Shownotes
Many business owners flinch when hearing the word “transition.” The reason is how, for so long, it has been associated with the death of the business. CEO and Partner of SVA Value Accelerators Sean Hutchinson says otherwise. In fact, he believes that it is the path to higher valuation, making the business more valuable. With his expertise on value acceleration and transition readiness for business owners around the country, he shares the reasons why equipping yourself with the succession tools are very important. Sean talks about the three buckets or classifications of business owners that represent different points along the journey to transition readiness: explorers, pivoters, and triggerers. Learn which among these you belong to as Sean gives the three ways that you can increase the value of your business.
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Creating The Path To Higher Valuation with CEO/Partner Sean Hutchinson
75% to 95% of the business owners’ net worth is tied up in their business, but only 10% have a plan for monetizing that net worth and only 20% will. On the show, we have Sean Hutchinson. He’s the CEO and Partner of SVA Value Accelerators. Sean, welcome to the podcast.
Thank you, Bob.
Tell us a little bit about your business and who you serve.
Our business is about value acceleration and transition readiness for business owners around the country. We only work with private businesses. We don’t focus on the publicly traded market and we work mostly with Baby Boomers, with some exceptions, that are middle-aged folks moving into the later stage of their business career. One reason why we work with Baby Boomers so often is there are so many of them. It’s a demographic that’s unprecedented in the United States. 50% of the Baby Boomers are saying that they’re going to transition their ownership in their business over the next five years. The other 50% say within ten. It’s hard to match that up with market cycles and other things. We focus on getting them ready so that they can take advantage of the window of opportunity when it’s open. The businesses tend to be in six different industries for us because we have specialty practices but they’re revenue-wise maybe $15 million to $250 million.
However, that ideal customer question had us perplexed because when people would ask, “What’s your ideal customer?” we’d start answering it in the way that almost everybody else answers it. It was “In this industry with minimum of $15 million in revenue. Business is healthy, not distressed, and so on” One day in a strategic planning meeting when we had a new advisor come on board, he asked the same question. We started answering in the same way and then somehow the conversation just stopped and we all looked at one another and said, “If the client is the owner, why are we describing our client with data about the business? Why is that the profile?” It seemed like the wrong answer and so we created what we call Three Buckets, three classifications, of owners that we think represent different points along the journey to transition readiness.
Bucket number one is the explorers. Explorers are owners who are trying to get insights and information before they decide to engage in advisory programs. They’re trying to get some clarity before they decide to spend the money, spend the time, devote the resources, to doing value acceleration and transition readiness.
The second group is the pivoters. These are the folks who have probably been sitting on their hands for a while. Procrastination is something that we all have to overcome. Whether it’s because of a life event or something else, they wake up and say, “I’ve got to do something about this.” It could be because of a business event. Things aren’t going too well in the business or something. They lose their top customer or whatever it might be that wakes them up. They pivot from inaction to action and they start moving on value acceleration and transition readiness.
The third group are the triggerers and believe it or not, we get calls from owners who wake up one day and say, “That’s it, I’m done. I’m ready to transition.” We have products and services in each one of those categories, along that spectrum. Our view has always been that we’re not trying to lasso an owner and pull them over into our world. We’re trying to go to them where they are and that’s why we had to understand the perspective of the owner about this process. Having those three buckets has helped us and it also helps us when we talk to owners. We lay it out and say, “Where would you put yourself?” Believe it or not, almost every owner that we talked to can pick one of those three things right off the bat, which tells us how to have the conversation. We don’t wander around in the wilderness talking about stuff that doesn’t matter to them.
For our audience and they go, “Transition what?” What is transition ownership?
That’s an important point and I’m glad you brought it up. For a long time, the word was, “Exit.” Exit runs into a brick wall pretty quickly because it’s got associations around it that most people don’t like to talk about.
Transition-ready businesses are more valuable.
The D word or the death word.
It connotes an end to something, which is not exactly the case. When we talk about transition, we’re talking about ownership transition but we’re also talking about the transition of the owner into the next act of their life. It truly is a transition, it’s a continuum. I respect and love owners. I’m in a third-generation family business back in Oklahoma City where I grew up. I know the stories of ownership. The things that happened along the way, the challenges that you face, the glories that you have, the victories that you can point to. This is one of the most important things that is ever going to happen in the life of a business owner, this kind of transition. Done well, there are all kinds of reasons to love it. It takes planning and it takes execution. It also takes some honesty from the owner about what they want to do next with their life.
