Questions you need to ask yourself if you are a business owner!  

  1. When would like to be done working in your business?
  2.  After you leave your business how much cash will you need (each year) to achieve your personal financial objectives?
  3. Who can afford to buy your company and who would you like to buy it.
  4. As you think about leaving your business, what keeps you up at night?
  5. What is the business worth?  How do you know its worth that amount?
  6. Do you have key people that handle the day-to day operations of your business which you feel is a substantial contribution and one that would be hard to find a replacement?
  7.  Would their be a great burden if they left abruptly?
  8. Do you have a strategy in place to reward those employees who you feel are helping you grow your business?
  9. Do you and your partners have a buy and sell agreement in place which is funded and up-to-date?
  10. If so, when was the last time you reviewed the agreement, and discussed the method of business valuation at a trigger event?
  11. If you could no longer run your company , what arrangement have you made to make sure that your family will benefit from your life’s work?

 

Your Exit From Your Company!

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!”

Transferrable Intangible Assets. 

Cash flow is what adds value to your business.  The value of your business to a potential buyer can be measured based on the expected future cash flow.

The price someone is willing to pay depends on the predictability, sustainability and the growth of that future cash flow.

Key elements of value depend on the continued presence of the key tangible and intangible assets which have been developed.  They sync to produce a product or service.

Intangible Assets:

Your workforce:   This includes the experience, education or training of the workforce. A study of (McKinsey & Company) 13,000 executives from 120 companies and case study of 27 leading corporations, found that talent will be the most important resource in the next 20 years.

Information base:  This includes business books, records, operating systems and other information base. This includes customer related information base, accounting or inventory control systems, customer lists, newspaper, magazine, radio or television advertisers.    This relates to a systemized system of your operation.  A business with a systemized operation/process for producing and selling products or services, has a higher value.  By having a developed and documented operating system (like manuals), you create more value to your business which a buyer is willing to pay a premium for.

Supplied-Based intangibles: Sometimes a business may have a relationship with another business who is exclusive.  This could be anything from a unique part of an engine to space in a major store to sell products.  This can be favorable supply contracts, or favorable credit ratings.  This helps with the future value of the company.

Licenses and Permits (private or governmental):

Covenants not to compete:  For example, an exclusive territory which competitors can’t compete in.

Franchises, Trademarks and Trade Names: This give exclusivity to the organization.    Trademarks, and Trade names.

Government Licenses and Permits:  Any right or license granted by a governmental unit is an intangible assets. The right to use, sell, or service in an area which is unique just to a business will add value to the concern.

Going Concern Value: A going concern value is the additional value that attaches to the property by the reason if its existence as an integral part of an ongoing business activity.

Absence of contingent liabilities: A business not having pending litigation, tax audits or breaches of contracts.  Also, a company without negligence claims, product liability claims and other contingent liabilities is considered an enhancement of a business.

Goodwill: Goodwill is attributable to continued customer patronage expectancy.  The goodwill can create value because of the reputation, along with other factors of the trade or business.     The public perception of a business.

 

PREPARING  YOUR BUSINESS FOR A FUTURE SALE

In some cases, when a business owner wishes to sell their business, they may not be in the best possible position.  For example, they may be a C corporation.  Because of the double taxation of the C corporation, it does not create an effective tax environment for selling the business.   Consequently, positioning to a pass-through entity would be more advantageous.  However, that takes time to arrange.

The principal advantage of this flow-through entity structure is that dividends can be paid by the company to the owners without additional tax.  In other words, the dividends can be placed into the hand of the owner with having only incurred taxation to the owner, not to the corporation and then the owner.

Under a C corporation, when the corporation distributes dividends (distribution) to the stock holders, the corporation must pay a tax on the corporate side, then the recipient pays tax on that distribution.  Dividends are not tax deductible to a corporation, so consequently there is the double tax. Bottom line, double taxes!

When you have an S corporation or LLC the Key employees can receive its share of company dividends free of additional taxation and use the dividend proceeds dollars-for dollars to pay for their stock investments.

It is important that in the future when you consider exiting your business, you start the process of planning with the most effective tax structure for the future. The C Corporation is fine when you are not in exit mode, and there are no dividend distributions.

Timing is important as it takes time to move from a C corporation to another form of pass through structure, such as a LLC or S corp.  Early planning will be a benefit.

A change from C Corp to a pass-through company can have tax ramifications, so planning is essential in when to, or if to, make this move.

Tax on Assets:

If you sell an asset of the corporation, it is possible that there is a corporate tax on that sale.  However, if you sold an asset of an S corporation, there would not be a corporate tax.

If you are considering changing your business type, we suggest you discuss this strategy with your tax advisor. 

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”

Key group wants to buy your business, buy do they have skin in the game?

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?”

Building Business Value Techniques!

If you permanently left your company today, would it continue with little effect on cash flow?  If so, would you consider this a transferable value? Transferable value is a driver that is critical for business growth.

A company management team is instrumental in growing cash flow and business value.  When a business has the capabilities of having little disruption with its cash flow when an owner leaves, you have a valuable transferable value.  A key component of building transferable value is Next-Level Managers. Usually they are experienced working for larger companies. They know how to grow companies and know how to attract people with experience and the skill to help run a company.   This level of management will demand more money, perhaps ownership as a condition of employment.

Next level management (NLM) and future changes!

  1. To attract NLM, it involves training and coaching for the existing management. When adding NLM it may involve replacing current managers who underperform.
  2. The decision to replace existing management is difficult and hard for many owners, as current management members have been loyal to the company. However, they may be moved to another position with the same type of responsibility.  They are good employees, but NLM do a much better job in the management position.
  3. Engage management consultants and outside resources to create more growth. NLM work well with these professionals.
  4. Owners provide leadership and motivation for management. Owners should design plans that provide strong incentives to management to remain with the company beyond the owner’s exit.
  5. Motivate employees to perform at higher levels, create a culture.
  6. Financial incentives designed to grow cash flow or business value is more likely to achieve the value or cash flow necessary to support the owners’ exit goals and value growth of the company.
  7. Top management must stay in the business when owners leave, or they don’t have a transferable value and will not achieve the goals when the owner exits. Incentive benefit plans help keep top management employees involved after the exit of the owner.
  8. The use of a “non-qualified deferred compensation plan” or NQDC Plan which involves a benefit formula and vesting schedule, highly motivates management to stay on.
  9. When you cobble the benefit formula to a performance benchmark it is possible to increase cash flow and profitability for the company.
  10. The vesting schedule in the benefit it makes it hard for the top management person to leave. They will leave too much on the table. The vesting schedule give the employer the benefit of keeping a top level management.  The employee benefits as the company can offer a richer benefit knowing the reward the employee receives is tied into the company’s profitability.
  11. The appeal of incentive plans for key employees (management) is understandable: To create transferable value, someone other than the owner must be similarly motivated to grow value and the cash flow necessary to achieve the owner’s exit goals and continue the company beyond the owner’s exit.

Operating Systems That Enhance The Transferable Value Of A Company!

Continue reading “Building Business Value Techniques!”