Exit Planning with Brian Trzcinski
One of the people that Ed’s been hassling and trying to track down and get on the podcast is Brian Trzcinski of MassMutual. Ed’s seen him speak probably three or four times, and each time he comes away shaking his head with such good information. MassMutual do some really great research. Brian is the director of the business market development over at MassMutual. He’s in charge of all the marketing programs aimed at assisting business owners in the marketplace. He truly is one of the defenders of business value. He’s making sure that all of the MassMutual guys across the country are armed with great data, data from, this is what we’re seeing in the marketplace, let me help you make the great decisions.
Enjoy this conversation with Brian Trzcinski!
2:06 – What do you do at MassMutual?
3:18 – How do you help identify value in MassMutual?
4:43 – Business owners have the option to build or exit or transition, but how many choose to build?
8:10 – Talk about income and value recovery for small business owners, and what is MassMutual doing to help offset some of the craziness that the world is experiencing?
11:21 – Talk about managing cash flow, both in urgent and can you also talk a little bit about your article?
15:32 – Do you think that there’s a premium that should be paid for businesses that thrive?
20:25 – How do you help a business owner transition and avoid exit?
21:53 – Do you double dip when you penalize the multiple and you penalize the business based on its earnings?
22:43 – Can you talk about income replacement value?
26:39 – Is there anything that can maximize the value in the short term that you’ve seen?
31:15 – What does Brian and the folks at MassMutual say about value and exits for 2021?
33:12 – Do you think good businesses sell in any environment?
34:50 – If you had one piece of advice that you could give the listeners that would have the most impact on their business, what would it be?
What do you do at MassMutual?
I’m the Director of Business market development at MassMutual. And with that come a lot of different activities and tasks that I’m sort of responsible for in MassMutual’s efforts with the small business markets. We do all of our own proprietary research, we manage all of the business valuation tools that we offer to our financial professionals across the country, we create all the seminar material, workshop material, resource material that you’ll find on massmutual.com as well as what our local advisors would deliver to their local communities in the business market. We love supporting the small business market, we feel that with our foundation of business value as sort of that stepping stone to doing effective business planning is really the most efficient and effective way for business owners to plan for their future. And we’re always excited to have an audience of business owners who are willing to give us a listen and hear how we can help them.
How do you help identify value in MassMutual?
It wasn’t always an easy road because we’re not credentialed evaluators nor advisors at MassMutual. It took us a little bit of time to have our financial professionals as well as MassMutual as a whole understand that with us, it’s all about understanding your value as opposed to knowing your value. Those are two very different concepts. Knowing your value is just having a number. And having a number is fine, but it’s not actionable. At MassMutual, we train our folks and we communicate out to the market that it’s all about understanding the value and when you understand the value, you know what’s driving the value, you know what value drivers are contributing to that value, so you know why the number is what it is. That’s a much more acceptable activity for a business owner and it allows them to take ownership of the number so that they can do what they need to do to either grow their business, if that’s their plan, or to exit their business and turn their largest asset, if you will, into something that can be monetized. A business owner can’t do effective succession retirement estate planning without having that business valuation information, or the plans just not going to hold together.
Business owners have the option to build or exit or transition, but how many choose to build?
That’s an interesting question and I’m going to even go a little step further back and answering that because when we train and we work with business owners, we follow a process. The process starts with an assessment of the business and the personal financial position of the owner and their family. You can’t make that decision to build or grow unless you’ve done that first. And then once you’ve done that, in addition to understanding the business value, you also identify red flags and risks that are in the business and in the personal financial position. It’s a fool’s errand on the part of a business owner to think they can grow their business until they’ve de-risked it. That’s the first step in the process is they got to de-risk the business; they got to de-risk their personal financial position. Then once they do that, a business owner sort of comes to a fork in the road, and they have to have sort of heart to heart with themselves and their family and their business partners to decide, is my motivation to grow this value and grow this business or is my motivation to say you know what, I’m going to plan my exit?
A business owner has to make that decision. And they have to make it for the right reasons. Unfortunately, as I’m sure you see, a lot of business owners decide to grow the business not necessarily for the right reasons, and they decide to exit the business not necessarily for the right reasons. You shouldn’t exit the business just because it’s gotten out of your control and you want it to be somebody else’s problem. And you shouldn’t grow the business only because you want to maintain your lifestyle that you’ve come to be accustomed to as a business owner, and you’re afraid you’re going to lose it when you exit. Those aren’t the right reasons to make those decisions. Business owners really have to sort of take stock and say, do I have the fire in the belly? Am I working towards a planned exit that I’m not quite ready to, and that’s why I’m going to stay and grow? Or have I groom successors properly? Have I built assets outside my business to fund my lifestyle appropriately, and that’s going to allow me to exit on my terms? A business owner really has to have that sort of heart to heart with themselves and make the right decision for the right reasons.
