Preparing Your Business for a Successful Ownership Transition

About the Guest:

Mark Dorman is an expert in business succession and exit planning. He is affiliated with Succession Plus, an organization dedicated to helping business owners transition out of their businesses successfully. With experience in guiding businesses through value maximization and transition processes, Mark has become a trusted advisor to many business owners aiming to retire effectively. Mark also hosts the Finish Big Podcast.

Episode Summary:

In this episode of Chamber Amplified from the Findlay-Hancock County Chamber of Commerce, Doug Jenkins delves into a topic for business owners: the impending wave of retirements as baby boomers look to transition out of their businesses. Doug is joined by Mark Dorman from Succession Plus to explore how business owners can strategically plan for these transitions. 

Navigating the future of a business post-retirement requires careful planning. With over half of privately held businesses expected to change hands within the next decade, Mark emphasizes the importance of starting the succession planning process well in advance—ideally three to five years before the intended transition. This episode covers strategies to avoid pitfalls, such as business overvaluation and insufficient preparation for sale. More critically, it examines how to ensure businesses are appealing to potential buyers by reducing risks and optimizing value.

Key Takeaways:

• Long-Term Planning: Begin planning your business succession three to five years before you wish to retire to ensure a smooth transition.
• Business Valuation: Regularly assess your business's worth. Many business owners aren't aware of their business's current market value.
• Reducing Buyer Risk: To attract buyers, work on reducing the risks in your business profile by, for example, diversifying your customer base and reducing owner dependency.
• Maximizing Value: Apart from financial metrics, improving processes and minimizing operational risks can significantly increase business valuation.
• Key Employee Retention: Maintaining a strong leadership core is crucial for attracting potential buyers and ensuring continuity once the owner exits.

Resources:

• Mark Dorman Contact Information: Email Mark Dorman at mdorman@successionplus.com or visit www.succession.plus/us for more information about Succession Plus.
• Phone Contact: Reach Mark directly at 330-416-9271.

Music and sound effects obtained from https://www.zapsplat.com

Transcript

0:00:00 - (Doug Jenkins): Coming up next on Chamber Amplified.

0:00:02 - (Mark Dorman): So I ask our clients a lot, you know, what are your plans for, you know, growth over the next three to five years? And the answer I get is, you know, sell more. But they don't really have a system on how that's going to produce opportunities and necessarily a professional sales process in place.

0:00:20 - (Doug Jenkins): Welcome to the show. I'm Doug Jenkins from the Findlay Hancock County Chamber of Commerce. On each episode of Chamber Amplified, we're examining issues impacting the local business community. From employee recruitment, retention, marketing, IT issues. It's really anything that can be impacting your business. Our goal is to give our members tips each week on at least one way they can improve operations and thrive in the current business environment.

0:00:41 - (Doug Jenkins): I read an article a little while back about the coming wave of retirements from business owners, and it was interesting that the stats are really significant. Some indications show that over the next decade, about half of privately held businesses are going to change hands. That's a big, big number. And certainly in Findlay and Hancock county, we have a lot of businesses that could fall into this bucket.

0:01:01 - (Mark Dorman): So.

0:01:01 - (Doug Jenkins): So we want to make sure that, one, the businesses continue to thrive in that transition, and two, that the business owner is prepared for the transition. Today on the podcast, I'm joined by Mark Dorman of Succession Plus. He spent a lifetime helping business owners prepare for the day that they hang it up. And as you might have guessed, it's a bit of a process. You don't just one day wake up and say, I'm done. Well, you might, but it's probably not going to work out well for you. We're going to talk all about that, including the pitfalls to avoid, as well as some of the steps that you need to take if you're thinking about selling your business in the future.

0:01:32 - (Doug Jenkins): Thanks again for tuning in. Remember, if you're listening on Apple Podcasts or Spotify, you can rate and review the show. It really does help spread the word. Now, let's get into it. I always like having someone who has their own podcast on because they have sweet microphones as well. That always sound good. So I appreciate that part.

0:01:49 - (Mark Dorman): Nah, you got it.

0:01:51 - (Doug Jenkins): So one of the things we're really focused on right now is we know baby boomers are getting retired, ready to retire out of the workforce. We've talked a lot about that. But that also means baby boomers are retiring out of their business that they own. And that presents a whole different element of challenges, not only for those businesses, but for the communities that have a lot of those Retiring business owners.

