish these things, as much as possible leveraging software. The SaaS companies tend to bring higher multiples than typical manufacturing and all this kind of stuff. Building a business that has scalability or choosing one, if you’re starting from scratch. Software, as they say, is eating the world. That’s because it saves so much work and it’s scalable. It doesn’t require anywhere near as many man-hours to make money. Anything that you can do to improve your process is, streamline and document them, protect your IP. Your intellectual property.

We see too many people who think that they are going to sell. When you review their business model, you realize that the only thing needed to replace this business is just for somebody to throw a little bit of money at it. There’s nothing prohibiting anybody else to enter into that business. That whole idea about understanding what your company is worth and why it’s worth what it is, that’s the key part. Not what is your number. Why is it that your business is priced above what the industry might be or below and identifies those we call catalysts? Identifying those things that identify for you. What is going to make your company worth more, the things that you’re doing now that are making your company worthless because you’re not doing them well? As you mentioned, it’s a process of understanding your business from the inside out in order to identify places where you can improve your processes and create scalability. To the extent, your business can do that.

This has been great. Where could our readers learn more about what you do?

BraveHeartBusiness.com is one of those. You can google me, Randy Long, The Braveheart Exit. We have our most book, which came out in October 2020, is a Bulletproof Your Exit. Both of those are on Amazon. I’ve done a lot of podcasts and interviewed lots of people. If they google my name and put the BraveHeart Business or Long Business Advisors as our actual name. We do business under LongBusinessAdvisors.com will get you there also.

Let’s close with four rapid-fire questions. Are you ready?

Yes.

Number one, a book that changed your life.

You’ll probably laugh at this but I would say the Bible would be my first choice. It deals with so many subjects on many levels.

Number two, a piece of advice you got that you never forget.

Always do the best you can do.

Number three, anything you wish you could go back and do differently?

People that tend to pay for good counsel tend to do better in the long run across the board. Click To Tweet

Mostly, I would say some of my decisions. I’ve raised five kids. Some of the decisions I made earlier cost me some setbacks, but thank God I was able to recover all of those things pretty much. Sometimes, we get so focused on how busy we are and how important it is to make money when we’re young that we almost miss out on the things that matter.

Last and final question. What’s still on your bucket list to achieve?

I want to spend some time in Italy. I’ve been there before but I’d like to spend some extended time in Italy at some point in the future. I’m also getting ready to take a trip across the country, which I’m just driving. I want to go to as many places as I can. I’m looking forward to that.

Randy, thank you so much for joining us. I know your time is valuable. That is why in the name of our readers, we will forever be grateful for sharing some of your time with us.

Thank you for having me. I enjoyed it.

It’s my pleasure.

Links Mentioned:

About Randy Long

Randy is the CEO of Long Business Advisors, LLC and author of two books, “The BraveHeart Exit, 7 Steps to Creating Your Family Business Legacy” and “Bulletproof your Exit.”

His unique business perspective, built on 30+ years of experience as a lawyer and a wealth manager, enables him to help business owners build, transition, or sell their business, allowing them to create a family business legacy.

Meny Hoffman

Meny Hoffman

Meny Hoffman is the Chief Executive Officer of Ptex Group, an Inc. 500/5000-ranked marketing and business services firm headquartered in Brooklyn, NY.

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