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.
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!”
The objectives of recruiting a key executive from the marketplace are to make your business more profitable, to grow the company and / or to bring talent to your business that does not currently exist. You must design incentive plans that achieve those goals.
You will always be a slave to your business unless you have capable management in place to run the business when you are not there. If you someday hope to sell your business to an outside buyer, you will need to have solid managers in place to get serious consideration from an outside buyer. As is the case with most companies, the management team could someday become your buyers. If you want to transfer your business to your children, you will need key employees in place to assist them with the transition.
In order to attract the right person to your company, you must offer them an incentive plan that rewards them for efforts that increase the value / profitability of your business.
You should pay a key employee for projects that they initiate. This could be an additional six percent or more of their base pay. When this key employee has a positive effect on the rest of the management team, pay them a bonus based upon that influence. This could be 10 – 20 percent of their base.
When hiring for key management, we find that most compensation packages combine base and incentives. Determine the incentive on the company’s growth once that employee joins you. Decide how much you are willing to pay the right employee and then back into that figure.
Continue reading “What If I Want to Recruit a Key Employee?”
Business owners have experienced a well-publicized meltdown in traditional financing. Now they want to know how they can prevent themselves from being vulnerable again!
Become Your Own Bank
What if you set a goal today to accumulate money on your own? Shore up reserves for use in emergencies in your business, or for business opportunities, investments and personal retirement. You take care of your employees, your vendors and your customers. What if you think about taking care of yourself? Traditional savings vehicles are not as attractive as they were in the past. Many companies have eliminated pension plans. Those companies that haven’t are finding that, in many cases, the owner can’t put a substantial amount away for himself. Today’s business owner wants to accumulate money for the future’s “what ifs” without depending on outside financing sources.
Set up a SIP
The solution is a supplemental income plan, or SIP. If properly designed, a SIP accomplishes several things. The growth is tax-deferred. If accessed correctly, the gain is tax-free. There are no contribution rules and no required distributions. Moreover, there is a pre-retirement survivor benefit paid to the family in case of the death of the business owner, also tax-free. With the cash flow rigors of owning your business, putting money aside gets more difficult every day. Traditional methods no longer work or are no longer attractive. Safety is a greater concern now than in the past. Business owners want to control their own financial destinies without depending on credit lines, business loans and outside financing. What if, going forward, you finance your own business purchases? Every cent you pay in financing costs is lost forever. Eliminate these costs in the future and use your SIP for purchases, investments, opportunities and emergencies. The savings on financing goes back into your pocket. This is perhaps the best recession-era lesson for business owners to absorb today and to never forget in the future. Do not rely heavily on outside funding in the form of loans, vendor financing or even business credit cards.
Today’s business owner wants to accumulate money for the future’s “what ifs” without depending on outside financing sources.
Do It for You
Right now, business owners must take care of themselves because no one else is going to do this for them. Valley business owners constantly tell me they are tired of lying awake at night, staring at the bedroom ceiling and worrying about cash flow. A supplemental retirement plan is simple. It does not involve any administration or fees. There is no ERISA or IRS involvement. Where is the best place to invest as you bulk up your SIP? In the past, you had two choices. You had market-driven vehicles that we now realize can be a roller coaster ride or safe vehicles that yielded small or no returns. Here is a new option for you and your professional financial advisor to consider. Life insurance—a product that has been around for more than 200 years—may present the flexibility and growth you seek.
Continue reading “What If I Want to Take Care of Myself?”