The Final Act! The Day Will Come – Part 1

Someday the day will come when you will want to exit your company, for better or worse.  Disposing of your company can be challenging! If done properly it can create great financial opportunity for you and your family, allowing for other options in life, especially during retirement.

However, if your business exit strategy is not effectively planned, the business, which has given you a comfortable living, may turn out to be worthless.  At the very least, you will be liquidating assets to take care of final debts and obligations.

Without a detailed plan you may not maximize the best potential price for your company.  Between the highest and the lowest potential value, many elements will decide which side of the ledger you will fall on.  Elements such as; a trained middle management group, systems, value drivers, culture of the company, consistent cash flow, profitability, and equity growth, are just a few elements that can  lead to an excellent or bad sale.

THE SUBJECT THAT IS RARELY MENTIONED!

Unfortunately, for most business owners, the idea of exiting their business is rarely considered until the time has come.  It most cases, the key planning elements of obtaining the best potential value of the business has been lost because there is a lack of time to implement them.    Most business owners know that in order to keep their business running profitably, like a well-oiled machine, they have to stay focused on the task at hand, always thinking the future will take care of itself as long as the business is profitable.  However, that is not necessarily the case in many situations.  Also, when owners started their business, they had a place to go, a paycheck and a position, not ever thinking about the end game until the time comes when the end game is staring them in the face. Continue reading “The Final Act! The Day Will Come – Part 1”

Why You Must Concern Yourself With The Exit Of Your Business The Day You Start It!  

There are two areas small business owners have a concern in:  

  • When the business has no apparent successor to take over.
  • Where the business owner has young children to succeed him, but they are too young to include in the planning at this point. This is a void period should the owner want to leave, become sick or die.   

Succession and Exit planning can be the most difficult planning a business owner can accomplish. However, it is the most necessary planning a company can undertake to protect the value of its shareholders and their families over the long term.  Succession planning concerns are often what keeps them up at night, giving them an uneasy feeling of a task not completed, the loose ends!

Succession planning is the natural outgrowth of strategic planning. In reviewing operational and financial goals, the need to ask a series of hard questions such as;   Continue reading “Why You Must Concern Yourself With The Exit Of Your Business The Day You Start It!  “

Insider Transfers! Ready Or Not!

Transfers to and insiders group appears to be the most   traveled paths for succession planning by business owners today, which are being successfully used by business owners.  

This is the method by default because of the lack of essential value drivers and systems developed by the business owner.  Because of the lack of transferrable value, insiders are the key market for the business owner.   However, it is possible that even though the employees might have the capital to purchase the business, they don’t have the necessary ability to run the business without the owner.   Consequently, this scenario may lead to an inside sale at a depressed value, or the owner becomes a semi-passive owner.   

Typically, The Transfer To The Insider:   

In many situations, the employee will put very little money down, because they don’t have what is needed, or is unwilling to finance a large part of the sale.    The Owner usually will take back paper and finance the sales price.  Typically, the buyer will default because there is not enough cash flow to support the operating expenses and pay the note payment.  

Even with that scenario, there are many employers who take the path of transferring their business to key employees. Even though in many cases the arrangement is ill-fated, and the business will fail.    The actuality is the transfer to insiders is the exit path most traveled by business owners. The point being is that there still needs to be planning done in advance, even if the transfer is two key groups.   

Benefit’s For The Key Group Becoming Owners:  

  1. The key group is acknowledged for helping to build the business; The owner wants the key groups to ultimately own the business, especially since they have been part of the success of the business.  
  1. Goals of the owner: The owner can see his legacy remain unbroken and his business culture continue. The business represents the owner’s value in the community, and the company’s consistent values.  
  1.  It enables the owner to plan their retirement and exit over a longer period of timeSince the process of transferring the business to the key group takes , the owner has the ability to plan their post retirement activities.  It gives the owner the chance to start delegating more responsibilities to the new ownership, testing the group’s ability to run the business. 
  1. It gives the owner a chance to share in the excess cash flow to build wealth outside the business.  This helps in transferring the business at, a lower net amount to the buying group, as the owner would have accumulated the wealth outside the business, but with business dollars.    
  1. The process of transferring ownership and control to the insider’s takes a period of time, anywhere between five and twelve years. This allows the owner to start adapting to a post business life. It allows the owner to start picking up other activities of interest. It allows the owner to contemplate his new life and start making plans well in advance. This is very important especially if the business owner has only singularly most of his business all his life.  The time gives the owner the ability to create new activities with interest, to test the waters.  
  1. Motivates employees: To stay with and grow the company if the owner has a properly planned internal transfer the owner can start this well in advance of their exit. The key employee becomes an owner through their purchases of non-voting stock. This is part of the powerful incentives for the employees to create an increased cash flow. It also motivates talented employees to see the future opportunities in the company, allowing them to stay and grow with the company.   
  1. Maintain senior control; The owner will not lose control of his company until he completely cashes out. Usually stock acquired by the employees is non-voting. Employees acquiring   the stock should be asked to sign covenants such as a not to compete, and non-solicitation agreement. This protects the owner from having the key person leave the company and take customers, trade secrets, and current employees with them.  
  1. Flexibility: A properly design transfer plan helps the owner maintain control until the owner can cash out. It gives the owner the ability to abandon the internal transfer so they can sell to an outside company, or a third-party at some point.   All ownership previously transferred would be subject to a buy and sell agreement requiring the employees to offer their ownership to you for repurchase at a predetermined price if the employment is terminated. 
  1. Business continuation at the owner’s death. By transferring ownership to insiders, it creates the succession plan should the owner die. The hope is that the key group has been trained well enough, to run the business without the owner. 