Talk about income and value recovery for small business owners, and what is MassMutual doing to help offset some of the craziness that the world is experiencing?
We’ve really been hot on helping business owners understand that right now the key is to keep things simple, as simple as they can. And really, we’ve boiled that down to four areas of focus in their business that really we think are necessary for that recovery that you mentioned. It’s their leadership, it’s their employees, it’s their operations and it’s their cash flow. If they can focus and drill down into those four things right now, we think the businesses that have the wherewithal to recover well, and really the first step in that process is to do what Stephen Covey had an exercise called the four quadrants. And basically what that says is that look, on one axis, you have what’s most important, and on the other axis, you have what’s most urgent, and a business owner really needs to take stock and what they have to do as an owner right now and plot those in those different quadrants and the things that are most important and urgent, they got to do them.
Managing cash flow, taking care of their employees, things like that are going to fall in that quadrant. Things that are very important but not so urgent are things that they should plan for, like updating your website, maybe researching some new suppliers, things that are important to the business, but maybe not so important right now, you can put them on the back burner, and you can plan for those in the future. Then the next box is what’s not important but urgent, answering customer emails, making sure orders are processed, making sure you got all your reporting done. Those are very urgent, but maybe right now aren’t as critical for the survival of the business. Those are the things that business owner needs to delegate. Find your key employees, find your key people and have them take those tasks off the plate. And then the final quadrant and the things that aren’t important, urgent and those are what a business owner has to eliminate, binge watching the news. We think that if a business owner can kind of start to plot their activities in those things really put a focus on, again, leadership, employees, their operations and their cash flow, they’ll be able to weather the storm and come out smarter, stronger, and more prepared than they were before.
Talk about managing cash flow, both in urgent and can you also talk a little bit about your article?
We also have a worksheet that helps with that prioritization, as well as the cash flow exercise, and I’m happy to share that as well. If you want to focus in on the cash flow aspect of those four areas of focus, the first thing they need to do is they got to determine what their cash flow needs are. We create a worksheet that we call cash in cash out worksheet, and what it does is four things. The first thing it does is it helps the business owner take a snapshot of what the next five months are going to look like. It totals up all the cash that they’re going to receive and that they’re going to need to pay out during that five months. Is it consistent across the five months is there one month where there’s a big payout and not much coming in? It helps give them a picture of what the five months look like.
Then they need to figure out who and what are most important. They got to prioritize those relationships first from a supplier and a customer perspective, because the worst thing a business owner can do is disenfranchise an important supplier or important customer during this time, so that when they do recover, that relationship has been damaged. They’ve really got to figure out who on that pecking order, who do I have to pay in 30 days? Who can I pay in 90 days? And really prioritize that. And then they got to say, “Well, who can help ease the burden?” And one of the things that business owners need to remember is that landlords, banks, credit card companies, they’re suppliers too, and reaching out to those folks and having real dialogue and communication with them and saying, “Look, is there anything that we can do to help ease this cash flow crunch?” And I wonder, like, for example, can you negotiate with your landlord to say, “Look, you’re going to waive or you’re going to defer the next three months of my lease payments in exchange for tacking on three months at the end of my lease.” Having those kind of strategic conversations with these people can help ease the burden. And then finally, figure out where your surpluses and your shortfalls are. And then see if there’s any maneuvering you can do on a month to month basis. That’s really the first step of the process.
The second step of the process is really much more strategic. The business owner needs to find new ways to generate revenue. And one way that they can do that, obviously, as I mentioned, is to renegotiate payment terms with their suppliers and their customers, who can be paid sooner, who can be paid later? Access business lending programs, I’m sure you probably had a podcast already on the cares Act and the lending programs in the SBA, and what’s out there to help. Don’t be afraid to leverage them. And then the last thing I think is important is to take a look at your operations. Are there ways that you can diversify your product or service to maybe find a new market or new customers that you can attract with a different use of your product or service? Or do you have the ability to bring a whole new product to market? We’re hearing all these wonderful stories about these distilleries who are now Making hand sanitizer. If you told them six months ago, they were going to be in the hand sanitizer business, they would have laughed you out of the room. But that’s creative thinking. And that’s how a business owner needs to think right now, to help augment cash flow and revenue coming into the business.