0:02:14 - (Doug Jenkins): Mark, I guess we'll start off with this is one. If you're thinking about retiring from business ownership, it's probably something you gotta give a few years thought to before you walk away.

0:02:25 - (Mark Dorman): Well, without question. I mean, it's a great place to start. I mean, so, you know, the question is, you know, how soon should I start to work on a transition plan or a succession or exit plan, however you want to name it? Let me just take a step back because really, when you look at small business today, there's some incredible statistics. So the for the first time in US history, 50% of the businesses out there, private and family businesses, are owned by individuals over the age of 50 and 60% of those are looking to transition sometime in the next five years.

0:03:05 - (Mark Dorman): So there's really kind of a bell curve there that it focuses on the people that are 58 to maybe 70, if you will. And this issue is so important, particularly for counties like Hancock or where I reside in Medina county, because small and family businesses are really the lifeblood of any community. They produce 62% of the US gross domestic product. They employ 64% of the workforce out there and account for 78% of all the new job creation. So this is a very, very, very important topic.

0:03:43 - (Mark Dorman): How soon should you start? The sooner the better, obviously. That's a simple answer, but at least five years from your transition and at no less three years, a lot of business owners feel like they just kind of hit a spot and go, okay, I'm done. I'm going to look to transition my business. It's just not that easy. There's a lot of moving parts. And that's why working with professionals in this space are vitally important to a successful outcome.

0:04:07 - (Doug Jenkins): What are the pitfalls that rushing to that spot can lead to? Instead of selling out that three to five year, I imagine you set benchmarks when you do that of things that you need to have done. But if you try and rush it, there have got to be some pitfalls that you run into.

0:04:22 - (Mark Dorman): Yeah, without question. I mean, one, you. The biggest pitfall is you would just fail to transition your business successfully, period. And that happens to about 80% of small businesses in America. They don't transition because of lack of preparedness. I would say secondly, and nearly equally as important is they fail to maximize the value of their business upon transition. So there's just so much to unpack here. Doug, 98% of small business owners today don't know what the value of their business is.

0:04:55 - (Mark Dorman): And when I speak kind of around the state and throughout. If I asked you or your business owners if they knew the value of their IRA or their 401k, they probably would know it to the penny or at least to the nearest dollar. But their biggest asset, their private and family business, they don't understand what it's worth. So furthermore, they don't understand if that number is large enough to fund their retirement, if they're able to successfully transition it.

0:05:23 - (Mark Dorman): And lastly, what they need to do to fix it and work on it to maximize the value in that three to five year period.

0:05:31 - (Doug Jenkins): Do you find that they overvalue or undervalue or maybe they just don't have any where to start from in their, in their head when they look at the value of the business.

0:05:40 - (Mark Dorman): I think most people look at their business very subjectively and overvalue their business. By and large they'll say, hey, if Doug sold his business for X and I'm in a similar industry, mine must be worth more. Of course my business is better. So we use a lot of, I mean, I'm not speaking for my business, but I'm just talking in general. So they're not, you know, they're not objective enough on how a professional buyer would look at their business and they don't really understand what the value drivers are inside their business. So at Succession plus, what we seek to do first and foremost is let's identify what the current value of the business is.

0:06:18 - (Mark Dorman): Let's help the owner understand what he or she needs to successfully retire, what the sources of that, that income and wealth might be, and then really start to focus on if there's a value gap as we refer to it in their business. Let's identify what that gap is. Let's identify the low hanging fruit and try to drive the value up in that three to five year period as they're preparing to transition.

0:06:46 - (Doug Jenkins): When it comes to trying to close that value gap and add value to the business, what is that low hanging fruit? What does that look like?

0:06:53 - (Mark Dorman): Well, that's a great question. I mean, first and foremost I think that it takes a village to work on that. So you would be working not only with the owner, but their other advisors, their cpa, their cfo, their financial advisor, perhaps their attorney. Typically what we see some items that are oftentimes recurring in closing that value gap would be things like owner centricity. Right? The business only works because let's say, for example, Doug Jenkins is the magic and he's the straw that stirs the drink.

0:07:28 - (Mark Dorman): They could have too much customer Concentration, which represents too much risk for a buyer. So the need to diversify your customer base, the need for the owner to elevate themselves above the day to day operations so they have a transferable business and then believe it or not, certain things of just having a systemized, a systematic and professional sales process. Right. So I ask our clients a lot, you know, what are your plans for, you know, growth over the next three to five years? And the answer I get is, you know, sell more.

