Building a business is hard work. Protecting and preserving it is even harder and overlooked by business owners.
While many owners expect family members to take over the business (69%), very few have actually made plans to make sure their wishes are accomplished (26%), even though they realize the importance of estate and succession planning as is an integrated part of that planning.[i]
A succession plan is complex, time consuming and involves attention to details along with many hard questions which need to be answered for a comprehensive and effective succession plan. It is also the key element in maximizing the return on the investment of your business. This is the big financial payout, the sale of your business.[ii]
SOME MAJOR QUESTIONS AND ISSUES TO ASK YOURSELF!
What if a shareholder wants to sell their interests?
- Is there a right of refusal for the other owners?
- What are the financing arrangements?
- What are the recourses if you fund the buyout especially if the funding is over a long period of time?
- What is the arrangement if the business fails, how will you get your money if you financed the sale?
Who steps in your shoes if you want out?
Not everyone has the luxury of leaving a business when and how they want to. Things like death, disability, and situations are uncontrollable.
- What are your contingency plans when a trigger occurs (death, health, non-voluntary situations)?
- Do other members of the firm have access and authorization to use funds to keep the business going if there is such an event?
- Does your family take on personal obligations for financial notes and loans you have signed personally to fund your business operation?
- Do you have estate documents and health care directives, should you have a disability or become incapacitated?
Taxes- and the planning for them Continue reading “Critical Questions That You Need To Answer If You Own A Business!”
Because of the Tax Cut and Job Acts of 2017, the marginal rates are lower. The impact of the recent tax cut is very straight forward. Lowering the rate, means a higher after-tax cash flow which translates into higher value for businesses.
Business owners know their business better than anyone. That being said, you would also assume they would know the value of the businesses? Not so fast!
Knowing your business and knowing what you think it is worth in reality can be two separate issues. If it were that simple, appraisers would not be needed, but they are, and they play very key role. They arrive at a fair market value after taking many facts into consideration.
Valuations; “The Walk Way Number”
The “country club” concept of a business owner having a number in his/her head as to what they would take, if offered, offers some interesting conversations during happy hour!
Over the years I have spoken to business owners, and periodically I have been told that the owner has a figure in their head, and if they were offered that figure for their business, they would take it! They seem to know their business better than anyone, so it is reasonable to believe they have a handle on the value of their company. In more cases than not, that figure would allow the owner to go and do what they want in life as it would give them the capital needed, and the can walk away from the business.
However, there are some different sides to this concept! A more logical way of knowing the business value!
Continue reading “Business Valuation After The 2017 Tax Cut And Jobs Act”
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.
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!”
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”