Surety Bond Quarterly - Fall 2017 - 22

200,000 businesses to change hands
each year for roughly the next decade.
Project Equity, a national nonprofit studying economic resiliency,
released data in May 2017, covering all
50 states, about the businesses owned
by Baby Boomers that are likely to
change ownership in the next decade.
According to the Project Equity study,
very few businesses owned by Baby
Boomers are expected to pass down
to family members (less than 15 percent). Some businesses will be sold
to an outside buyer, and some to an
internal management buyout. The
majority, however, are more likely to
just shut down and go away-sometimes through a planned and orderly
liquidation, but more often through
a sudden and disorderly liquidation.
The likely reason for such a prompt
business shutdown is that most Baby
Boomer owners are ill-equipped to
face their exit from business, both
emotionally and financially unprepared for a life without the business. Decisions to exit their business
can frequently be triggered by an
unplanned, life-defining moment,
including burnout, sudden illness or
disability, a death in the family, or a
divorce. Often, the only means for
such an exit is liquidation.
A Successful Business Exit for
an Owner of a Bond Agency
The best option for a successful business exit that provides the
bond agency owner with value is a
well-strategized plan that reviews
all aspects of both the agency and
the agency owner's readiness and
that is put into action with enough
time to positively impact retaining
or increasing value. That timeframe
is at least three to five years before
a planned business exit date. Given
that timeframe, Baby Boomers born
in 1957 and later should already be
involved with an exit plan or ready to
start one within the next few years.
Planning covers both sides of the
business exit. On one hand, an agency
should be evaluated as to its strengths
and weaknesses and what its current
market value may be with any flaws or
short-comings. Is the agency operated

22

SURETY BOND QUARTERLY | FALL 2017

for maximum results, or is it operated
only to provide a certain "lifestyle"
for the owner? What are its financial
strength; capability and average age
of workforce; products; position in
the marketplace; current marketing
strategies; current adoption of technology and future technology plan;
and current business documentation?
A strategic plan is developed to assist
the agency in addressing factors that
negatively impact the possibility of a
sale or other transfer. This plan normally takes several years to both put
into place and see results that would
improve the attractiveness and value
of a business for sale.
On the other hand, the agency owner's readiness should be evaluated at
the same time, both from a financial
and emotional perspective. Are the
majority of the owner's assets tied up
in the business? Does the owner have
a diversified financial plan in place?
(that is, can investing the proceeds of
the sale support the owner's lifestyle?)
Has the owner given thought to his
or her life after exit and where he or
she will find personal fulfillment? The
same three-to-five year exit plan helps
the owner to prepare him or herself for
a positive experience post-business.
Without this type of preplanning, the
statistics show that, one year after
sale, 70 percent of business owners
are unhappy with their decision.
In addition to a solid, strategic business exit plan, deal negotiation support is important. Details are essential,
from how long the agency owner may
stay to assist in transition, whether
those transition services are paid for or
not (ego here tends to disrupt deals),
how the deal itself is financially structured, whether the agency owner is
willing to self-finance all or a portion of
the sale, whether there are "earn-outs"
involved (retention of clients/contracts/
revenue) and for how long, whether
key employees stay or go, and so on.
Misunderstanding
the True Sale Price
Most owners believe hearsay about the
value of their business and are most
likely to believe that their business is
worth some multiple of annual sales.

In reality, businesses are worth some
factor related to their ability to produce
net cash flow that is relatively consistent over a period of time. A small
business, with sales under $500,000,
is more likely to sell to an individual
seeking potential job security by business ownership and will generally sell
for an amount related to the compensation the current owner gets.
A business owner will often hear
that a competitor's business sold for
$X and believe that this competitor
actually walked away with that $X,
but this focus on the sale price is a
common misconception. What usually
happens is that the sale price is reflective of what is known as an "asset"
sale, which may include fixed assets,
client lists, value of an "in place" workforce, and value of current contracts.
The price offered does not include
acquiring any of the current business's
debt because the purchase is usually
financing the asset purchaser with outside financing. In order to truly understand the sale price, the seller must
evaluate the sale in terms of ultimate
cash flow after all business debts are
paid and all taxes on the gain from
sale are calculated. The amount left
in the seller's hands is usually far less
than anticipated from the sale price.
The actual number that an owner
will walk away with after debts and
taxes associated with a business sale
will have a significant impact on the
owner's ability to retire and maintain
a certain quality of life, so understanding the true value of this number is
key in an owner's important decision
whether or not to sell.
Looking Forward, Acting Now
The bottom line for agency owners
of the Baby Boomer generation is
that there will be an inevitable point
in the future when the owner will give
up his or her shares in the agency,
whether that be to a third party, a family member, or someone within the
company, or the owner sells his or her
business altogether. Operating on the
assumption that the owner will need
a minimum of three years to institute
a well-executed succession plan, it
makes sense that, the sooner the



