Entrepreneur’s Wealth Digest
Seeing business exits fail is one of the reasons we created Entrepreneur Aligned. One of the areas where we have seen failure points is when there are multiple owners of a business and their needs from that business are not in sync. We start or join a business with the best intentions and with the goal of making the business all that it can be. This generally involves growing the business in revenue and profitability, with an eye toward someday selling our business equity at a profit. At the basic level, it seems like everyone should be aligned and share the mindset of “Let’s grow this thing and we all win!”. Not so fast. If we lack specificity about business growth, compensation for owners along the way, and the vision for the business exit, we are set up for failure.
How do we get to that level of specificity individually and as a group? What happens if there are disagreements or different needs? We have a process to uncover needs, get clear individually, and create a strategy that works for each partner. We call this our Partner Aligned process and I will share the key phases and tasks here in this article. I will also walk you through the major components of each phase so that you can take action with your partners even if you don’t work with us here at Entrepreneur Aligned.
The 4 Phases:
The outcome of the first three phases of the Partner Aligned process is that each partner is clear on the current business strategy, current business value, the factors driving that value, and what their personal financial needs are for the business. With clarity around each of these, we can then move into the fourth phase which is a review of areas where partner strategy matches well and where the gaps are. We then provide recommendations on how to address those gaps and facilitate discussions about how to reach the best outcome for all owners. The process finishes with any needed updates to legal agreements and ownership documents so that the structure of the company matches the strategy chosen. In the rest of this article, I detail the first three phases and their key components. Next week, I will dive into the fourth phase in Part II and get to the final outcomes.
Phase I: Business Strategy Review
Each owner needs to be clear on what their business strategy is and the key metrics that let them know how they are doing. Some of the key questions that we ask and that you should be asking your partners if you are going through this process together are:
Being able to answer these questions gives you clear direction on the business strategy as a whole. A business seeking to grow by 50% and sell in 3 years to an external buyer will have a drastically different focus than one seeking to grow by 500% in the next 10 years and have an internal equity management strategy to sell to key employees over time. Neither approach is better, but they have to fit your company goals. If you lack a vision for your company, that is a great reason to connect with a business mentor or coach, your peers, or even a counselor to explore what success means to you.
When we are working with multiple partners, we ask that the business strategy come from all of them as a group, as clearly as they have it today. If the company lacks a vision, timeline, or key metrics, that becomes part of Phase IV and we simply move on to the current valuation in Phase II.
Phase II: Business Valuation
The key to an effective business valuation is believability. Too often business owners choose to go with one of the following three bad valuation methods:
Whether the business owner will admit it or not, they know that this number isn’t accurate, and if we don’t believe in a number, we rightfully refuse to take action on it. So what does a good business valuation look like?
A good business valuation should have a professional reviewing your recent financials, forward financial projections, and available information on similar business sales. Sometimes these are industry experts who broker M&A deals in your area. Sometimes they are CVAs or CPAs with access to private market transactions. Occasionally, you can get a good business valuation from some type of automated tool, typically for plain vanilla businesses without a lot of complexity. In most cases, you are looking for someone who does valuations on a regular basis, has the training to do them correctly, and has private market transaction data about sales of similar businesses.
This valuation should also have a breakdown of the factors that are driving it, both up and down. These factors give you insight into strategic decisions for your business from the perspective of a future buyer. They allow you to incorporate these items into your planning process so that you improve the transferability of your business and thus, its value over time.
Phase III: Individual Partner Personal Planning
Now, we turn to what we view to be the most overlooked area of business strategy planning that we have seen, which is the personal financial needs of each partner. Most business equity planning includes business strategy, valuation, and ultimately M&A support, but the needs of the individual owners should be at the center of the strategy. During this process, we work separately with each owner on what we call Level 1 Personal Planning. Level 1 planning includes reviewing financial goals, timelines, and all available cash flow and assets for the household. We work with each partner to model each of these elements together and examine tradeoffs and how best to reach their goals. We are also incorporating the current business strategy from Phase I and the current valuation from Phase II.
The objective is to understand whether the current strategy will support their needs or not, and if not, how much will we need to move that needle on the business strategy or valuation. We also call it Level 1 planning because we are not diving into areas like personal tax planning, personal estate planning, or the implementation of individual strategies to reach their priorities. Level 1 planning is about awareness. Level 2 is comprehensive planning and implementation which can be done simultaneously with the Partner Aligned process but is not a requirement. Remember, the Partner Aligned process is about setting the business up for success and we are placing partner outcomes at the center of that.
At the end of Phase III, each partner should be clear about what the current business strategy is, what the business is worth, and whether those two things will get them to their personal financial goals. In my Part II article, I break down Phase IV Business Strategy Integration and how we solve any gaps that are uncovered.
If you have a question or simply want to talk through your financial planning, we are here to help.
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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy. Advisory services provided by Destiny Capital Corporation, a Registered Investment Adviser.
Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams for EA and DC you can find him chasing his twins, wily trout or a podium spot at an OCR race.