Category: Strategies of growing business

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

by YOUR BUSINESS WORTH, posted in Company Wealth, Income from your business, Inside Sale, Key People_Or Group, Passive Ownership, Selling Your Business, Strategies of growing business, Valuation, Value drivers, Working On Your Business

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!  “ →

Drop Dead Business & And Personal Planning Questions!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Strategies of growing business, Value drivers, Working On Your Business

These are questions I believe everyone should be asking themselves when you start their planning. Not all the questions may relate to your situation, however, many of them will. It is important that you take time in evaluating your outcome in your planning as it relates to theses questions!

1. Have your wills and associated trust documents been updated in the past three years, if not, why not?

2. Do you have the following: declaration for desire of natural death, power of attorney, and health care power of attorney? If not, why not?

3. Does your testamentary documents make sure your family’s business and estate is private after your death?

4. Are your assets titled properly between you and your spouse in order to take maximum advantage of the estate tax laws?

5.  Do your testamentary documents specifically address the disposition of your family business/family assets?

6. Do your testamentary documents agree with other business arrangements such as buy and sell agreements?

7. Do you pass ownership of the family company/estate assets to your spouse in your testamentary documents as a tax avoidance measure? If so, is will that;

Make practical sense, and is that consistent with your wishes of your spouse? If the business ownership does go to your spouse, is there a potential for your children to inflate his/her estate thereby increasing their estate tax burden during his/her surviving lifetime?

8. What are your testamentary provisions for treating your employee and non-employee children fairly and equitably?

9. In your “drop dead” planning, do you have insurance proceeds includable in your taxable estate?  If so, why? 

10. For your real estate; do you use family limited partnerships or limited liability companies? If not, why not?

11. If there is more than one shareholder in your family enterprise, do you have a binding, modern buy sell agreement? If not, why not?

12. Does your agreement cover typical items such as disability, “bad boy” behavior, windfall sale, non–compete provisions, etc.?

13. Do you have a written plan for when your family members get home from your funeral to lessen the burden on them? If not, why not? In the future will your business go to family members some of whom are employed in the company and some of whom are not? If so, what provisions will you make to balance the interests of employees’ shareholders versus non-employee shareholders?

14. Your CPA, attorney, and other advisors have probably been after you for some time to address the issues of your exit, future management of the company, your estate planning, etc. What are the barriers that prevent you from tackling these tough family business and estate issues?

15. Children inherit too much in the way of assets too soon? What do you see as the downside of “affluenza”?

16. Will your children inherit the business/estate assets in equal proportions, or would one child be designated the prize, and take and receive a larger portion.  What are the pros and cons of each course of action?

17. What do you have too much of in your business?

18. What do you have too little of in your business?

19. What do you have too much of in your family?

20. What you have too little of in your family?

21. If you had a magic wand, what will be the one thing you would change about your family or business?

Getting Ready To Sell Your Business Even Before You Thought About Selling It!

by YOUR BUSINESS WORTH, posted in Company Wealth, Executive Benefits, Inside Sale, Selling Your Business, Strategies of growing business, Uncategorized, Value drivers

Business owners who have the ability to hire, train and retain excellent employees do themselves a great favor when it comes time to sell their business. Recruited employees who sign on to the company culture, are potential purchases of the company.  They get involved in all aspects of the business when given the chance.  The ability to nurture these employees not only creates a great long-term employee, but possibly future owners of the company.   The investment in good employees has the by-product of creating a potential market for the business owner’s business. 

Over time, these owners can create   employees who become extremely loyal, and feel part of a group and the business itself.    They observe how the current owners treat the business, the employees, and learn the long-term elements needed for a successful growing business.  They become clones of the current ownership, and start to think like owners, while taking on more responsibilities.

While the owners at some point need to make the commitment to the potential employee(s) purchaser to sell the business to them, it also means the employee or employee group needs to be able to commitment to the purchase of the business.  To the purchasing party, this means committing to taking on risk and financing for the purchase of the business.  In most cases this is something they never have done before.

The commitment to sell the business to key people, or key person is a long-term process.  The owners have to make sure the key person (s), have the ability to think like employees, and the abilities to run the business with expectations of the company being profitable.  The owners will spend time training and assessing the abilities of the key group to prepare them for the business takeover There is a commitment on both sides as to arranging this type of sale.