Table of Contents for the Digital Edition of Surety Bond Quarterly - Fall 2017

NASBP Upcoming Meetings & Events
2017–2018 Executive Committee
From the CEO: Advice for the Advisor!
How Can Construction Contractors Expedite Payment on Federal Contracts?
The Growing Importance of the Bond Producer in the Efficient Resolution of Claims
Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Bond Agency Owners: The Hardest Part is Letting Go
New Software Selection and Implementation is not a Weekend Project
Is Canada Soon to Have Its Version of the Miller Act?
2017 NASBP Resource Directory
Surety Bond Quarterly - Fall 2017 - Intro
Surety Bond Quarterly - Fall 2017 - cover1
Surety Bond Quarterly - Fall 2017 - cover2
Surety Bond Quarterly - Fall 2017 - 3
Surety Bond Quarterly - Fall 2017 - 4
Surety Bond Quarterly - Fall 2017 - 5
Surety Bond Quarterly - Fall 2017 - 6
Surety Bond Quarterly - Fall 2017 - 2017–2018 Executive Committee
Surety Bond Quarterly - Fall 2017 - 8
Surety Bond Quarterly - Fall 2017 - From the CEO: Advice for the Advisor!
Surety Bond Quarterly - Fall 2017 - How Can Construction Contractors Expedite Payment on Federal Contracts?
Surety Bond Quarterly - Fall 2017 - 11
Surety Bond Quarterly - Fall 2017 - 12
Surety Bond Quarterly - Fall 2017 - 13
Surety Bond Quarterly - Fall 2017 - The Growing Importance of the Bond Producer in the Efficient Resolution of Claims
Surety Bond Quarterly - Fall 2017 - 15
Surety Bond Quarterly - Fall 2017 - 16
Surety Bond Quarterly - Fall 2017 - 17
Surety Bond Quarterly - Fall 2017 - Practical Tools to Help Jump-Start Your Company’s Cyber Plan
Surety Bond Quarterly - Fall 2017 - 19
Surety Bond Quarterly - Fall 2017 - 20
Surety Bond Quarterly - Fall 2017 - Bond Agency Owners: The Hardest Part is Letting Go
Surety Bond Quarterly - Fall 2017 - 22
Surety Bond Quarterly - Fall 2017 - 23
Surety Bond Quarterly - Fall 2017 - 24
Surety Bond Quarterly - Fall 2017 - 25
Surety Bond Quarterly - Fall 2017 - New Software Selection and Implementation is not a Weekend Project
Surety Bond Quarterly - Fall 2017 - 27
Surety Bond Quarterly - Fall 2017 - 28
Surety Bond Quarterly - Fall 2017 - 29
Surety Bond Quarterly - Fall 2017 - Is Canada Soon to Have Its Version of the Miller Act?
Surety Bond Quarterly - Fall 2017 - 31
Surety Bond Quarterly - Fall 2017 - 32
Surety Bond Quarterly - Fall 2017 - 2017 NASBP Resource Directory
Surety Bond Quarterly - Fall 2017 - 34
Surety Bond Quarterly - Fall 2017 - 35
Surety Bond Quarterly - Fall 2017 - 36
Surety Bond Quarterly - Fall 2017 - 37
Surety Bond Quarterly - Fall 2017 - 38
Surety Bond Quarterly - Fall 2017 - 39
Surety Bond Quarterly - Fall 2017 - 40
Surety Bond Quarterly - Fall 2017 - 41
Surety Bond Quarterly - Fall 2017 - 42
Surety Bond Quarterly - Fall 2017 - 43
Surety Bond Quarterly - Fall 2017 - 44
Surety Bond Quarterly - Fall 2017 - 45
Surety Bond Quarterly - Fall 2017 - 46
Surety Bond Quarterly - Fall 2017 - cover3
Surety Bond Quarterly - Fall 2017 - cover4
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