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!”
Selling your business to a key employee, or a group of employees.
Assuming that all of the purchase price is to come from the key employee (s), you can help the purchase, by (a) using a stock dividend distribution, or (b) bonus of money to the employ, such as a bonus executive program. (See Restricted bonus agreement).
It is important that the company have consistent cash flow, (discretionary cash flow;) to use for this purpose. (This is the cash generated by the company which is not needed to run the operations, for debt service or capitalization of the business).
Planning for the sale of the stock to insiders, and cash flow;
It is important to have a accurate idea of the yearly cash flow. For example, if the discretionary cash flow is $1 million a year. You might commit 10% of the company, or $100,000 a year to help pay for stock. Continue reading “Creating Cash Flow In Your Business”
When considering the transfer of stock to a key employee, or a group of key employees, (referred to Key group), you need to determine how much they want to be involved in the company, and the risk they are willing to take in the future of the company.
In Tier One of the purchase, the key group will purchase stock. They purchase stock from future salary, financing, or from future cash flow in the form of dividend payouts.
It wouldn’t be uncommon for the owner to want to see the purchasing employee put some skin in the game. Seeing the employee be committed allows the employer to consider future financial programs to help the employee purchase the balance of the stock under Tier 2 (the selling of the balance of the stock).
The owner in most cases will look at the bottom line what they want in the end and the financial capabilities of the key employee. Smaller employees will try to make it easier for the key person to purchase the stock. Using a bonus plan to help them buy the stock can be a very useful tool for both parties. The employer gets a tax deduction, while the employee has additional funds to purchase equity in the company.
Using lower valuation for a better cash flow when business is sold Continue reading “Key group wants to buy your business, buy do they have skin in the game?”
A major challenge for a small business owner is selling their business for the right price and to the right purchaser. However, in most cases we find that many business owners don’t spend the needed time to do this planning. Consequently, they jeopardize the potential sale price.
Many small businesses will not be purchased from an outside purchaser, (about 5%), but the sale could come from either family members or inside employees of the business.
A 2003 study suggested that owners felt nine out of ten family owned business leaders thought their business will continue to be run by the same family or families in the next five years. 
You may have considered keeping the ownership of the business in the family and may have already gifted stock or sold stock to your children. If this is the case, your planning should be more directed to other parts of the financial life, and possibly the role as a passive owner in the business.
Continue reading “LOOKING WITHIN FOR YOUR POTENTIAL SALE OF YOUR BUSINESS!”
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?”
There are business partners who at their death, want their family to continue to own their shares even though the family member will not be actively involved with the business. We see this with businesses that are expected to grow significantly. Each owner wants their family to share in the future growth even if they should die prematurely.
A no-sell buy/sell agreement has a fairly simple structure. The management and the voting stock all remain with the surviving owner. The deceased’s ownership interest remains with his family. We take each owner’s interest in the business and divide into voting and nonvoting stock. Upon the death of one of the owners, the deceased’s voting interest is bought by the surviving owner per the terms of the buy/sell agreement. The non-voting interest of the deceased owner remains with his family. This way, if the business does grow significantly, the family of the deceased will share in the growth. The control of the business remains in the hands of the surviving owner. The family of the deceased owner has non-voting interest in the business only and cannot expect to see any money out of the deal unless, and until, the business is sold. Continue reading “What If I Want A No-Sell Buy / Sell!”