CHALLENGES AND LANDMINES!  Continue reading “Insider Transfers! Ready Or Not!”

Building Your Leadership Team And Going Deep!

One important issue an owner can spend their time on, is getting the right people to fill the right positions in their company, while removing the wrong people from positions.

Situations are always changing and can change the dynamics of the business.  For example; the retirement of a key owner or other key employee, the unexpected loss of a key person due to death or disability can pose a significant financial hit to any company.  Planning can reduce the adverse impact.

Continuity of leadership is important.  Having a backup for the key positions would be ideal.  Sometimes you don’t have the personnel to accomplish this.  A company training program can be a valuable tool for the long-term growth of the company.  Cross training is worth the time.  Having personnel filling in for important jobs when needed is a valuable element for the business growth.

Trader Joe ‘s is a very good company and a great example of a company with interchangeable job descriptions.   Employees learn multiple jobs and task.   They rotate their jobs every few hours on the employee’s shift.  They create teams, with captains and the team helps with on the job training for the e different jobs.  Their education is ongoing.  Trader Joe’s has a bench ready to go.  This is also done with their management team.  Their candidates are always being educated to move up the line and into the position.

Board of Directors

Having an active Board of Directors can help with guidance in implementing employee growth.  This is next level management.  This is a value driver which is of importance to the growth and value of the company.  It is what a potential purchaser looks for in a company that they may be interesting in purchasing.

The board helps provide management continuity and immediate oversight in triggering events, such as divorce, death, disability, or withdrawal.  The board can be made up of key insiders and some outsiders who have insight to your business, but not necessarily in your business or industry.    Continue reading “Building Your Leadership Team And Going Deep!”

Creating Cash Flow In Your Business

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”

Planning For The Tax Efficient Insider Sale!

The sale of your business to an insider requires the simultaneous presence of a capable insider purchaser coupled with your intention to exit.   The reason is the “capable insider” who wishes to purchase your business is not interested in hanging around forever waiting for you to decide to sell.  Without   a solid commitment from you on the timing of your exit, prospective purchaser will ultimately become disinterested.

There is also the possibly of you having to finance part of the purchase price.    Chances are that you will be helping finance part of the sale, which represents actual years after your exit, which you are tied to the company.

Using a two-tier system for the purchase of your interest!

Under a two-tier   purchase system, a portion of your stock would be transferred to your inside buyer initially, and the balance would be transferred when the business is sold.

By using the two-tier purchasing system, there are a number of advantages:

  1. Providing stock ownership to a key employee today can provide incentives for better job performance.
  2. It can help reduce the risk that they will be attracted to a job offer from a competitor and ultimately leave you with your company secrets.
  3. Improves the likelihood of a bank financing the balance of their purchase in the future at your final exit.
  4. It gives them “skin in the game” when they contribute some of their funds to purchase some of the stock, giving them additional motivation to help the company be successful.
  5. Allows you to become a mentor to your key employee to further develop their skills under your watch, while still controlling the company.

Continue reading “Planning For The Tax Efficient Insider Sale!”

The Four Life Changes Of A Business Owner!

What is it that you think about the most as a business owner?   Chances are they are one of four things:

  • What if I don’t want to stay in business and I want to drop out?
  • What if I get sick, disabled, or die?
  • What if my key person (s) decides to leave me?
  •  What if I can’t increase and improve my cash flow (life blood of the business), or the economy crashes?  

Besides running the day to day of the business, and the stress that goes with this, the four items listed above are probably the biggest stressful thoughts business owners have.   Let’s break them down.

Why the typical business owner thinks about these issues, is because they know they put a lot of sweat, tears, money, time  into their business.  They have most of their wealth in the business,  and know that they have no way of extracting that wealth when these events happen!

What if I don’t’ want to do this any longer and just want to drop out? 

Think about it!  The business owner has most of their wealth and time tied into this business.  In most cases it is very difficult to just stop doing what they are doing, lock the front door and leave the responsibility, wealth and reputation behind.  They still need their wealth in the business to maintain their life style.

Business owners are human beings and sometimes they just get tired of doing what they are doing, they burn out.   Sometimes they feel they are trapped and living a life of desperation.  They are making a nice living, and seeking to make a great life  for themselves and their families.  Chances are when they started the business they were only looking for a place to go, a position, a paycheck, and with a little luck a dream. The stress of running a business can take its toll on the businessman and the family.

They need the wealth they have invested, but don’t have a way of selling the business at a reasonable price.   Can the business be sold to an outsider?  Or, is there someone inside the company who will buy the business?  If so, do they have the money?  Is there someone who would run the business while the owner keeps their hands in the business?  Or, do they liquidate it?   Many times, even if a business owner sells their business, they find that after the taxes and expenses there’s not enough capital at a guaranteed rate of return to produce the income needed to keep the business owner and their family in the lifestyle they been used to. Because of this factor, more stress is added to the business owner and their future income. Continue reading “The Four Life Changes Of A Business Owner!”