To get ready to sell your business, you will need to start preparing years in advance. It’s like wanting to sell you home, you don’t know when, but you know you wish to sell it. It could happen years from now or it can happen tomorrow. Key to Success of selling your business! Be ready at all times !
Some things to decide
This is not a complete list, but it is a list of things to start the process of selling your business and marketing decisions.
Establish preliminary exit objectives
- Prepare for life after retirement
- Get market information
- Start working on your team-intermediary, investment banker or broker
- Review value drivers and what to do to enhance them
- Get your employee prepared
- Start your tax planning (this takes time to position yourself and organization
- Implement the incentive plans and stay bonuses
- Market to potential buyers
- Establish a departure date
- Define what you need for your financial security from your business
This is only a brief list of what you need to start working on before you sell your business. Keep in mind that the sooner you start the better the chances or selling with more potential profile. There is a lot of work to do if you wish to extract from your business the highest possible potential profit from your business.
The present value of the cash flow is a way of pricing out your company. A high certainty that the company will produce steady, predictable cash flow. Cash flow is king! Predictability only creates more value.
A buyer is willing to pay your price if you have a plethora of tangible and intangible assets and systems that function like a Swiss watch.
A “Swiss Watch” of a company needs to produce the consistent cash flow without you. As an owner you want to sell your business and move on. In many cases, a purchaser may want the owner to stay on and run the company for a period of time. However, if your company is able to produce a cash flow without you, it not only allows you to get your price, but allows you to get out of dodge.
It is worth your while to put together a talented management team, that can not only keep the cash flow consistent, but has the ability to keep the cash flow machine working even if you are not there. Your key management team may be the most important element of your business.
Whether buyers are strategic buyers, or financial buyers, they will be looking for value drivers. From the beginning of your business ownership, these are the things you need to start working on.
- Key management group
- Loyal client base with diversification (most of your firms revenue should come from more than 10% of the clients)
- Efficient production and manufacturing facilities
- Leading edge products or services
- Supplier network
- Intellectual property rights (patents, trademarks, trade name)
- Steady, predictable solid profits and cash flow
- Proven growth record
- Effective workforce in place
- Transferable franchise or license
- Key location or territory
- Barriers to entry for a startup
- Research and product development team
- Company name
- Exclusive territory
- Above industry average financial ratios
- Systematized business processes/documented so continuing success is not dependent on any particular person (including the owner)
These are the areas of your business you need to develop and maximize in order to demonstrate the potential for steady predictable growth in the future.
Since the price you will be asking for your business is relevant to your successful retirement (to fill the retirement gap), you will want to spend the time in the areas which will increase the value of your business. Usually, they will be Industry-Specific Business Benchmarks.
Knowing how your competitors are using their resources and the efficiency which they are utilizing them can give you ideas about the strategies being used, and strategies you can compare to your methods. If you are utilizing your resources better than your competitions, you will be able to negotiate a better price for your business.
I read somewhere that over the next number of years, at least one in every four small businesses will be sued or threatened with a lawsuit. The odds are great that it will come from within the company.
Will your death, disability, or withdrawal cause a dispute? In many cases it can come from not having communicated the exit or transition plan for the company.
Your Corporate Board of Directors
The Board of directors in your company is crucial to the short and long-term success of the company. The board helps in the avoidance and resolution of disputes. The board can help direct the company’s planning, officer selection and the compensation. The board can help in dispute avoidance, dispute resolution and overall corporate management.
Disputes, can come from compensation agreements, benefits, health co-pays, benefits paid. These are many other ares which a dispute can occur. The hope is that there is a board of directors to help with the resolution.
When the owner dies, becomes disabled or just wants out of their business, and there is no business continuation or a buy and sell, the risk of a dispute rises. A buy and sell agreement will establish the rules in the event a trigger that sets off a change within the business. Remaining partners will need to know what the value of the company stock will be sold for. The surviving family will need to know what the value of the business is and what the family expects to do with the company values. Without a solid written plan, there are unanswered questions and confusion. Continue reading “Your Exit From Your Company!”
A stock option plan is an option to give the key employees more incentive to stay with your company and potentially purchase your company. Usually the owner will sell to the employee (or employee group), 10%-25% in total. The amount of the stock will always be less than the majority of the stock.
The key person has a better chance of financing future stock purchases from financial institutions by owning this amount of stock in the company. This creates the building blocks of a future sale for the current owner.
This percentage of ownership doesn’t give the key employee control of votes during shareholder meetings. The majority owner can maintain control over the voting as long as the Articles of Incorporation and the Bylaws have been properly structured.
Another options is to issue only non-voting stock to the key employee(s) in Tier 1. By amending the corporations’s Articles of Incorporation, you can issues non-voting shares. You can even do this with S corporation. The one class rule of an S Corp does not apply as non voting stock is not considered a second class of stock for purposes of this rule.
CONTROL IN SELLING YOUR COMPANY
Usually corporate laws generally require at least two-thirds approval by the shareholders when the corporation has a major event as selling the company to a third party. As long as you maintain at least that amount of percentage ownership, will have the ability to control the decision regarding a future sale. Continue reading “Transferring Stock does not mean you have to give up control. “
Selling your business to a key employee, or a group of employees.
Assuming that all of the purchase price is to come from the key employee (s), you can help the purchase, by (a) using a stock dividend distribution, or (b) bonus of money to the employ, such as a bonus executive program. (See Restricted bonus agreement).
It is important that the company have consistent cash flow, (discretionary cash flow;) to use for this purpose. (This is the cash generated by the company which is not needed to run the operations, for debt service or capitalization of the business).
Planning for the sale of the stock to insiders, and cash flow;
It is important to have a accurate idea of the yearly cash flow. For example, if the discretionary cash flow is $1 million a year. You might commit 10% of the company, or $100,000 a year to help pay for stock. Continue reading “Creating Cash Flow In Your Business”
When considering the transfer of stock to a key employee, or a group of key employees, (referred to Key group), you need to determine how much they want to be involved in the company, and the risk they are willing to take in the future of the company.
In Tier One of the purchase, the key group will purchase stock. They purchase stock from future salary, financing, or from future cash flow in the form of dividend payouts.
It wouldn’t be uncommon for the owner to want to see the purchasing employee put some skin in the game. Seeing the employee be committed allows the employer to consider future financial programs to help the employee purchase the balance of the stock under Tier 2 (the selling of the balance of the stock).
The owner in most cases will look at the bottom line what they want in the end and the financial capabilities of the key employee. Smaller employees will try to make it easier for the key person to purchase the stock. Using a bonus plan to help them buy the stock can be a very useful tool for both parties. The employer gets a tax deduction, while the employee has additional funds to purchase equity in the company.
Using lower valuation for a better cash flow when business is sold Continue reading “Key group wants to buy your business, buy do they have skin in the game?”