0:08:00 - (Mark Dorman): But they don't really have a system on how that's going to produce opportunities and necessarily a professional sales process in place.

0:08:08 - (Doug Jenkins): I want to focus on the owner centric business for a second because I think especially when you talk about baby boomers retiring out, this is a generation, they built these businesses from scratch. They want to be in the midst of the day to day because they help build it that way. That has drawbacks. As you start to transition towards retirement, what are the pitfalls there? I keep saying pitfalls. There's always one verbal crutch. I fall back on every podcast. We found ours for today.

0:08:35 - (Mark Dorman): Yeah, well, you know, first of all, there a lot of great businesses are owner centric, right. So that doesn't mean, you know, having an owner centric professional services, for example, accounting firms, law practices, financial services practices, sometimes they're so relationship focused that they are very, very difficult to transition. So that being said, I think the key in working on your business in this regard for transition is identifying that, recognizing it and planning around it.

0:09:06 - (Mark Dorman): Right. The pitfalls certainly are that if the owner gets hit by a bus or can't transfer those relationships, then that business is really not transferable at all and that owner will retire with little value being extracted from the value of their business. So in that. But we've, you know, we've had cases over the years where in that three to five year period you could bring in some fresh blood work on transitioning those relationships, making the owner less critically important to the day to day operations and increasing the odds for a successful outcome and transitioning the firm.

0:09:44 - (Doug Jenkins): So people's, a lot of people's timeline, maybe they think, well, I'm ready to sell time to look for a buyer. What you're saying is there are a lot of steps before you get to that. Let's look for a buyer. What point does that start to become something on the horizon that you have to start thinking about?

0:10:01 - (Mark Dorman): So first of all, you know, there's, there's. When you're looking for a buyer, you really have to understand that the Vast majority of businesses will not transition. Why? Because they're not prepared to do so. That's because the work hasn't been done to prepare the business to be attractive, to be less risky to a potential buyer, and we say potential buyer. Depending on the size of the enterprise, it could be another business owner that wants to acquire, acquire you for strategic purposes. It could be a private equity firm, it could be someone within your building, perhaps it's an esop, et cetera. But you have to identify the elements of risk that are within their, within one's business and then seek to eliminate or reduce those.

0:10:50 - (Mark Dorman): In doing so. That does two things. It makes the business kind of go to the top of the list of attractive, less risky businesses, much more. You know, those are great attributes to have when you're looking to sell your business and it makes it more valuable as well. So you get kind of a double, a double whammy there.

0:11:08 - (Doug Jenkins): You've walked several people through the process. Is there, I imagine there's some consternation in the beginning, but is there a peace of mind for some, someone who's ready to retire and move out of business ownership as they go through this process? Do you, do you see that with the people that you've worked with?

0:11:24 - (Mark Dorman): Yeah, I mean, it's without question. There is a lot of what I would say, emotional drag trying to get people to move forward with this process. Because, I mean, let's face it, as you get older, you're starting to, you know, look at Father Time and say, hey, you know, I can't believe that I'm 60 years old. How did that happen so quickly? Two, when you really look objectively at your business through the eyes of a professional buyer, you're going to see some things you might not like or want to see. Right? It's like stepping on the scale or looking in the mirror.

0:12:00 - (Mark Dorman): And you have to be comfortable to say, I recognize those, I'm going to fix those. Now. At our firm, what we do is called a dynamic revaluation, meaning that every 12 months in an engagement, we will revalue the business that we're working on. And on average, we're averaging about a 35% increase in the value of the enterprise after a 12 to 14 month period. So I say that not to pat ourselves on the back, but that once you have those positive results, then the owner gets really engaged and really excited to say, hey, look at the work that we're doing, look at the improvement we're making.

0:12:44 - (Mark Dorman): And I will also say this, that oftentimes you know, owners will say, well, if I sell more, if I increase my EBITDA or my net income, my business, that's the only way I can make my business more valuable. And the answer is, no, that's not the case. You can have what I call same store sales, so same revenue, same net operating income, or ebitda, but make your business less risky and in turn, maybe get another couple turns in your multiple to make it more attractive to a potential buyer. So there's a lot of ways to skin a cat.

