Working Through the 2022 Exit Planning Summit Case Study

Working Through the 2022 Exit Planning Summit Case Study


During the 2022 Exit Planning Summit, the largest exit planning centric conference in the United States, attendees heard from over 40 exit planning experts over the course of three days. The exit planning profession is highly collaborative, with advisors working on cross-functional teams to best assist the business owner during their exit. On the last day of the Summit, the over 500 advisors in attendance worked collaboratively on an exit planning case study. This group work session was followed by a panel discussion led by Exit Planning Institute CEO and author of Walking to Destiny, Christopher Snider. 

Review the full case study here. 

We could not get to every question during the Case Study Panel discussion, so Chris provided some insights on the business transition. 

Family Dynamics and Succession Planning 

Jim seems to have laid things out fairly well. He controls 70% of the company. He is firmly in control of the family enterprise and he has family and non-family working in key roles. As far as determining a potential successor, there are a few paths Jim could take. Sarah, his son, and his grandson could be options. While it is not clear how much Sarah is involved, his son, the plant manager, might be a good fit. Jim’s grandson is already very entrepreneurial, and Chris Snider suggests that Jim hold the company and bring the grandson onto the team.

Chris scores his overall family situation a 3, given his relationship with Joy, and, even considering his brother, there do not appear to be any family conflict issues. Chris shares that he would score him a 4 or better if he had more formal structure and clarity around the family dynamics.

Chris Snider’s Family Recommendations:

  • Begin holding regular family meetings to discuss his exit. Consider setting up a family council.
  • Make sure at least one family member is on the personal advisory board.
  • Talk to Joy and Brian about his son. Then talk to his son to determine if there is any interest in joining the company.
  • Explore why Jim is not willing to finance a family buy-out. Also talk to him about a hybrid option involving family, management (Brian), and his son.

Determining a Wealth Goal and Wealth Gap

Chris Snider shares, “The first issue I see is what is the wealth gap.” Jim says he needs an income of $600,000 at exit. How did he get to that number? Today he makes 70% of $2.235M or $1.565M per year. Why does he think $600K will be enough? $600,000 / 4% (Rule of 4) = $15M. But Jim says his wealth goal is $28M. So, is his wealth goal $15M or $28M? Why $28M? Or it could be both: Needs $15M. Wants $28M. 

Chris determines, “To maintain his present income level his wealth goal needs to be $39M ($1.565/4%). Finally, Jim grosses over $1.5M a year in income. Given his annual income, and that he has been in this second generation business for a very long time, I would expect Jim to have more than $6M outside the business today. Historically has the business not generated this level of income in the past? Or is the reason he has not generated more assets outside the business because of his spending? If so, again I would question whether $600K is enough. Are Jim and Sarah willing to modify their spending habits?”

The second major issue is the lack of estate and tax planning. Jim has a decent size business, three children, and family in the business. Is he deferring as much income as possible? Is he tax planning? Why doesn’t he have a Trust or even a series of Trusts already established? Is he gifting on a regular basis? The case said Jim’s father “gifted” shares to his children. How were these gifted? In a Trust? What type of corporate structure are the shares held in?

Third, there is no mention of financial, tax, or estate planning advisors. 

Chris rates Jim’s personal financial readiness a 2. He shares, “There is a lot of work to be done here.”

Chris Snider’s Financial Recommendations:

  • Jim needs a personal financial team around him now. Let’s get a team in place.
  • We need to dial in his wealth goals based on needs and wants. This is why it is critical he put structure around his personal plan.
  • Jim needs to get on the stick with estate and tax planning right away.

Personal Planning 

According to a recent Ernst and Young study, most business owners begin thinking about their exit at the age of 62. Jim is currently 63 and falls in line with these findings. He has allowed himself 4 years to prepare. Although he has not prepared a formal written personal plan, he has been thinking about and has some strong ideas about what he would do in his next act. Jim’s health and energy seem fine and his reason for exit is a good one – “do other stuff.” He has a business board, but not and personal advisory board. Chris Snider shares, “Even though his plan is not written might still score him a 3 on personal planning given how much thought he has put into it and the fact that he has allowed himself 4 years to prepare. He could easily get to a score of 4 if he formalized his plans.”

