The career school industry is emerging from a tough time of regulations. The extreme scrutiny of the past few years has not been good for business. But regulations are easing, and indications are that there is a cautious optimism among school owners.
Despite the industry hardships, owners can now begin to prepare their businesses to recapture prosperity. For many, the first item on the list is to enhance school value in preparing for the future. There are opportunities to both reduce risk and increase value. Business owners have a considerable legacy of knowledge that comes from surviving the difficult times. Now is the time to take a critical look at the current state of the business and develop a plan to be able to achieve greater financial returns.
Begin with the end in mind
A familiar book to most of is Steven Covey’s book The Seven Habits of Highly Successful People. The first habit is ‘begin with the end in mind.’ For career school owners, developing this habit is the first step in recapturing value. Preparing for the end goal doesn’t mean the days are numbered. But what it does mean is that the owner is in a position to transition the business on his or her own terms, whatever the circumstances.
Why business owners need a succession plan, even if they’re not ready to exit
Succession and exit plans aren’t a single event. They are a process of maximizing enterprise value while the owner is still at the helm. Such plans are a way to exercise control over the future of the business and achieve financial freedom in the process. However, as important as it is, 78% of business owners have no formal transition team, 83% have no written transition plan, and 49% have done no planning at all.
Succession and exit plans ask and answer all the business, personal, financial, legal and tax questions involved in transitioning a privately-owned business. The plan includes contingencies for illness, burnout, divorce, and death. Being prepared with a succession or exit plan enables the owner to exit on his or her terms, achieving the maximum value of the business, minimizing taxes, and achieving personal and financial goals.
Business owner concerns
It takes 100+% of a business owner’s effort to run a business. So, it often seems like there’s not enough time for the valuable, non-urgent tasks. Business owners ask:
- How will I know when it’s a good time to leave the business?
- How can I maximize business value in a down cycle?
- How can I minimize taxes?
- How do I know what a potential buyer wants to know, and is it really any of their business?
- What are my options?
- Will I get enough out of the business to continue my lifestyle?
Statistics show that the concerns are valid. Twelve months after selling, three out of four business owners surveyed profoundly regretted the decision. Only 30% of all family-owned businesses survive into the second generation, 12% into the third, and only 3% into the fourth. Business owners often have unrealistic expectations of company value, leading to 70-80% of businesses on the market that don’t sell. More than half of business owners think they have a good idea of what the business is worth, but only 18% have had a formal valuation in the last two years.
Now for the good news
Creating a business strategy with the end in mind builds wealth into the business. It’s an opportunity to step back and focus on what’s important. The result may be a shift in the current paradigm as the business evolves to integrate best-in-class practices into daily operations. At the same time, the owner prepares for what’s next after transitioning the business to the next generation or selling.
Value acceleration process
It’s difficult for most business owners to execute a process independently. Owners are so close to the business, and their expertise is the business itself. With help, the process kicks off with an accurate current business valuation. The next step is to identify the company values, determine what investments are necessary for business improvements and assess the business risks that could slow down value acceleration. Armed with such information, it’s time to set goals and create a master plan to achieve the goals. Examples of goals may be value acceleration reducing business risks, or improving on best practices. Once the master plan is complete, the owner decides what’s next for the business and his or her personal involvement. Whichever way the owner decides to go, the plan is set to grow the business prosperity.
Types of advisors
A Certified Exit Planning Advisor (CEPA) has the specific training to navigate the value acceleration process. The person acts as a quarterback for the team; he or she is a team member calling the plays, but the team working together makes it happen. The ‘quarterback’ may bring in other resources that add value to the process, such as a CPA, attorney, or banker. The team works together to achieve the business owner goals of enhancing value and maximizing current and future wealth.
About Ron Salmon, CPA, CEPA
Ron Salmon is a CPA and Certified Exit Planning Advisor and founder of Salmon Sims Thomas & Associates located in Dallas, Texas. He has over 30 years’ experience working with hundreds of career schools from an accounting and financial planning perspective. He uses his industry expertise to guide schools in recapturing and growing value.
About Rachel Alexander, CPA, CEPA
Rachel Alexander is a CPA and Certified Exit Planning Advisor and has worked at Salmon Sims Thomas & Associates for a number of years consulting with clients on tax matters. She now works closely with owners of privately held companies to enhance the overall performance of their companies, making them transition-ready.