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3 Years to Freedom



It’s 2023. If you are 40 or older like myself, we’ve had quite the professional career. 3 recessions, 1 pandemic, countless innovations that have turned industries upside down, and so many other externalities have made stability a difficult concept. Given the amount of change and the rapid pace of innovation, our adjustment frequency (or outright directional change) has noticeably increased in our society. Where the greatest generation and early boomers would stick with their jobs or businesses for their entire working careers, late boomers, Gen Xers, and even millennials are making quicker career changes based on market conditions.


Furthermore, I believe, the pandemic taught us all something about our values and where we spend our time. Many of today’s workforce and business owners are unwilling to sacrifice their balance for a job or a business.


So where does that leave us as a working population? What does the next 10 years look like for business owners and their employees?


An estimated 10 trillion dollars are going to have to be transferred from retiring or dying business owners in the next 10 years. It is also estimated that only 30% of that amount will be transferred effectively. This means almost 7 trillion dollars will be absorbed inefficiently through improper taxation, undervalued acquisitions, or business shutdowns. Why will 70% be lost? I believe it is largely because business owners are unprepared for the future. Business owners have not optimized their companies for sale and also have not optimized themselves for what comes next. I have direct experience on both sides of the purchase agreement. I have bought companies and integrated teams and I have sold companies, leaving me with a new professional direction. I’ve also been involved with the very difficult dissolution of a business and have seen firsthand the impact it has on the individuals involved.


If you own a business, this post is for you. My mission is to see businesses operate at peak performance and for owners to get the most possible value from their exit. The 3 years to freedom process does not mean a foregone exit, although that can absolutely be the outcome of the efforts. Freedom means options. If your business operates with high margins, great processes, happy customers, and market leadership, you are free. If your business is appealing to an acquirer and you ultimately exit at a peak value, you are free. I’ll state it again, Freedom means options. The reason to venture down this path is so the business owner can make financial decisions at a point of success, not duress. When the business owner exits (in 3 years or less), they will be well informed about the ways they can transfer, what their life will look like next, and who they can trust in a highly ambiguous moment in their lives. Below is an outline of what the next 3 years will look like.


Step 1: Analysis (6-10 weeks)


In this initial step, the business owner will conduct as much research and analysis as possible. It’s important to take time to find the right trusted advisors to support the process. The process will include (but not be limited to):

  • Business valuation from a licensed business valuator familiar with the business’s sector

  • Personal valuation from a CFP that clearly understands the business owner’s goals and reserve burn rate

  • Business process analysis. This analysis digs deep into the company’s processes and ability to operate efficiently and effectively.

  • Risk factor analysis. The goal of this analysis is to understand what a potential buyer would see as a risk and develop a strategy to de-risk the contributing factor. Risk factors could include, but are not limited to: Client concentration, leverage, market leadership, sales projections, intellectual property, key employee/ownership overreliance, etc.

  • Readiness score

  • Attractiveness score


One of the most important and often overlooked exercise is a valuation analysis that indicates the valuation range of the business and what efforts can be conducted to increase the value over the course of 72-104 weeks. For example: An average business of a particular size in an industry sells for $6M. The market leader carries a valuation of $13M. After calculating EBITDA and estimated multiples, a company that wants an exit is valued at $4M. By running an in-depth strategy session, the selling company should know what actions need to be taken to increase the value of at least $2M and possibly more. Hopefully, this places the company in the frame of mind that improving business operations, margins, management, staff, and product will not only potentially increase cash flow, but also exit valuation.


By running this exercise, I find my clients have a complete shift in their mindset. Whereas they thought of business optimization as an arduous task with no clear benefit, they now see it as a profit center to increase short-term cash flow and business value. Weekly and quarterly meetings reinforce this mindset and help institute real change throughout the organization.


Step 2: Optimization (72- 104 weeks)


Regardless of whether the company has an exit, optimizing the organization will improve margins, culture, and owner morale. By running the business optimally, the company will become more profitable, capture market share, and, if decides to exit, will sell at a premium. Below is an outline of what optimized means for a business.


