With over 30 years of experience as a chief financial officer/controller, Stephen Taylor prides himself on having the expertise and knowledge to help businesses identify problem areas and then craft solutions to address them. In his current role as partner at B2B CFO Partners, a 26-year-old business advisory firm comprised of former CFOs, Taylor says the bulk of his practice is helping small to medium-sized business owners devise a sound plan on how to sell or exit their business. Recently, Taylor spoke to business writer Iris Dorbian about why he feels it’s imperative that business owners should plot their end scenario right when they launch their business instead of right before retirement.
ID: How do you advise small business owners who want to exit their business? What's the first thing you do?
ST: I start with all my clients asking questions. In the case of an exit, I ask them, "What is it you want to accomplish?" Then the questions go toward assessing their financial and mental readiness to exit. Depending on where they’re at, one exit option might be better suited to their circumstances than another.
ID: When do you think it’s the right time for a small business owner to exit? And conversely, when should they stay?
ST: That’s really up to the business owner. In some cases, the business owner is nearing retirement age but there are other instances where younger entrepreneurs—we call them serial entrepreneurs—build a business and then want to sell it to build another business.
I worked recently with a business owner, close to retirement, about 64 years old, who had a third generation family-owned business. He was just tired and wanted to exit. One thing that all of my partners do when we start working with a client is a "discovery analysis." It's a seller’s due diligence. This gives you a quick snapshot of where the business is. In this case, the client had a manufacturing business but he had some other activities, which included real estate and some rental properties that he owned. By the time I finished my discovery analysis, I concluded that for the five quarters of good data I was able to get, he had very minimal earnings before interest, taxes, depreciation and amortization [also known as EBITDA]. He would not be able to get the price for the business he needed to retire. I helped him get more liquidity into the business. But he will have to spend the next three to five years trying to get some revenue back into the business and some profit. So he was ready to retire, but it just couldn’t happen.
ID: That’s unfortunate.
ST: It is. Typically these business owners have an unrealistic expectation of what their business is worth. I mean, people tell them things about how to value their business and they tend to listen only to the things that assign the maximum value in their mind for it. We’re able to look at it more objectively and give them a realistic gauge. That’s why it’s best to start this process early. It can take three to five years of planning to do it right.
ST: His business was $7 million to $10 million in revenue. [The staff size was] probably 25 to 30 and probably half of those people were in the office doing various support functions.
ID: How often do you work with small businesses in this situation?
ST: I talk about exit strategies even when the business owner doesn’t bring it up. One of the things that happens a lot in a small business is that for the business owner, it becomes a job and not a business. And when he’s ready to retire, there’s really nothing there of value. If the business owner wants to build something of value, build a company—that’s one thing. But if he’s just in it for a job, he’s not going to have anything of value when he wants to exit.
ID: Based on your experience and insight, what would be your tips to small businesses owners seeking an exit strategy? What should they do and what should they not do?
ST: First of all, it takes a lot of planning obviously. One thing that a lot of small business owners do is run their businesses for tax efficiency and they take advantage of charging whatever they can for the business to save on their income taxes. It’s perfectly fine and legal to do that, but it creates a problem. Buyers will typically look back at the three years of EBITDA. It is important for a business owner to do everything possible to maximize EBITDA at least three years prior to an exit. Some business owners continue to run their business for tax efficiency but that diminishes EBITDA and the perceived value of the company. If you know you’re going to exit the business in three years, you should start managing to maximize profits and not minimize taxes.
ID: Do you have another example with a small business client that you can share that illustrates one of your tips?
ST: Another one that I was indirectly involved with was when I helped a partner. In this case, the owner wanted to retire but was willing to stay on temporarily. We were able to engineer a plan whereby the manager, chief operating officer, and a group of senior managers were able to buy the business out over time with the seller taking a [promissory] note. That can be done when the business owner has done a good job of building his management team. If you have a strong senior management team, they’re always good candidates to acquire the business.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified professional for advice specific to your business.