Indecision: The WRONG Decision

“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now.” If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they think they cannot plan their exits.

Know that in your indecision, you are making a decision. As Winston Churchill observed, “I never worry about action, but only about inaction.” When you take a passive attitude toward the irrefutable fact that you will — one way or another — leave your business, you are deciding to settle for a least profitable exit for yourself and for your family.

If you are an owner who isn’t sure about what you want, or when you want to leave, why is it so important to decide to act today? Why can’t you wait?

• Preparing and transferring a company for top dollar takes time — on average about 5 years. Most of those years will be spent preparing the business for the transfer. If you decide to sell to employees or children (two groups who rarely have any money), they’ll need that time to earn the money to pay you for your interest.

• More time often equals greater reductions in risk. Time can be used to design and implement income tax-saving strategies, build value, strengthen your management team, begin a gradual transfer of ownership (not control) to key employees or children. If you wait too long, you probably won’t have time to implement these strategies and you’ll likely end up transferring your business on less-than ideal terms.

• The market does not operate on your schedule and may not be paying peak prices when you are ready to sell to an outside party. If leaving a company you’ve worked so hard to build and having little or nothing to show for it, is unacceptable to you, let’s look at a few of your options.

Wait for a buyer

According to Deloitte’s Entrepreneurship UK: 2008 survey, 35 percent of business owners said they will wait for a third-party offer for their businesses. Owners in this group believe that one day a buyer will contact them, negotiate a sale, and that will be that. Well, this is a decision of sorts — but one that flies in the face of reality. While few businesses are being sold today, there will likely be a significant number of Baby Boomer business owners vying with you to sell their businesses in the M&A market.

In a competitive buyer’s market, only the best-prepared businesses sell for top dollar. And the owners of those well-prepared businesses will be those who made the decision to act to prepare their company years ahead of the actual sale.

Liquidate

Liquidation is a common exit path for owners of companies whose cash flow is flat and has little probability of improving—absent the design and execution of a business exit plan. If you find yourself in this group, we recommend that you meet with your tax and other advisors to do the planning necessary to create the most tax-efficient liquidation possible.

Decide to exit and plan accordingly

Start today and take the following steps:
1. Fix a departure date.
2. Determine your financial needs.
3. Decide whom you want to succeed you.
4. Have your business valued to see if: a) should you sell today; and/or b) it has the value necessary to meet your financial and other exit objectives.

Based on your objectives and the realities of your business, use a skilled exit planning professional to forge a plan with accountability and decision deadlines.

Deciding to do something now to create the best possible exit path is not difficult. The failure to act, however, can potentially be fatal to a successful exit. The success of your business exit is simply too important to you (your family and your employees) to leave to chance. Why wait? Why decide not to decide?

Original Source: Business Enterprise Institute Inc

Why You Can’t Sell Your Business

 Why You Can’t Sell Your Business

It’s a tough climb to your exit, but don’t do it alone.

You are probably the worst person to manage the sale of your business. Even if you’re a professional salesperson. The answer is simple: you’re already tied up in every part of the business. Even if you think you can view the sale process objectively, you may be blind to its flaws, and over-emphasize its strengths.

Turning to a specialist, like a valuation expert or a relationship developer, can help you look at your business from an arm’s length. They’ll think about things you overlook, and give you facts about where your business stands compared to the competition, and the market in your industry. That kind of research is what you need to get a fair view of where your company stands as you develop your exit plan.

Time You Don’t Have

If you’re considering selling your business to a third party, remember that while you’re only going to sell your company once, many buyers have experience picking up multiple businesses. They know what to look for, and how to negotiate the best deal for themselves. An exit planning team brings experience and knowledge you don’t have to any bargain for the business.

Exit planners also can spend the time you can’t spend preparing for the sale. Time spent readying a business for a transfer is time you’re not spending on improving the company’s value. A company that isn’t worth much won’t find many buyers.

When you work with EXITS on an exit plan, you’re welcoming a skilled, experienced group to your team. Their entire goal is to meet your exit objectives, whether that’s making you as much money as possible, treating employees the way you want them to be treated, or simply taking the pressure off you as you get ready for retirement. The EXITS planning team is there to help you sell your business — because you shouldn’t try and sell it yourself.

Why are you selling your business?

(image: Don Stott)

Exit Planning Step 5: Transferring To An Insider

Exit Planning Step 5: Transferring To An Insider

Are you ready to turn over the key to your business?

