Determine a reasonable salary for a corporate business owner

Brian O’Connell:
Hello, this is Brian O’Connell with Better Business with Barnes. Thank you for joining us for our most recent podcast here. This one’s entitled Exit Planning. In our episode today, we will be focusing on the exit planning and building value beyond the exit.

Brian O’Connell:
Joining us today is Mike Pappas, director of our Audit and Assurance Services Department. Mike also became a certified exit planning advisor in 2018. Mike, thank you for joining us.

Brian O’Connell:
Let’s start with the basics. Just what is exit planning?

Mike Pappas:
Exit planning is not to be construed or confused with succession planning. It is much more about preparing a business for the eventuality that may occur when someone decides to exit. So it’s really all about building a great business and making sure that the business is performing at optimal performance so that when you choose to exit or succeed it, it’s in the best possible position.

Brian O’Connell:
How far in advance should a business owner start planning for their exit?

Mike Pappas:
It’s never too early to start and it’s never too late to start. Unfortunately, some people think maybe a couple of years before they’re ready to exit or sell their business or succeed it to the next generation that that’s a good time for them to start thinking about it. Not to say that you can’t do it then, but if you really want to get the business performing at optimal performance, it’s going to be pretty difficult to do that in a two year period of time. So I typically tell people, ideally, 10 year window is perfect. Can you do it in less? Yes, but it means you got to have everybody moving in the same direction at the same level of speed to accomplish the end game.

Brian O’Connell:
Now you say everybody moving in the same direction. Who should be involved with this type of discussion?

Mike Pappas:
It is typically the key leadership team in the organization because it’s going to involve every facet of the organization itself, the business enterprise. And the more that you have everybody on board working with improvement, the better result.

Brian O’Connell:
Who should know about this? If I’m a small manufacturing entity and word gets out, “Oh, Brian’s planning to leave the business,” and all of a sudden you have people panicking and who’s going to take over. What’s some advice there?

Mike Pappas:
It’s not about saying, “Hey, we’re going to embark upon an exit planning process.” I think it could make some people very uncomfortable by thinking about that someone’s thinking about selling the business. It’s really about building a great business. So the way I kind of characterize it dealing with clients, it’s taking your business, it’s measuring how it’s performing today and getting it to best-in-class.

Mike Pappas:
I like to use the comparison when people were back in school, not too many people raised their hand and said, “You know, I’m okay with being mediocre.” Everybody wants to be best-in-class. Everybody wants to get the A grade or excellence or whatever. So relative to the business, it’s the same thing. It’s about measuring what your current performance is and determining how do we get the best-in-class in everything that we do. If you’re operating at best-in-class, it creates the highest level of profitability, and it also creates the greatest value.

Mike Pappas:
So it’s about taking the business where it’s at today, measuring where it’s at today, how it performs on the scale of an under-performer, an average performer, and then best-in-class performer and determining what we need to do to get the best-in-class. And there’s ways to do that.

Brian O’Connell:
Now, as a guy who graduated in the part of the class that made the top half possible, you had referenced succession planning. What’s the difference between the exit planning and the succession planning?

Mike Pappas:
Succession planning goes a lot easier once you have a great business. It’s much easier if you have a business that is performing at optimal performance; it’s much easier to succeed it. When we talk about succeeding it, there’s many different avenues that people evaluate. Some people think about, “I’m just going to build it to sell it.” Some people say, “I want to succeed it to a next generation. I want my kids to have the same opportunity that I did to create a great livelihood and create some personal wealth.” Some say, “Hey listen, I want my employees to be a big part of that. I want them to be a part of the succession plan. I want them to be part of the ownership team.” Or we can potentially sell it to management.

Mike Pappas:
So there’s many different ways to succeed the business, but that really comes down to the owner’s desire and wishes. Some businesses are easier to sell than others, so it all really all depends. But the overreaching item in the whole process is build a great business. You build a great business it’s easier to succeed it whichever avenue you choose to do.

Brian O’Connell:
Now as far as the exit plan, you said it’s never too early. Some companies may want to consider building their exit plan at 10 years before they plan to exit it. Is there certain benchmarks along the timeline, like at the 10-year mark you should do this, at the five-year mark this should be in order, at the three-year mark you should have these ducks in a row?

Mike Pappas:
It boils down to what’s referred to as a business attractiveness assessment. That process involves getting a leadership team together and through a series of anywhere from 120 to 150 questions, doing a business diagnostic on every aspect of the business, and then grading them on a scale of one to six, one being the least performer and six being the optimal performer. By going through this methodical process, a report is developed, which then is discussed with management leadership team to determine, “Okay, these are the areas of our business that are performing well. These are the areas of our business that are not performing well. How do we improve those?” Once again, the end game is to get the best-in-class at everything that we do, and then also doing some benchmarking of the business itself.

Mike Pappas:
We’re fortunate enough to have a business valuation group, and because of that ability, we have a lot of business data available that we can compare our current business and how they’re performing to some industry benchmarks and determining from an operational performance, where they fall on the spectrum of below market performers, average performers or best-in-class performers. I think it’s an easy way and it’s a methodical way to address the areas of greatest need in the business. And then you begin the process of improving those one at a time with the leadership team involved to help accomplish that.

Brian O’Connell:
So Barnes could kind of be driving the ship with input from key management personnel, key Barnes personnel.