Financing the Sale: 

A sale of the business to an outside group usually is a cash sale.  Or, a combination of cash and stock of the new owner.  (Usually when a larger company buys a smaller company).

It is here that the advisors need to make sure the selling owner maximizes his sales with tax efficient transactions.  Many business owners sell their firms only to be surprised at the after-tax results of the sale.  Keep in mind that when you sell the business, usually there is a low-cost basis, the consequence paying higher taxes on the gain, means less net profit!

If it is an asset sale, there may be a low-cost basis   of the assets being sold, consequently creating more tax exposure, and more taxes.

Take for example, an asset being sold after it has been depreciated, it may be taxed as ordinary income.  Usually the asset is owned by the corporation.  If the company is a C corporation, the sale is taxed at the corporate level, then taxed at the personal level.  The combination of a low-cost basis, C corporation tax, ordinary tax rates, and double taxation can erode gross profits to a point where the owner wonders why they sold the company for the next. 

If the owner sells their company to a publicly traded company, and takes back some of the  purchaser’s stock, there should be pause as the consequences should the stock value fall because of the transaction, and the uncertainly of the value when the selling owners wish to cash out.

It has happened more than once when selling owners, ended up with much less in their pockets after the taxes and expense of the sale were taken out!

Selling to a key group or a key person is usually a different arrangement.   Usually the employee does not have the financial ability to purchase the company, thus a loan from the small business association or bank is needed.  Sometimes, the employee comes up with money by refinancing their home or borrowing from the family.  In many cases, the selling owner usually takes back a note expecting payment from the cash flow of the business.  It’s common to have a combination of refinancing, a promissory note, and possible deferred compensation payment to the selling owner.  In any event the selling owner usually has some skin in the game as to the financing of the sale.  Because of owner financing, the ultimate payoff might be extended over a longer period of time.  Not necessarily a bad thing, as the owner can spread the tax liability over a period of time.  The owner will also have a security interest in the stock, assets, and receivables of the company, until the loan is paid off.

Continue reading “Getting Ready To Sell Your Business Even Before You Thought About Selling It!” →

Get Ready Now To Sell Your Business Tomorrow!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Income from your business, Inside Sale, Strategies of growing business, Working On Your Business

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.   

 

Why Would Anyone Want To Buy Your Business At The Price That You Set?

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Income from your business, Strategies of growing business, Value drivers, Working On 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.   

Partial list:   

  • 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.  

 

 

Your Exit From Your Company!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Income from your business, Selling Your Business, Strategies of growing business, Uncategorized, Value drivers, Working On 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!” →

Transferrable Intangible Assets. 

by YOUR BUSINESS WORTH, posted in Selling Your Business, Strategies of growing business, Tax Efficient, Uncategorized, Working On Your Business

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.

 

The Complexities and Issues of Business

by YOUR BUSINESS WORTH, posted in Company Wealth, Selling Your Business, Strategies of growing business, Working On Your Business

A chief concern for many business owners is how to arrange the orderly transfer of business to the next generation of family members or key employees. By far the biggest concern is how to keep the family business and the family. It is estimated that more than 70% of family-owned businesses do not survive the transition from the founder to the second-generation.

There are essentially three levels of the business succession plan.

Management; this is day-to-day management of the business which can be left to one person, one child or a group  of children. Also, this group might not be active in the business. This group could also include key employees rather than family members

Ownership; most owners would prefer to leave their businesses to the children that are active in the business. However, not all the children might be involved. Owners would still like to treat their children fairly, but not necessarily equally. Consequently, if the business interest is not left to a group of children, some other value would be left to the non-business children. A subset of this topic is whether the business owner will need a continued economic benefit from the business after the transfer. Also, will the business owner continue to control the business after the transfer is complete.

Transfer taxes; estate taxes can erode business value.   The question would be is there enough liquidity to take on the debt and keep the business going? This is truly a challenge to high-value business especially with a estate tax being a moving target as to the exemptions and percentage of taxations.

 Level I management

It might take many years for an owner to train the successor management team so that the business can run automatically. This allows the owner to walk away from the day by day operations. To do this the owner must give up control and tasks in which they ordinarily controlled. This is easier said than done. Whether the owner creates a management team with the next generation, or a key group of employees, the owner must learn to delegate important tasks.

Continue reading “The Complexities and Issues of Business” →