What is their life-after-business plan? There needs to be one and it needs to be funded in one way or another. It’s like retirement, but for owners it’s a big shift in identity. I think about an entrepreneur. They’ve been doing it maybe for 35 or 40 years. They own the business. They’ve built the business. When they think about, “Who am I going to be when I am not an owner anymore?” That existential question is sometimes paralyzing and sometimes motivating. It’s a hard thing to talk about. If you place the exit as a point in time, you have to think about it differently. It’s a transition from one phase to the next phase. It’s a point in time on the journey.
When you have a business owner call you, what’s the typical range of initial questions that you get asked?
There is no typical range of questions. Every situation is different, which is another demonstration of why that first discussion is so critical. When it’s initiated by an owner, they’re expecting us to come to the table with a packaged solution in a way. When we first meet with an owner, something that often comes first in the conversation is, “What do you guys do?” We say “It doesn’t matter what we do. What matters in this conversation is your story. It’s not our story, it’s your story. That’s the one that we need to be talking about. If you don’t mind, that’s what we’d like to talk about in this meeting .” Stories connect people. If you think about your friendships, for instance, the conversations that you have with your best friends are stories. That’s how we relate to one another. That’s the only way that we can do it emotionally and with authenticity, having deep thoughtful conversations with one another.
We’re challenged in that first conversation with the owner to connect as humans, not advisers, to show that we’re interested in the story. Once we hear it, once we can get deeper into it, then we can start talking about what some steps are to get them to their objectives, whatever those might be. A lot of owners in this particular area of transition or value acceleration, it’s a black box for them in the beginning, it’s mysterious. They probably haven’t been through this process before. They don’t know where to start. They don’t know who to work with. There are all kinds of mechanical questions I suppose. The through line in all of those is, “I don’t know what to do next.” Our response is, “Let’s look at the situation, let’s have a discussion about it and then let’s decide to do one thing. Just to get started, let’s decide to do one thing. There is going to be a lot more that needs to happen in the future to get you to these objectives. We’re going to start with one, whatever might be the appropriate next action.”
Both of us are exit planning guys. You were one of the instructors at Exit Planning Institute’s most recent Certified Exit Planning Advisor course in La Jolla. My broad impression was that business owners don’t know what they don’t know. My sense is they’re so busy operating their company and they’re going to want to sell it someday. They said, “I know what it’s worth,” and then they go, “I’m ready to sell next Tuesday.” There’s an enormous disconnect between what they’ve been doing and what they understand it’s going to take to get a reasonable price for their business. You have more to say about that than I do.
Transition Readiness: Owner motivations for a developing a complete transition-readiness roadmap
We don’t come at it from a position of, “This is a complex process. Let us fill you in on what’s going to happen next.” Our position is business owners are a whole lot smarter about their business than we’ll ever be. Our job is to enable them through this process, to facilitate the discussions that are going to be important, to help them learn how to talk about it, to understand the vocabulary, to communicate effectively internally and externally and to be honest with themselves about what they want. It’s very fuzzy when the conversation starts, for everybody. They don’t know what they don’t know. We don’t know what we don’t know. Everybody is trying to get to the same place which is clarity. We always talk in our business about an owner’s needs in this process.
The first one is clarity. That’s what we’re going for in the first stages. What are we dealing with? Let’s do some discovery. What’s the baseline here? We can look at it from our perspective. The owner has theirs, other people in the process have theirs. If we synthesize all of those viewpoints, all of those perspectives and data points, to bring together a story in a way that has not been told before, then the owner begins to look at the situation differently. The various professionals and people in their company, outside their company, family members, whatever it may be, are able to then able to paint a full picture of what the current state might be. That’s current state. The future state is up to the owner to decide. It’s our job to create a path between the two that all the stakeholders can walk together. It’s not out of reach, it’s clear, so we have clarity.
The second piece is liquidity. For most owners, that’s part of the objective. But I would say it’s not always part of the objective. If you think about a family business for instance, you’ve got multiple generations either working in the business or not working in the business. They might be children, they might be 1,400 cousins, whatever it is. Sometimes the transfer doesn’t have anything to do with money. In fact, some owners will tell you they don’t need to get any money out of it at all. They want to make sure that it transfers smoothly to the next generation and it doesn’t create undue risk for their kids or grandkids. Peaceful orderly transition to keep it in the family. For other owners, it’s all about transferring the business to an outside party and monetizing the net worth, which is usually 75% to 95% for all owners.