0:13:15 - (Doug Jenkins): What are some of the ways that they can reduce that risk to a potential buyer?

0:13:20 - (Mark Dorman): Great question. So I would say one of the things, particularly in this economy coming out of the COVID years would be key employee retention. Right. So there's this. This piracy, this. This. This piracy of talent going on. It certainly went on during COVID First thing, a professional buyer is going to ask you, Doug, to tell me, you know, if you were going to sell your businesses. Tell me about your key employees. Tell me about your management team.

0:13:46 - (Mark Dorman): Are they. Are they in positions to. Do they have a kind of a ladder to equity to stay with me? Because if I buy your business, you're leaving, Doug, and I want your team to stay. So that would be something that we certainly focus on customer concentration. It could be, you know, just simple things like, you know, operations. You know, is, are you as efficient as possible? Are you. Do you have, as I mentioned earlier, a proven and methodical sales process that you could show people, hey, if you buy my business, here's where you could take it.

0:14:22 - (Mark Dorman): I'm. I'm unwilling to stay on for that long because maybe I'm getting a little bit tired. But a new, fresher breath, air in the room executes the plan that you've. You've laid out for them. And those are extremely, extremely attractive levers to pull.

0:14:37 - (Doug Jenkins): That's a, That's a really good point. Is just having that person who's there to see it through even. Even when you're ready to step aside. So let's get to that point. The person sells their business. I am retired. Where does your involvement? And I can't imagine it ends there, because all of a sudden you get this time. You've got investments, you've got a lot of stuff that you still need to take care of.

0:14:58 - (Doug Jenkins): That almost seems like the afterthought that really. You can't afford for that to be the afterthought.

0:15:04 - (Mark Dorman): Well, yeah, I mean, a lot of exit planners are financial advisors. We're not. Right. So we just do what we call value maximization. So within our process, we're going to get their financial advisor involved early on in the game and they'll stay in the game. They're going to under we're going to understand how much money does your business owner client need to generate in retirement? What are the sources? Social Security, retirement assets, maybe business real estate.

0:15:30 - (Mark Dorman): And then how much is the value of their business? And if there's a gap there, can we work on it? So while the financial advisor is working on maybe an income plan post transaction or post transition, we would hand off the business maybe to a business broker or an investment banker and say, hey, this business is now ready to be sold to a professional buyer pre due diligence has been done and you've got the best odds for a successful outcome.

0:15:59 - (Doug Jenkins): Very good. Well Mark, obviously we're just scratching the surface of everything that goes into this. If someone would want to have a conversation with you about maybe they're approaching a time where they're thinking about retirement and selling or maybe they it's years off but they just want to start the process now. What's the best way to get in touch with you?

0:16:17 - (Mark Dorman): Well, great question. So I can be reached at M Dorman. That's M as in Mark, D as in Dorman. So D as in dog O R M a n@succession plus you can check out our website at ww.succession.plus backslash us or you can call me on my mobile at 330-416-9271. Also on LinkedIn as well.

0:16:43 - (Doug Jenkins): All right, Mark, thanks for joining us today.

0:16:45 - (Mark Dorman): Great. Thank you Doug. Have a great rest of your day.

0:16:51 - (Doug Jenkins): Obviously this is a significant topic and one will be dedicating some resources to here at the Findlay Hancock County Chamber. On our next episode, we're going to be focusing on this again. This time from the perspective of what happens after you do retire. What's next? It's really important. We're going to tell you all about that next time. We're also going to have some workshops on this topic in 2025 as well and certainly we'll continue to monitor it.

0:17:13 - (Doug Jenkins): Chamber Amplified is a free podcast for the community. Thanks to the investment of members from the Findlay Hancock County Chamber of Commerce and because of our robust membership, we're able to focus on providing timely information to the Findlay and Hancock county business community, run leadership programs for adults and teenagers and be an advocate for the area while while also providing tools that help local businesses succeed.

0:17:33 - (Doug Jenkins): If that sounds like something you'd like to be a part of, just let me know and we can talk about how an investment in the Chamber not only helps strengthen your business, but the community as well. That'll do it for this week's episode. If you have any ideas for topics you'd like to hear about in the future, just send me an email. Djenkinsindleyhancockchamber.com thanks again for listening. We'll see you next time on Chamber Amplified from the Findlay Hancock County Chamber of Commerce.