And then the other thing too I mentioned is about the distribution method. Business owners whether they want to or not have to rethink how they service their clients, whether it’s to go on the e-commerce route, whether it’s cyber delivery, if we’ve been moving in this direction for some time and a lot of business owners were kind of giving it the Heisman and saying, “I’m not going there.” If this pandemic proved anything to anybody, it’s that we can’t stop that progress, because it’s coming now, and business owners really have to be strategic and creative about how they service their customers going forward.
Do you think that there’s a premium that should be paid for businesses that thrive?
We actually surveyed, we hosted another national webinar with one of our other partners a couple weeks back, and part of the registration process of that webinar was we asked the folks a series of questions and you mentioned, you love our research. So why don’t I give you some of that research to answer some of that questions. I think it’ll help get to the heart of what you’re asking. The interesting thing about a lot of the business owners that answered this question that were part of this particular webinar, and just to sort of set the stage, most of these businesses were growth or mature businesses, with valuations greater than a half a million dollars. So these were established thriving businesses pre COVID, and they told us, 51% of them said that they feel good, and they expect to be back to business as usual, eventually. So the confidence level, which is typical of a business owner, is still staying pretty high. And to your point, 18% said that we’re very confident because the business is still going strong. So there is that some sub segment of business owners that aren’t really feeling much of it, it’s not a huge number, but there is, say close to 20% that is, and only 6% told us that they’re not sure that they’re going to make it and that was really promising and really positive to hear in terms of some other things we learned through that exercise. We also asked them what resources for cash that they were leveraging and they could check as many as they wanted. And number one business operating capital, 58% said that they’re leveraging business operating capital, which was interesting. And what that really tells us is that business owner and we all, hey, listen, I’m guilty of it, as I’m sure maybe you are sometimes and we’re always getting on business owners for not having emergency funds and safety nets.
Maybe we underestimated them a little bit because 58% told us that they do have that in place. And to kind of answer your question, we’re going through an exercise now where we’re taking a look at all of our clients, all of our financial professional’s clients, and we’re kind of doing our own little four box strategy. And we’re saying, “Well, on one axis, we have the business owners preparedness. And on the other axis we have their industry in terms of how risky it is coming up.” To answer your question, we feel that the businesses that are in stable industries and have done what they need to do to prepare to weather this storm should probably consider maybe selling because they’re going to be an attractive business, they’re not commercial real estate industry. They’re in a stable of their industry, where there’s probably going to be some interest. And they have taken care of all those value drivers that we talked about, and making sure all their value drivers are in order. So that might be something they want to consider. And then you think about the businesses that did what they need to do to prepare, but maybe you’re in a little less stable industry. Those folks also may want to consider an exit, but they probably want to look at it in terms of what you alluded to earlier, is that income replacement value, because they may not be able to sell at that valuation that they thought they were because their industry multiple may change because their industry is now less stable. But there’s an opportunity for them to think about building assets outside the business and start to plan for that eventual retirement. So we could talk a lot about this because there’s a lot of different nuances to it, but I think there is definitely something to be said for where you’re heading with your question around this notion of business owners preparedness and the level of security in the industry that are in could present some interesting opportunities.
How do you help a business owner transition and avoid exit?
Before we transition out, it’s just one more point on that I agree with you, but what we don’t know, what’s still certainly the unknown at this point is how is this going to affect industry multiples? Are the bell curve is going to change? Are manufacturing businesses still going to be able to trade at three to seven times? Are construction businesses going to be able to trade at whatever historically they’ve traded at? That’s the unknown. And a lot of people in this space that I’ve talked to aren’t too concerned; they feel confident that the industry multiples will be able to continue as they were, but we don’t know. And I just think, if we’ve learned nothing else in this, we got to plan for the ifs. That’s really got to be the biggest takeaway here. So if I’m a business owner, we are always telling them don’t make your retirement or your exit your financial future solely dependent upon the sale and transfer of your business. If we’ve learned anything else during this time, that’s how true of a statement that is business owners really start thinking about, how they can have other assets outside the business to make sure that they’re financially secure in the future.
Do you double dip when you penalize the multiple and you penalize the business based on its earnings?
It’s just too soon to tell, but it bears watching and it just gets back to that whole concept of preparedness. Don’t leave it to chance. And if you want to talk about income replacement value now, it kind of is a nice segues, we can do that. But it’s just all about that. So the concept of income replacement value is really this.
Can you talk about income replacement value?