I’ve had a few cases where I had owners with a significant amount of wealth outside of their business but they had underestimated the value of their business, believe it or not. It’s rare. They might have $50 million in wealth outside the business with the assumption that they’ve got a $50 million business. They’re 50/50 and they’re feeling pretty good, but then they find out their business is worth $150 million and they haven’t done any planning on it. The risk allocation is not looking so good but they’re excited to find out that they’ve got more in the business than they thought. It’s the right kind of problem. The question is what are we going to do to grab that $150 million if that is important to you? Part of this discussion is always about what matters to you about money. That’s one of the core questions that has to be answered. It’s a snowflake effect. We see similarities, but every situation is so different. If you try to bake them all down into their similarities, you miss the enriched stuff around the edges, which is what counts the most. One of the things that we have to do in our practice is to learn how to synthesize huge amounts of quantitative and qualitative information.
Stories connect people. That's how we relate to one another.
Human, financial, operational, strategic, all these things have to be combined into a story, which is going to be ongoing. You make a good point about whether the owner is working with us and asking us to help with preparation, maybe execution of some ownership transition or not. Remember we focus on transition-readiness. We don’t care in our work whether the owner is going to exit in the next year or twenty years. Our premise is that transition-ready businesses are more valuable, by virtue of the fact that they’re transition-ready. Our work in transition readiness is to get risk out of the business and to create value opportunities. The owner still has a business to run. They are still “head down.” We’re asking them to go “head up” as much as they can. In fact, there are other people in the company that we want to be “head up” and take that future state perspective. You can’t do this work if you can’t get that, at least grab some of that attention. We respect the fact that we can’t ask the owner to walk away from daily operations and work solely on transition-readiness, that would be presumptuous of us. We want to respect the fact that the owner is doing exactly what they want to do and love, which is to run a business and build a business. In most cases, they love it. In some cases, they don’t.
I’m a business owner, you’re a business owner. I’ve had a number of businesses here. I’m a fan of business owners. They have courage. I love their perspective. Their story is awesome. Part of the reason for the podcast is to record the story. The difference and a key discriminator is the business owner that maybe the one business that they’ve run and want a transition. How many businesses do you think you’ve seen the internal workings on during your career?
Probably 400 to 500. It’s a pretty big number.
For you, the perspective is when’s the last time you did something great the first time you ever did it? For the business owner, there’s that urge to say, “I’ve got my brother-in-law and my other adviser too and I can do this by myself.” Can you touch on that a little bit?
Transition Readiness: SVA Universe
It happens a lot. Being an entrepreneur, there’s a certain amount of self-confidence that goes with it. That’s one of the things that drives success and we want to make sure that we build on that because you need a confident client. You need someone who’s willing to do the work and not be overwhelmed by it. That said, it can breed risk. That same self-confidence can be something of a liability. I have seen it many times. I was talking to somebody, as matter of fact, about it. He’s a successful entrepreneur. He had built a business from scratch that ended up being sold to a strategic buyer in the same industry. It was never fully disclosed, but the folks that are in that community think it was probably about a $50 million sale. He did it himself. He refused to hire an adviser. He had some lawyering around him, some accounting around him. He saved probably a couple of million, not having an investment banker in the deal, not using advisers as fully as he probably could. What do you leave on the table? How much tax did he pay that he didn’t have to pay? Were the terms and the structure of the deal built in his favor or in the buyer’s favor?
I can tell you it was built in the buyer’s favor without good advisers at the table. Whatever he left there, he left something. He certainly paid more tax than he should have and he didn’t know how to structure the deal because he’d never done it before. Entrepreneurs are self-disciplined in most cases, self-confident in most cases, maybe overconfident. Our position as advisers is always that we’re never going to ask a client to do anything that doesn’t produce both an immediate and a long-term return on investment. In our view, it’s all about creating value. We always tell our clients, “We’re never going to ask you to do anything that doesn’t add value to your business.” There is lots of stuff we can fix. There are lots of little rocks that we could pound into gravel but they don’t add value to your business. They don’t increase the transferability. They don’t increase the attractiveness to the outside market. They don’t reduce risk. They’re just things that we’re fixing in order to fix them. Let’s pick the things that matters. Let’s pick the big rocks and let’s move those rather than spending resources solving problems that don’t move the needle for you.
There are a couple of terms in there that you’ve said a couple of times. One is attractiveness, readiness and de-risking. Do you want to touch on those a little bit?
There are three ways to increase the value of a business. The one that most people focus on is increasing earnings and that’s a good one to focus on. We want to see growth in revenue. We want to see cost controls. We want to see margin in the deal and we want to see an encouraging pattern. I would always prefer to see something solid, something pretty stable rather than spikes to high profit and then falling off to a much lower level. Volatility is one of the value killers that we
