Get Ready Now To Sell Your Business Tomorrow!

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.   

 

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?

 

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

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.  

 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.  

 

 

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!”

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.

 

Transferring Stock does not mean you have to give up control. 

  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. “