Let me caveat by saying that the income replacement value is not the value you will sell your business for. What it is though, is it’s what the business owner needs the business to be worth to maintain their lifestyle when they exit. And we know that most business owners would fall into that classification of a lifestyle business owner. They’re usually perfectly happy with the value of the business as long as it’s affording the lifestyle that they want and that they’ve become accustomed to. But what happens is, is when a business owner exits, what’s going to fund that lifestyle, and we know that they don’t want to change their lifestyle when they exit, and we know that they’re not always necessarily going to get the value that they had planned for. So they end up staying in the business longer than perhaps they should, or they continue to receive income from the business after they exit. They just create all sorts of red flags and potential pitfalls with exiting. But income replacement value basically does it says, “Look, we need to figure out all of the benefits and perks that the business owner is drawing from the business.” And it’s not just their salary and their bonus, its things like travel, company paid car and meals, are they running real estate through it or transportation through it, and we got to add all of those things up and we got to say, “Look, a business owner that may be drawing down a $250,000 salary might actually be drawing down an additional $200,000 of additional perks and benefits on an annual basis, that all has to be considered.
Once we add all that up, we say, “Look, what is a reasonable withdrawal rate on that amount that the business owner is pulling from the business that we can apply to that factor to tell us what they need the business to be worth to maintain their current lifestyle?” And we recommend that factor be usually between three and 5%. So what that does is you apply that withdrawal rate to the total value of all the benefits and perks around to the business. And that gives you your income replacement value. What business owners often find is that the income replacement value is higher than what they think or know the business has to be worth. Business owners then have to make that decision, that strategic decision. Do I want to add value to the business to make up the gap? Or do I want to say, “You know what, either the value isn’t in the business to do it, or I just don’t have the resources, the fire in the belly, whatever to do it, then we’ve got to figure out what other assets you have outside the business that are going to make up that gap?” Whether it’s qualified plans, whether it’s other investments, personal savings, your IRA, or whatever it is. We’ve got to figure out the value of those.
It all comes back down to that strategic conversation around keep a bro. And then the business owner can make the determination. And there’s a lot of tools that are out there to help a business owner put value on the business, and not only put value on the business, but also tell them what the business could be worth if it was operating at its peak level, relative to its peers. Business owner could even understand and say, “Look, I have an $8 million income replacement value on a $5 million business. Is it even possible to get $3 million out of this business?” The answer to that question may be no. And it’s important information for the business owner to have. That’s why the succession retirement estate planning is so critical on understanding your business value.
Is there anything that can maximize the value in the short term that you’ve seen?
There’s a lot wrapped up into that question. So I’m going to try to unwrap a couple of things as we as we go through it. Let’s first start with the psychology of what you’re asking. The Psychology of what you’re asking is this whole internal struggle that business owners have around exit, the whole struggle between the businesses my baby, and the businesses, my lifestyle. So you see these 65, 70, 75 year old business owners hanging on and a lot of them will tell you the reason they’re hanging on is because well, the business is my baby, I can’t see anybody else running it, they’re not going to do it like I do. It defines who I am; I can’t let it go blah, blah, blah. And that’s probably true. I’m not saying it’s not, but the other side of the coin that has to be taken into consideration is the notion that it’s also their lifestyle, and they don’t want to see that change.
In terms of understanding short term, and again, that’s why that keep believe that grower exit conversation has to happen early, is what you said, you need that runway to do, because what a lot of business owners don’t take consider is how their chosen exit strategy is going to impact their future income. It may sound like a wonderful gesture to gift the business to your children, that the children may want it, the children may very well be equipped to do it. But that’s going to be a non cash transfer. So what does that mean for the owner in terms of their future income? And that’s why you see a lot of family owned businesses staying on a payroll. But because they haven’t planned, they haven’t said this is my chosen exit strategy, this is what it’s going to mean for me in the future financially, and these are the other steps I need to take to make sure that I’m financially independent.
In terms of your question around what can business owners do on a short term basis to grow value, that really involves in depth analysis around the value drivers. And there are tools out there that can identify which value drivers are most impacting the value gap. And then a business owner can take a look at that. And I’m making this up as an example. But they could say, “My business has a $1 million value gap, meaning it could be worth a million more if it was operating more efficient relative to its peers. What the tools are telling me is that my sales and marketing and my HR is what’s driving the biggest discrepancy in that gap.” So now as a business owner, I can say, “Well, those are what I’m going to focus on in the next 12 to 18 months to grow my value.” And again, that’s why there’s such a difference between knowing value and understanding value. If I just have a number, I have no insight into what’s driving that number. And to your point, I can’t do anything to grow value unless I understand what’s driving that number.