An insider is a family member or key employee whom you want to take over your business after you exit. But unlike a transfer to a third party, the insider transfer can come with a lot of risk. Here’s a look at why:

  1. Insiders have no money.
  2. Insiders’ business skills and commitment to ownership may be untested.
  3. Owners who don’t have control — if your own exit isn’t planned correctly.

Insiders have no money

In many cases, you’re selecting an insider to take over your business for their knowledge and your trust in their ability. But if you’re counting on your business providing the cash to meet your objectives after your exit, you’ll need a third party owner with big pockets. There are two ways to address this issue:

Prepare a reward, like a pay bonus that builds over time. A wealth management advisor can help boost that earning by putting the money into securities (stocks or mutual funds) and build it even further.

Minimize taxation by speaking with a tax advisor. Without careful planning, cash flow can be taxed twice, the so-called “double taxation.” In addition, a lower valuation means a smaller tax burden. A valuation specialist — like the ones in your EXITS team — can help keep the valuation low, but still get as much money as possible out of the business sale.

Untested business skills

Your son, daughter or key employees may be working alongside you as a manager, but that’s not the same thing as being owner. When your successor takes over, will they be able to maintain the same relationships with customers and vendors? Will they have the same ability to deal with employees — their former co-workers, in some cases?

During the transition to the new owner, a written plan can help. You know how to handle people in your company, but have you communicated that to your successor? If not, try writing it down. After all, you won’t always be there to help in person.

What else can you do to help your successor’s transition?

(image: Felix atsoram)

Improve the Odds for a Successful Third Party Sale

Before you put your house on the market, you might fix a broken step or clean out your garage. Before buying a car you might research the horsepower, gas mileage or long-term value. Before you take on your largest order for products or services in the history of your company, you might give some thought to how you’ll deliver on this commitment. And, before you take your company to market, you may also want to do some Exit Planning. If you and your company are prepared and well-informed as you head into the third party sale process, you may find fewer surprises and a process that runs more smoothly.

Preparing for a sale can mean many things, but first we want you to understand the reality of a third party sale process.

Third Party Sales Involve Risk

You may believe that a sale to a third party buyer is less risky than a sale to employees or other insiders. But this is probably true only if your business can be sold for all cash or if there’s simply no time to implement a carefully designed sale to an insider.

Buyers place emphasis on the areas that are important to them, which may include:

• Appealing market sector or market position
• Strong historic and predicted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
• Strong fundamentals, such as customer base, accounting practices and business processes
• Unique competitive advantage

You may not be able to sell to a third party for substantially all cash if your business does not meet the buyer’s ideal standards in each of these areas. For those companies that are not in the most desirable segments, the M&A market can be decidedly cool, if not stone cold. Without proper planning, you may go along for years believing your business to be just the thing that buyers are fighting to win, but you may not be correct in that assumption. Is not knowing and not being ready worth the risk?

So you may not be ready to sell today, and you may not know what tomorrow’s buyers want. Should you just wait until you are ready to retire and find out then what the market thinks about your business? Waiting also involves risk. We suspect that some owners hold to the belief that there’s little risk in waiting for a third party buyer because it provides an excuse to “avoid the hassle” of planning. “No risk?” we ask.

• What if a qualified buyer doesn’t show up when you decide you are ready to go?
• What happens if, when you are ready to sell:
◦ the M&A market is dormant; or
◦ your industry niche has fallen out of favor; or
◦ your business and/or the economy is in decline or worse?
• What if something happens to you and you are not able to lead the company through the sale process? Will the company be in good shape as your family grapples with what to do? Why subject your future financial security to these uncertainties?

Why not assume control of your exit—your life, really—by creating an exit strategy that allows you to:

• Choose your buyer
• Name your sale price
• Control ownership until you are fully paid
• Shift the burden of the company’s future performance from your back to the buyer’s

Unnecessary Risk is Your Enemy

Business owners take calculated risks on a daily basis. But it is hard to find a business owner who, knowing the alternatives, takes unnecessary risks. Knowingly reducing the chance of a successful outcome is typically not a winning business strategy. The sale of a business, for most owners, is the single largest financial transaction of their lives. So how can you reduce the risk?

Exit Planning for owners who are interested in a third party sale in the future often includes:

• Benchmarking the business to see where it is today in terms of value, desirability, competitive advantage, etc.
• Pre-sale due diligence to find your own skeletons and clean them out of the closet before the buyers find them
• Developing and locking down critical management team members to drive the company forward before, during and after a sale
• Getting your own financial house in order so that you understand your financial targets that a deal must achieve and the terms on which you are willing or able to sell

We discuss these and other important issues with every client who believes that a sale to a third party is a desirable or likely path they’ll take to exit their businesses. A systematic, action-based approach to positioning yourself and your business for a successful sale doesn’t have to be a time-consuming burden that distracts you from your other responsibilities. A series of checklists, an action plan, and a timeline may be just the things that you need to put yourself ahead on this exit path.

