Business Succession planning for businesses, especially private companies, should be on the a top propriety in the planning area. Whether the sale will be to top management, middle management, family or to outside sales, it should be an ongoing planning concern.
A number of private established company’s do not have any such planning, and newer companies in where the owners have no family to take over have the same problem. In both situations there is a challenge to create a succession plan.
Business succession planning could be the hardest planning of all. However, it is a must in planning. It is the only way the current owners can guarantee that the wealth of the company will either be passed on and continued, or the wealth is transferred to the families through the sale of the business. Without the succession plan, the largest potential of business wealth can be lost forever.
The lack of a Succession planning is the reason why many stockholder owners walk the floors at 2am. They have a true concern for the successor of the firm and the protection of the wealth of the firm.
Some of the questions that the owners of firms have:
- What if I die or become very sick?
- What if I lose my key person or key group?
- What if don’t want to do this any longer?
- What if there is an economic downturn and I can’t recoup?
Other areas of concern are:
- If I want to sell, when do I sell?
- What is the business worth?
- Does the senior management want to leave and retire, or stay active?
- Can the main group of owners afford to retire without creating a cash flow crunch?
- How vulnerable is the company if key people leave and take the secrets with them, or even start their own business, using the company’s business model, or share vital business secrets?
The questions discussed above along with many other questions, are the basis of the planning and will help the planning team of advisors guide the owners through the maze of planning traps and opportunities as they walk the path together. Continue reading “Business Succession Planning Is A Necessity For Every 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.
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.
Selling your business is an important financial transaction that requires a well developed exit strategy. Many owners view their business as much more than an asset. They’ve poured their hearts and souls into it. Maintaining the established business culture motivates them to sell to insiders. In fact, 95% of all sale transactions involve insiders, who may include co-owners, family members, managers and key employees. The insider group that is buying the business is called a key employee group (KEG).
There are four ways to transfer a business to insiders: Continue reading “Transferring A Business To Insiders”