  1. Vision: The company needs to have a clear vision to achieve its goals. A vision should include the core values of the company (developed by the executive team, not an individual), Core purpose, clear marketing strategy, 10-year target, 3-year picture, and a 1-year plan. As an EOS implementer, I use the V/TO or Vision / Traction Organizer to capture the vision in a clearly understandable document. Once the document is created, it’s important the entire team shares the vision so the organization can work as a team to bring it to life.

  2. People: It’s imperative to have the right people doing the right things in an organization. If individuals don’t align with the vision, achieving the goals will be exponentially harder. And, I might add, a whole lot less fun. We use a few tools to see if you have the right people. One is the people analyzer. This tool grades individuals against the core values of the organization as well as if they understand their role, want to do their responsibilities and have the capacity to operate effectively. Other tools we use include the CVI test (core value index), the 6 Working Genius test, and the accountability chart. The key is to make sure the company is bottlenecked or hamstrung by a role or an individual. Both situations will increase the risk for a potential buyer as well as make replacing the individual in the role extremely difficult if the relationship sours.

  3. Data: Know the numbers. Make sure employees know their numbers. Hold people accountable to agreed-upon numbers. Regularly establish check-in meetings to understand what needs to be adjusted so kitchen fires don’t turn into house fires. It is the job of the manager to teach and hold individuals accountable for performance. If the manager is not conducting these two core behaviors, they are not leading, they are operating. That is not what the company needs to be optimal or appealing. (Check out the Organizational Proficiency Pathway to see where individuals fall in their roles)

  4. Process: A company with clear processes that are followed by all is a valuable company that operates efficiently. Think of all the greatest companies and market leaders. They all are process-driven. Employees are indoctrinated in the ways of conducting their roles and held accountable to established metrics of performance. Building processes is a trillion-dollar opportunity and probably the most neglected and largest hindrance to company growth. At this stage, we build processes with key leaders, document them in an easily understandable way, and ensure individuals and teams are following them closely.

  5. Issues: Knowing the key issues of the company eliminates ambiguity and creates a clear path to success. The practice any company should get in the habit of doing is attacking the hardest problem first. In a non-optimized organization, the hardest issues are often ignored, leading to compounding internal problems. Getting into the habit of solving the hardest issues in an efficient process will not only build company value, it will instill the confidence of the team AND build better leaders within the organization. I often find the biggest problem with companies is they didn’t start the company to solve internal business problems. The company was founded to solve customer problems, but once it grew, the company didn’t start addressing its own problems. Solving issues in an effective manner helps the company thrive and break through the ceiling that’s hindering its optimal state.

  6. Traction: Traction boils down to two disciplines. 1) Conduct regular and effective meetings using a predictable agenda 2) Develop crucial business goals (rocks) every 90 days to build value for the company. Easily stated, but difficult to execute. If you’re a suboptimal business, effective meetings, and rock setting will feel uncomfortable at first, but it is necessary to build value and attractiveness for a potential suitor.

  7. De-Risking: De-risking an a process of understanding elements of the organization that could kill the deal of an exit. Every company has different risk factors according to their industry and economic climate, but a few contributing factors to risk to consider are owner dependence, lack of company documentation, lack of transferable systems and processes, product liability, EPA/Safety issues, lawsuits, and customer concentration. This is not a comprehensive list but hopefully does provide a starting point to analyze an organization.


Does an organization need to be 100% strong in every area of the 7 components to build value for an organization to exit (or grow)? Absolutely not. This is not a binary equation. Improvement is the key and showing a team that the organization has the ability to accomplish hard things. Starting on the path of optimization is a win-win-win endeavor. The company will become more profitable, more valuable, and the employees (including the owner), will find more purpose in their roles.


Readiness


Before moving to the next step, readiness needs to be addressed. Readiness is a three-legged stool and can help transition the organization and the owner to the next chapter in their lives. Think of it as a soft landing for people and organizations.


There are three elements to analyze the readiness of the individual and the business: Personal, Financial, and Business. I will attempt to briefly address each one as they can be highly complex, nuanced, and dynamic.


  1. Personal: When a business has an exit, most owners don’t understand what the future will hold. What I’ve encountered in my own exit and witnessed with others is a high level of ambiguity and in some instances, confusion and regret. In Viktor Frankl’s book, “A Man’s Search for Meaning,” Frankl attempts to provide a guidebook to what humans need to have meaning. To summarize his findings a person needs 3 elements to find individual meaning: Professional Proficiency, Meaningful Relationships, and Suffering. Suffering, as defined by Frankl, is embracing difficult endeavors and overcoming them.