We’d be happy to talk with you in more detail about a customized action Exit Plan for you and your company.

Original Source: Business Enterprise Institute Inc.

Exit Planning Step 4: Transferring To A Third Party

Transferring To A Third Party

Will your buyer come from a big city or your hometown?

A third party is another business, one that’s not currently connected to you — maybe a rival, maybe a bigger company looking for a foothold in your region or specific market.

Your EXITS business advisors can help you identify companies that are interested in your business. Keep in mind, though, that this is a challenging task. According to the Business Enterprise Institute, a lot of business are only looking at taking over companies worth $1 million or more in annual earnings (EBITDA), and are in a popular industry like medicine or technology.

Buyers are often willing to pay cash for a company, instead of having to deal with more complicated things like stock or co-ownership. There are other advantages, and disadvantages, too:

Advantages

  • Nearly all businesses should get the majority of their money from the business at the time the business is sold. The fundamental advantage of the third-party sale is receiving immediate cash. This ensures that you attain your financial objectives and, perhaps, avoid risk as well.
  • If part of your post-exit plan is to divide the money from the business among family members (as part of an estate plan), a third-party sale means you can treat family on an equal basis without having to worry about who is going to run the business.
  • Often an unanticipated advantage in selling to a third party is the ability to receive substantially more cash than your CPA anticipated because the market is “hot.” A valuation expert or M&A specialist probably has a good feel for the mood of your industry, but this can change from day to day.

Disavantages

  • Regardless of what the buyer says, the personality and culture of your business will undergo a radical change. A buyer would not buy the business unless convinced that the company can be improved through change. Maintaining the culture of the business is normally best achieved by selling to someone other than an outside third party.
  • If you do not receive the bulk of the purchase price in cash at closing, your risk can be substantial. The best way to avoid this risk is to get all the money you will need at closing so that anything else is extra, not necessary.

Who’s the best third-party buyer for your business?

(image: Brian Tan)

Exit Planning: For Love Of Family

Exit Planning: For Love Of Family

Will your son or daughter take over your company when you exit?

Happy Valentine’s Day! One option for exiting your business is to turn it over to loved ones, like a child or sibling. That person may already be a leader in the business, or even your partner. But today we’ll look at selling to family members, one type of insider (Step 5: Discuss Ownership Transfer to Insiders) in the EXITS exit planning process.

Family Business Consultants

You could say EXITS specializes in transfers to family members, given our background in relationship building and experience with family owned businesses. If you’re worried that the transfer of your business to a family member could be tangled up with emotional issues like favoritism or unrelated family controversy, try using a Family Business Consultant.

How can a consultant help? Think about these potential pitfalls:

  • Conflict: Family members often argue and fight, even when money isn’t at stake.
  • Avoidance: You or another family member have a difficult time taking about important issues — no one wants to “rock the boat.”
  • Outside triggers: Your exit plan may be set just the way you want it… but then a family member dies or gets divorced, and all the relationships change in ways no one expected.

At all times, remember that an exit plan is for you and your business. You need to make sure it meets your objectives. If those objectives conflict with a family member’s objectives for the company or themselves, EXITS professionals can help you make the decision that’s best for you. But it’s your company, and the way you leave your business needs to be the way that benefits you best.

Do you have an insider in mind for your business exit?

(image: iprice.ph)

Trump vs Warren: Implementing the DOL Fiduciary Rule

Exit Planning: Elizabeth Warren

Elizabeth Warren, a critic of the DOL Fiduciary Rule

Of all the things Donald Trump has done since taking office less than a month ago, this is the one that may have the most effect on your business. The U.S. Department of Labor Fiduciary Rule would change the status of financial professionals who deal with retirement planning to “fiduciary,” which means stricter standards on what they can say — and charge.

If your business has a retirement plan in place (or you’re going to create one to build value in preparation for your exit), this will affect you.

Pros and Cons (and Democrats and Republicans)

A fiduciary, by definition, is someone who acts in the best interest of their clients. That seems obvious: why work with someone who isn’t working for you? But financial advisors who aren’t registered with the Securities and Exchange Commission can pick appropriate investments for you. Those investments do meet standards you set up when you opened an investment account, but they may also earn higher commissions for the advisor.