There are different value drivers out there and each of them holds different levels of weight. Some examples of things that are going to always add value, if you’ve got them in your business, this is going to increase your value are things like having a dominant market share, having reoccurring revenue, having difficult barriers to entry of competitors and having good margins. Those are some examples. If you’ve got those, you’re going to add value. But on the flip side, there are always things that are going to detract value. And not having a good senior management team could detract value, not having your customer base, diversified aside is going to detract value, not having your financial and your operations and processes and procedures in order is going to detract. So business owners really need to understand to your point is that, yeah, there might be some things that you could say to the next buyer, like, they may have their own sales and marketing team that they’re going to bring in and they’re going to completely revamp the sales and marketing department. If my sales and marketing is not doing well, it doesn’t matter because they’re going to bring in their own, fine. But if you go to a buyer and try to tell them that your customer base isn’t diversified and just think they’re going to solve that problem, it’s just not going to work.
What does Brian and the folks at MassMutual say about value and exits for 2021?
I really think a lot of it has to do with what I was mentioning earlier around the current position of the business. If you’ve done what you need to do to be prepared for this, and you’re in that 18%, that your business is still going strong, and you’re in an industry that wasn’t too impacted by the government restrictions and other things that have been going on, it’s probably going to be business as usual. And if you were planning an exit, you probably will be able to continue on the trajectory you’re on. And your value will probably stay where it was at and perhaps even be higher. If you weren’t prepared for this, and from a financial perspective took a hit, but your industry is strong, I think the learning has to be that we can’t let this happen again. We’ve got to be better prepared. We got to be to make sure that the what ifs in our business are taken care of. If they were planning an exit, they probably should de-risk the business first, maybe put their exit strategy on hold, do some de-risking activities, and then revisit that path that they were on before. If the business is going strong, they did prepare, but the industry is in flux, same kind of thing, as I mentioned earlier, I think it just really drives home the point that business owners need to not be so reliant on their business for their financial future, and they’ve got to start building assets outside. So what is the future hold? I think it really depends on the preparedness of the business, as well as the industry that they’re in, but the good news is that what we’re seeing is that most business owners feel they’re going to come out of this, they’re feeling positive, they’re staying strong, they’re going to be ready to be more prepared, smarter and stronger than they were before.
Do you think good businesses sell in any environment?
One of the things that we’ve been talking about with folks, not so much from the full exit, but more is now a good time to look at a recapitalization perhaps, as a way to bring cash into the business, because that’s been a question that we’ve thought and we’ve spoken to some folks and really what we’ve been prescribing is, in this environment, it’s probably more important to focus on the merger than necessarily the acquisition. And let me explain what I mean by that. There’s still a lot of cash on the sidelines. There’s still a lot of cash on the sidelines that can be infused or in fluxed into the business. Finding that is not the problem. What the challenge is, is finding somebody that fits your culture, finding someone that can truly make a difference in augmenting your cash flow for the future and giving you access to new markets and products and services, or whatever it is. So what we’re telling business owners who ask us about well as a recapitalization makes sense, the answer is it could, as long as you’re doing it with a partner, that’s going to better position you for what happens when we come out of this. And not just take the cash today and partner with somebody that isn’t going to open up new opportunities for you when this is all over with.
If you had one piece of advice that you could give the listeners that would have the most impact on their business, what would it be?
I think it really all goes back to preparing for the what ifs. We always tell business owners that, our financial professionals always tell business owners that we share our data and our statistics and they tell a nice story. But until you really live it, and you realize that yes, the what ifs can happen at any time, and they can happen in any form, who predicted that this was going to be our what if. And really what it comes down to proper preparedness is making sure your structural capital is in order, your processes, your documents, your agreements, your operational partnership agreements, buy, sell agreements, all the things that basically are the secret sauce in your business and make it transferable are an order, making sure that you have that financial safety net in place so that you do have to tap into operating capital you can, making sure that you have the right employee benefits in place, making sure that the employees are going to stay loyal to you through things as crazy as a global pandemic. And if you do have to furlough or you do have to temporary layoff employees that they’re going to want to come back when this is over with because the last thing you want to do is lose that key research and development manufacturing expert to your competitor because you had to furlough, making sure that’s in place. And then again, understanding your baseline business value, because when you are going to rebuild and reopen, you’ve got to reestablish your new normal. And if you knew what your normal was before, it’s going to be a lot easier for you to reassess and recalibrate. So just financial preparedness, preparing for the what ifs, putting all your documentation, having any products in place that helps you de-risk the business is critical. And of course, working with your team of advisers, whoever is part of that team, and just making sure you’re lockstep with them and they’re helping you build a stronger, smarter, more prepared business. And then you’ll be able to weather almost any storm that comes your way in the future.
Connect with Brian:
Website – https://www.massmutual.com/