When an owner sells a business, most of their professional proficiency (i.e. identity) is tied to the business. So, in turn, through an exit, professional proficiency is mostly eliminated.


Secondly, a vast majority of a business owner’s meaningful relationships exist within the business. So, when the business is gone, so are the relationships.


Lastly, owning a business is largely defined by suffering through difficult problems and emerging victorious. If there are no more battles to be fought, how can an individual find purpose without a war?


Before a business is exited, the owner(s) need to have a sometimes difficult analysis and develop a strategy about what comes next. Their lives will be dramatically changed and could be perceived negatively if not carefully prepared for.


  1. Financial: How much money does the exiting owner need? How long will it last using current spending habits? What are the tax implications? How can the earnings be put to work? An experienced CFP in business exiting will be able to strategically manage proceeds from a business transaction. Proper planning will inform the seller of all taxation, expenses, earnouts, estimated returns, and countless other blindspots that occur during a transaction.


  1. Business: How ready is the business to sell? Is the correct value calculated? Can a negotiation be held in good faith and clear terms? Business readiness leads us down a path to understanding the overall health of the company (culture, transferability, risk, etc.), the financial reality of the value, the marketability of the organization, the desired exit form, and several other contributing factors which will most likely be revealed in due diligence. This is the owner’s chance to get real about if there is a sellable asset or not. It also helps understand what needs to be worked on and what estimated value the work will add to the business.



Step 3: Exploration (6-26 weeks)


Step 3 brings us to the biggest decision of all. To exit or not to exit? I believe the first two steps are relatively easy to decide but difficult to implement. Step 1 is largely about finding the right partners to provide meaningful guidance to the business owner(s). Step 1 is largely a financial investment that provides actionable insights about the business. Step 2 is proven to create value and growth for the business. The tactics are difficult to execute, especially if the business needs to make significant staffing and procedural changes, but there is a clear playbook to follow that adds value to the company.


Step 3 is the tough one. Now that countless hours have been put into optimizing the business for value creation, the owner(s) need to decide to exit (and if so, in what form) or keep the business. At this point, if the exit team’s work has been properly executed, the owner(s) can make decisions based on a strategy and not on pure emotion. Also, if the exit team is operating in the business and in the owner’s best interests, either outcome is ideal.


I’ve seen owners fall back in love with their businesses through the optimization process and ultimately find a deeper purpose in their work. I’ve also seen owners realize the exit timing is correct, the buyers are well-matched to the company and the transaction must occur. Either outcome is the correct outcome as long as the company (and owner) is ready to sell.


The point of all of this hard work on the business is to create an asset the owner can be proud to own or proud to sell.


Let’s tackle the no-exit option first. What comes next is easy to understand: Keep running the optimized business. Hopefully, the purpose of the company is clear and the work is rewarding. The owner can maintain and continue to improve upon the effectiveness and efficiency of the organization through a value enhancement strategy and decide on the mechanics of the exit at a later date. The exit process hopefully instilled lasting good habits and helped differentiate the business in the marketplace. Harvest profit, invest where it’s strategically aligned with goals, and elevate the best team members to be great leaders. Never forget that the best team members could be future buyers of the business.


If the decision to exit is reached, there are several options to explore. I’m only going to scratch the surface of these options as the exploration process is personal and can fluctuate based on changing inputs from teams and buyers.


Internal Exits


  • Intergenerational Transfer: This is the family business way to transfer. This is a low-cost way to transfer, but it’s at the sacrifice of sale price and potentially losing top performers because of nepotism. There are also family dynamics to factor into the decision. It’s estimated that planned intergenerational transfers exit only 30% of the time.

  • Management Buyout (MBO): The owner will sell a portion or all of the business to the acting managers. If the buying managers are financing through the SBA, the owner will most likely need to be 100% out of the business. The pros for this type of exit are continuity, potentially lower cost, and more planned. The cons are more circumstantial. Management distraction, non-financeable parties, managers sometimes don’t make good entrepreneurs.