Mike Pappas:
Yeah. It’s not like we’re driving it as much as we’re facilitating. Typically, they know the areas they need to work on. Where we found that people need the greatest amount of help in is staying accountable and focused, and our job is to do that. So if we can help people be accountable and focused on that, then they’re accomplishing something because like most of our business owners, they’re dealing with the fire of the day issue, whatever that may be and it’s hard to stay laser focused. We like to refer to it also as relentless execution. Not many people can focus on executing their plan to achieve a desired result. Our role is wanting to help facilitate and help be accountable.

Brian O’Connell:
We had mentioned in the opening comment that you’re a certified exit planning advisor. What’s involved with this credential, and why did you decide to get it?

Mike Pappas:
I decided to get it because of the need for our clients. I mean, our privately held businesses have that ultimate desire to do something with their business, and we want to help them create the greatest amount of value with that business. We want it to perform optimally. Meaning we want them to be the highest level of performance in either against themselves or within their industry group. By doing that, you’re creating more value and more flexibility for ultimate succession.

Mike Pappas:
The certified exit planning advisor credential the process for doing that is you have to go through a four day MBA style intensive class. The culmination of which is in a three hour examination that is taken, and then of course you have to have a passing score. A passing score is not merely 51% either; 70% has to be the passing score in order to receive the credential.

Brian O’Connell:
What did you get on the test?

Mike Pappas:
They don’t disclose it. They just tell you if you pass or not. The good news was I passed and I didn’t have to take it again. It was kind of interesting. It’s been a long time since I had taken an exam, so there’s a little anxiety when you’re going through the process.

Brian O’Connell:
Is there a re-accreditation process, or once you have it, you have it?

Mike Pappas:
Once you have it, it’s about maintaining a certain level of education to maintain it. It’s pretty much at a three-year window. Similar to maintaining a certified public accounting license permit; it’s a three-year window of continuous education and training. It’s a good process.

Brian O’Connell:
Now, is there a threshold as far as revenue where a company should say, “Okay, I should really jump into this.” Is a bigger business more difficult or easier because the systems are usually better? What advice would you give to business owners about getting their ducks in a row to start this?

Mike Pappas:
I think the biggest thing is a willingness of management and ownership to embrace an assessment. Some people are much more inclined and open-minded to do that, others … I get it. Some people have pride of authorship and I’d rather do it myself, and that’s okay. I mean, that’s your choice. But I think those that embrace it open-mindedly with a leadership team that is open and willing to commit to the process, will achieve the desired result.

Mike Pappas:
It’s kind of like a little story right now. I’m working with a client that has been wrestling with growing their business. They’ve been pretty stagnant. You either grow or you die. You have to choose which direction you want to go. We’ve been talking about growth and they haven’t been able to effectively institute a growth strategy. They finally decided to embark upon this process and engage us to be a part of that process. We’ve been doing it now for less than a year. I constantly check with them. We meet quarterly. I ask them, I say, “Is this accomplishing your objective,” after every session. “Are we on target?” The response is, “Absolutely. We love the accountability. We’re moving forward. We probably made more strategic investments in the past eight months than we’ve done in the past 10 years.”

Mike Pappas:
But it’s a process. This is only year one. They’re not quite where they want to be with it, but it’s all laying the foundation to achieve the ultimate growth and profitable growth that they want to achieve.

Brian O’Connell:
So you’re providing the tough love to kind of help them navigate what’s ahead of them?

Mike Pappas:
Yeah, there’s some give and take in the process, but you’re trying to bring those issues to the forefront and get everybody to agree that we need to work on it together. If you don’t have leadership team agree to work on it, guaranteed nothing will happen. It’ll be sabotaged. People will dis the process, and that’s the worst thing that you can have happen.

Brian O’Connell:
You had mentioned grow or die. So I guess in theory, part of an exit plan may be an actual organized wind down.

Mike Pappas:
It’s possible. It’s possible. You don’t like to see that too often, but there are cases where that could happen. You could have an industry that is obsolete or becoming obsolete, as we’ve seen certainly with the technology industry, and some industries have had more pain than others, so it’s possible. But you really kind of have to take your head out of the sand and be open-minded with how you want to approach this. It’s fun. It’s fun working with clients that are open-minded to do it.

Brian O’Connell:
So before we wrap up today, any key points you want to give our listeners?

Mike Pappas:
I think the biggest thing is when going through this process, the owner also has to do a personal assessment themselves, and do what’s referred to as an owner exit readiness to decide which direction they want to go, because they need to align their personal business and financial goals. All have to be in line, and if they’re not in line, then this could be a little bit problematic. That’s a separate discussion. But if owners are willing to embrace on this, they first have to do an assessment themselves because they need to know what direction they ultimately want to go.

Brian O’Connell:
Well you heard it here, business owners, do your self-assessment, and then reach out to Mike.

Brian O’Connell:
That’s going to wrap up our podcast for today. Thank you, Mike, for joining us and discussing your insights. We could talk about this for hours.

Brian O’Connell:
This episode will be hosted on our website for future listening. Stay tuned for more topics in future podcasts. For more information on this topic, please visit barneswendling.com/insights. Again, we try to keep these around a 15 minute mark. There’s plenty out there for you to listen to and reach out to us with any questions, concerns, input, feedback. We’re always here for you.

I’m Brian O’Connell. Thank you for listening.