President Obama pushed for a rule change on fiduciary status in April 2016, with it set to take effect this year. Earlier this month, President Trump called for its review, effectively putting the timeline for the rule on hold. Some financial firms say the rule limits what they can offer clients. Consumer advocates say the rule protects investors from advisors who don’t have them as top priority, with Democratic Senator Elizabeth Warren calling the rule one that will “make it easier for investment advisors to cheat you out of your retirement savings.”

The Rule And You

Statements and actions by Trump and Warren — and everyone else in Washington — may be political theater, or they may make a change to the rule one way or the other. If nothing else, the struggle over the fiduciary rule shows how important it is to know what you’re being told when talking with a financial advisor. We count several financial professionals among the EXITS team.

No matter what ultimately happens with the fiduciary rule, having a retirement plan in place can benefit your business. It can be part of the “golden handcuffs” that keep employees working past your exit, streamlining the process of bringing on a new business owner. It’s also a positive for buyers of your business, who see that you’re thinking about the future of the entire company, not just yourself.

Should the Department of Labor Fiduciary Rule be put in place?

(image: A. Shaker)

Building Value is the Win-Win of Exit Planning

In all likelihood, you are absolutely critical to the success of your business. Without you, there is no business. We want to fix that. With a little luck and a lot of hard work, we can help you become an “Inconsequential Owner.” Having said that, perhaps a bit of explanation is in order.

All owners understand, at some level, that they will someday leave the businesses they have created. Let’s assume for a moment that tomorrow you leave your business permanently. If you are an Inconsequential Owner, your exit will have no impact on the business, and that’s good for business value. Buyers pay for business value—not for the departing owner.

If you constitute a significant part of your company’s value (aka a Consequential Owner), and you have left the scene, there will likely be few buyers interested in your company, and those who are will likely pay significantly less than they would had you been an Inconsequential Owner.

Exit Planning is the process you can use to transform yourself into an Inconsequential Owner for your sake, for your family’s sake and the sake of your company. While perhaps not the most flattering label, it probably aligns with what your children have been telling you for years!

Put another way, your Exit Plan should answer this question: “What has to happen in my business by the time I leave it, to: (1) enable me (and my family) to achieve financial security and (2) allow me to move forward with the rest of my life, secure in knowledge that I have been a good steward of the business?”

The details that constitute “what has to happen” are discussed in a number of newsletter articles, books, and white papers that we can share with you. But for most owners, one of the first and most important things that “has to happen” after figuring out where you are (current business value) and where you want to go (your exit objectives) is to create and sustain business value.

When we talk about value in the context of Exit Planning (Step Three of The Seven Step Exit Planning Process) we divide the discussion into three areas: Building Value, Protecting Value, and Minimizing Income Taxes.

Building Value

We will explore several themes. First we ask, “What do you, as the owner, need to do to create a successful company that can operate without you?” Topics include:

1. Develop a market focus
2. Create a top management team
3. Adopt a proper financial focus and corresponding policies

For more information on these topics, you might read Innovation and Entrepreneurship by Peter Drucker.

Second we ask, “What characteristics will buyers pay handsomely for?” We call these characteristics Value Drivers and they include (but aren’t limited to):

• A stable and motivated management team
• Operating systems that improve sustainability of cash flows
• Understanding and nurturing you company’s Competitive Advantage
• A solid, diversified customer base
• A realistic growth strategy
• Effective financial controls
• Good and improving cash flow

Protecting Value

We’ll talk about protecting value from both internal and external threats. Instead of handling these threats as they occur, we’ll talk about the threats and how to avoid them before they happen. Topics will include:
protecting propriety information and trade secrets; preventing employees from doing harm to the business when they leave (by taking customers, employees, business relationships, etc.); and anticipating and evaluating outside threats to your company.

Minimizing Income Taxes

The lifeblood of every business, and therefore its best indicator of value, is cash flow. Our discussion includes how to preserve cash flow and value from income taxation—legally, of course. Income taxes on the sale of your business interest can range from zero to over 50 percent. Future issues of this newsletter will discuss how to avoid excessive and unexpected taxes. Of course, each tax-efficient design and the tools used to implement those designs usually have both disadvantages and advantages. To date, however, we’ve been unsuccessful in identifying any upside to paying more than necessary to your silent partner, Uncle Sam.

As you read this article (and subsequent ones) about exit planning process, we hope you begin to appreciate that while planning and preparing yourself and your business for an ultimate exit may seem to be a daunting task, it need not be so. Indeed, if you approach the task systematically, you will use only small chunks of time and effort for a potentially enormous payoff.

If you would like more detailed information about Value Drivers, please contact us and we’ll send you a complimentary copy of our white paper, “Value Drivers.”