  • Sale to Existing Partners: This exit is not available for single-owner businesses. There’s potential for lower cost and great continuity, but there are several pitfalls that need to be explored before committing to this strategy.

  • Employee Stock Ownership Plan (ESOP): This is the classic “company buying the company” situation. The company then contributes shares to a trust on behalf of the employees. This can be very complicated and expensive, but for the right company, it’s a highly effective retention strategy.


External Exits

  • Sale to Third Party: The business is sold to a strategic buyer, financial buyer, or private equity group. This is probably one of the more common exits and has the most variables. Higher price, but higher costs. “Mic drop” exit, but could have a long earn-out.

  • Recapitalization: Brings in a lender or equity investor to act as a partner. This can be a strategic earn-out over time or a strategy for growth. This kind of exit can change the culture quite a bit and also change the way the owner runs the company, but again, could be a great fit for the company.

  • Orderly Liquidation: Probably the most painful way to exit. The psychological impact is very high on the owner and the reputation can be damaged. This exit also has a lot of unforeseen expenses and taxation that have the potential to blindside the owner.


Hopefully, this helps understand some of the pitfalls and expectations of Step 3. This is probably the least straightforward step as it’s a culmination of the hard work to optimize the company, company culture, market viability, and owner emotions. Working with an Exit Coach or a team of trusted advisors will help build a clear strategy and remain focused on the objective. This is a step to lean on the expertise of professionals and make informed decisions.


Step 4: Re____(Born, New, Generate, Tire) (10-16 weeks)


The least focused on and arguably the most important step in this process is Step 4. Owners and Executive teams will spend the majority of their time optimizing and preparing for the sale, but almost no time for what comes after. How Step 4 impacts the owner has less to do with age as the 3 Purposes (See above Viktor Frankl) impact individuals at any age. What comes next? When relationships, profession, and problem-solving opportunities are taken away, what is a person to do?


Each person will have a unique plan based on their interests, passions, and purposes. The focus here is to have a plan. Ideally, the planning should begin at Step 1. What is next? How does an individual stay engaged in their community? Is there a new career that can be started or a new business?


Many of the answers to these questions come down to values. It’s important to discuss Step 4 with family and friends. They are going to be the ones that are tapped most frequently when an organization is no longer available. What are the individual expectations? What are the personal, professional, and family goals? Do they align? What wisdom and contributions can be made to the industry or community?


The statement one should avoid is “I’ll figure it out” and have 0 idea where to start. If you are an entrepreneur, the drive to make, execute, solve, and innovate doesn’t die. That energy must be positively channeled to a new chapter. I recommend having countless conversations with individuals in your industry, mentors, friends, family, advisors, and anyone else who might have insight into what the next step looks like.


The framework I work with my clients on is outlined above by Viktor Frankl.


  • Professional Proficiency: What will you work on that makes you feel valued? What projects do you have planned? What are going to do after that? And after that? Are you starting another business? Are you giving yourself the same amount of time to ramp up?

  • Meaningful Relationships: Do you have a plan to connect with people regularly? Keep in mind, before the sale, you probably interacted with meaningful relationships every day. Are you joining peer groups? Do you have scheduled meetings with friends?

  • Suffering: Are you challenging yourself? Are you solving difficult problems? How are you measuring your successes and failures? Is your suffering in service to a greater purpose? Is your suffering physical or mental? Suffering is shorthand for overcoming challenging goals. This may not seem critical to meaning, but it is equally weighted with relationships and profession.


After our questionnaire is completed, we create a visual timeline and start working on Step 4. Step 4 is process-driven for discovery, but not bound to circumstantial instances. If life changes, so can the plan. Again, the purpose is to have a plan. Exiting without a plan is a recipe for disaster. Over 75% of business sellers regret selling their company 1 year after the sale is complete. Solving the 3 questions won’t totally shield sellers from this statistic, but they will greatly increase post-sales success.


Conclude: My hope is this post outlines what is potentially to come for the sale of a business. 3 years to freedom is something all businesses should strive for as it can lead to greater value, wealth, and health. This is a process that a team of trusted advisors can ensure success. CFPs, CEPAs, CPA, EOS implementers, lawyers, bankers, and others can serve the interests of the seller and make the process clear. Good luck on your journey to be Free in 3.



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