Chris Snider’s Personal Recommendations:

  • Establish a personal advisory board similar to his business advisory board
  • Get your personal plans documented
  • Even though your health seems fine, get a health check-up if you have not done so already
  • Meet with other exited business owners to discuss the personal adjustments after exit

Business Strategies 

The business is financially performing just a few points below best-in-class (12.4% vs. 15%). This is a good sign and makes the business attractive. Chris shares, “However, I wonder if this can be sustained given his poor readiness score and some present deal killers: owner dependency and customer concentration. We don’t know his past CAGR nor is there any mention of the potential for growth. He seems to have found a nice niche that he is comfortable with and the business is on autopilot. But we all know how dangerous that kind of complacency can be.”

Jim has two good middle-aged leaders in Joy and Brian. They have a vision, but how much are Jim’s control issues impacting them? Chris explains, “I had a client a couple of years ago that lost a key family member who was acting GM because he felt his uncle would never give up control. He got frustrated and quit.”

The Strength of Intangible Capitals

His 4 C’s score was 54%, which is below average. It’s not because the business is not performing well financially. The score is lower mainly due to a lack of readiness to transition and grow.

The facility and equipment are old. Is Jim undercapitalized? This would be another factor that could dramatically affect his valuation.

The good news is Jim is not that far from moving his scores to above average or even into the green zone (67%). To begin, he needs to address customer concentration, owner control, and infrastructure.  Additionally, Jim needs to formalize the company’s growth strategy and ensure there is a succession plan for his first-line managers who are aging and near retirement. Chris shares, “Addressing each of these would improve his scores in human, customer, and structural capital. Socially, the company already appears to be above average. I think the improvements mentioned above would also improve the social capital further.”

Improvements to the Multiple

Chris Snider says, “Right now if Jim sold at $7M, he would still be short of the minimum wealth goal of $15M and only 45% of the $28M he says he needs. But if he moved to above average his multiple would go to 6.0x and his valuation to $13.4M. With his $6M outside the business today he would be worth $19.4M before taxes and fees – exceeding the minimum wealth goal which would secure his $600,000 a year in income goal post business. I would guess that making these improvements would also improve his sales and recasted EBITDA as a % to sales raising the overall recasted EBITDA $.”

Jim’s Profit Gap is only $465,000 (15% x $18M=$2.7M best-in-class less $2.235M = $465K). Again, Jim’s bottom-line performance is above average. However, his Value Gap is $14.6M ($2.7M x 8.0 = $21.6M less $7.0M = $14.6). This is because Jim is only achieving a 3.0x multiple vs. the 8.0x best-in-class multiple). Readiness, not attractiveness is holding Jim’s score down and thus his valuation back.

Chris states, “That’s why I think Jim’s stated wealth goal of $28M is within reach. A combination of financial planning, estate and tax planning, and growth in the business would raise income. Additionally, readiness improvement, which would raise his multiple, would result in an accelerated gain in value and income. He could freeze his personal spending and move the additional income to investments outside the business.”

Overall, Chris rates Jim’s attractiveness as average but his readiness below average, perhaps even a red flag. The odds of Jim being able to scale this business are low given the readiness issues. Plus, the risk is above average given the owner dependency, customer concentration, human capital, equipment, and facilities issues. 

By relinquishing more control to Joy and Brian, Jim would de-risk and enhance the business and create time to work on his personal, financial, and estate plans which will require a fair amount of his time. Chris explains, “My guess is one of the reasons he has not done more personal, financial and estate planning is because he simply does not have the time today because all his time is directed to the business. This is a classic case of an owner too involved in the business at the peril of his personal and financial readiness.”

Chris Snider’s Business Recommendations:

  • To begin, perform a Triggering Event engagement so we can understand more deeply present and potential value and identify the personal, financial, and business levers we can pull to drive to an above-average business valuation.
  • Jim stated he wants to be out in 4 years. So, hold the business for now. Initiate a value enhancement program starting with several de-risking actions.
  • Develop a more formal strategic growth plan. Allow Brian and Joy to lead this. This plan should address the opportunities and capital/investment required to enhance the 4Cs including the equipment and facility needs.
  • Develop a formal management succession program to transition more control to Joy and Brian and address the first line manager issue.
  • Take the time over the next 2-3 years to examine the pros and cons of all exit options, including hybrid options and exiting with multiple bites over a longer time period.
  • Invest the additional income generated from growth and profit improvement in resources to improve his financial position outside the business.
  • Consider taking on some debt to better leverage the company and possibly improve his financial position outside the business.

Read what some of our 2022 Exit Planning Summit attendees thought about this case study here.   

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