Original Source: Business Enterprise Institute Inc

Exit Planning Step 3: 4 Ways To Maximize Business Value

Exit Planning Step 3: Maximize And Protect Business Value

Businesses of all sizes need to build value.

This is the big one, the way to both see more profit today and to improve your company’s value when it’s time for the new owner to purchase the business. You’re constantly trying to improve the company’s value, of course, by selling more products, adding your customer base and reducing expenses. But there’s a few methods for boosting business you might not think about.

The four methods are: Reducing distractions, increasing sales diversity, improving processes and developing branding.

Dodging Distraction

Planning an exit can be a huge distraction from operating your business. That’s why you turn to specialists like the EXITS team. It’s also a good reason to stay focused on your business, right up to the last day you’re in the company president’s chair. You don’t want to be ready for an exit, only to find the company’s performance has dropped in the last few months before the sale, all because you were thinking about the future, instead of the present.

Embracing Diversity

Increasing sales diversity isn’t just selling a lot of different products; it’s also:

  • Having a good group of salespeople who get your products and services in front of potential buyers.
  • Having the technology to accurately show how well your sales staff is performing, and where they can improve.
  • Standing out in a crowded marketplace, making what your company does distinct from others in the industry.

All of these can make your business unique, and more valuable.

Improvements In Place

Process improvement is probably something you’re doing all the time. It can mean updating your computer software, replacing an aged machine or changing employee responsibilities to better cover all the steps in an office routine.

As you improve your business as part of your exit plan, it can also mean making sure you have good relationships with your existing customers, that you’ve protected your intellectual property, and that you have a strong management team to help with the transition.

Branding

Branding may not sound important for your business, but even if you don’t sell to the public, your product must have something different about it. There’s some reason a customer would buy from you and not from others in the industry. What is that reason? What are you doing to empasize that?

When someone comes to buy your business, they probably aren’t interested in the real estate where your factory or office sits. They want the name recognition that you have or the inventions or processes you’ve developed. Making sure everybody knows what you have to offer: that’s branding, and that’s why your company is valuable to a buyer.

Having a recognizable logo can help with branding too, especially if you offer a product, or a service with a public face. For example, the staff of a house cleaning service could wear shirts with the company logo on them. This builds value: evidence the company is in the community, doing a good job.

Protecting Your Assets

Maximizing your business value is the obvious part of the process, but once you have value, you definitely don’t want to lose it — to competitors, to the government (in the form of taxes and regulations), or to anyone else. Your business can be set up so the business losses are separated from your personal net worth. Step 3 of the EXITS planning process is also a place to consider insurance policies on assets (property insurance) and people (life and health insurance).

How do you maximize and protect your value?

(image: unsplash.com)

Exit Planning Step Two: What Are You Worth?

Exit Planning Step 2: What Are You Worth?

What’s in your wallet, and your business accounts?

Step 2 is Discover Your Business and Personal Resources. Having a firm idea of what’s available to you right now financially and in terms of contacts is key to making sure you can build your business up. A summary of where your company stands can reveal strengths and weaknesses and help you compare to other businesses in your industry — including potential buyers.

1. What Your Company Is Worth

Learning about your business resources starts with valuation. Valuation is not: “How much is my company worth?” but “What is the most I can get for my business under the most favorable terms and conditions?” There are several ways to determine that number, and a valuation expert like those we use at EXITS, LLC, will help you.

There’s the tax considerations (the net worth of your business, and the amount that will be taxed on a sale). There’s also labor policies (how you handle employees), production diversification (how many vendors do you have? How many customers?), and your own value, what will be lost from the company once you exit.

2. What You Are Worth

Valuation is important for your company, but it’s also worth looking at your personal worth. Do you have an IRA or 401(k)? How about stocks or mutual funds? Do you have rental property? You might also have cash value life insurance, annuities or other holdings.

Your Financial Need Analysis gives you a place to write down your personal assets, and like your business information, you or your accountant might already have some of this information. Think about everything you have — cash, investments, property, side jobs, credit cards, your mortgage — when you’re assembling your needs analysis. Keep track of what it’s worth now, and how much you have left to pay on any debts or liabilities. Step 2 might be the easiest step in the exit planning process, especially if you bring a valuation expert on board who can help with some of the less specific numbers. It’s more than just collecting your bank account statements and IRS forms together, though. When you consider your entire business value, you could see places to improve: maybe you need a new employee handbook, or to revisit contracts with suppliers.

Every part of the exit planning process gets you closer to your goal: the day you leave your business in style.

What is your company worth today?

(image: David Playford)