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.   

 

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!”

Creating Cash Flow In Your Business

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”

Building Business Value Techniques!

If you permanently left your company today, would it continue with little effect on cash flow?  If so, would you consider this a transferable value? Transferable value is a driver that is critical for business growth.

A company management team is instrumental in growing cash flow and business value.  When a business has the capabilities of having little disruption with its cash flow when an owner leaves, you have a valuable transferable value.  A key component of building transferable value is Next-Level Managers. Usually they are experienced working for larger companies. They know how to grow companies and know how to attract people with experience and the skill to help run a company.   This level of management will demand more money, perhaps ownership as a condition of employment.

Next level management (NLM) and future changes!

  1. To attract NLM, it involves training and coaching for the existing management. When adding NLM it may involve replacing current managers who underperform.
  2. The decision to replace existing management is difficult and hard for many owners, as current management members have been loyal to the company. However, they may be moved to another position with the same type of responsibility.  They are good employees, but NLM do a much better job in the management position.
  3. Engage management consultants and outside resources to create more growth. NLM work well with these professionals.
  4. Owners provide leadership and motivation for management. Owners should design plans that provide strong incentives to management to remain with the company beyond the owner’s exit.
  5. Motivate employees to perform at higher levels, create a culture.
  6. Financial incentives designed to grow cash flow or business value is more likely to achieve the value or cash flow necessary to support the owners’ exit goals and value growth of the company.
  7. Top management must stay in the business when owners leave, or they don’t have a transferable value and will not achieve the goals when the owner exits. Incentive benefit plans help keep top management employees involved after the exit of the owner.
  8. The use of a “non-qualified deferred compensation plan” or NQDC Plan which involves a benefit formula and vesting schedule, highly motivates management to stay on.
  9. When you cobble the benefit formula to a performance benchmark it is possible to increase cash flow and profitability for the company.
  10. The vesting schedule in the benefit it makes it hard for the top management person to leave. They will leave too much on the table. The vesting schedule give the employer the benefit of keeping a top level management.  The employee benefits as the company can offer a richer benefit knowing the reward the employee receives is tied into the company’s profitability.
  11. The appeal of incentive plans for key employees (management) is understandable: To create transferable value, someone other than the owner must be similarly motivated to grow value and the cash flow necessary to achieve the owner’s exit goals and continue the company beyond the owner’s exit.

Operating Systems That Enhance The Transferable Value Of A Company!

Continue reading “Building Business Value Techniques!”

The Small Issues Which Business Owners Need To Know About!

The Small Issues Which Business Owners Need To Know About!

When working with business owners, it is important to communicate many of the overlooked issues which may blindside them and cause disaster in their financial future.

Small issues turn into major problems bringing with them costly consequences. Many of them are obvious, and can be game changers in your future.

Whether you are an advisor or a business owner, some of the ideas I put forth will help you communicate these overlooked issues.

Estate Planning

I am sure if you asked 10 people to describe what estate planning is in one sentence, you would get 10 different answers.

At one time most advisors and business owners  would suggest that estate planning is about reducing taxes.  However, I would disagree that estate planning is just  about paying death taxes and mitigating estate costs.

To me, estate planning consists of three phases, creation, preservation, and distribution.  Each of the phases is distinct in and of themselves.

Creation is the concept of money, and accumulating.  Implementing strategies, which allow estate owners to create wealth, and avoid losing wealth by making financial mistakes.

Preservation is about protecting what you have from, inflation, lawsuits, expenses, and taxes. 

Distribution is the orderly distribution to your heirs.  It also is   a phase where the estate owner can distribute wealth to certain beneficiaries, at the least cost possible.

DORIS DAY:  THE EXAMPLE

Doris Day’s husband died in his 60’s.  He had taken care of all the financial areas of their life.    After his death, Doris Day did not know what she had, or what she owed.  The net result was she ended up owing a fortune to the IRS, in income and estate taxes.

Business owners not only have needs as business owners, but also have needs as individuals. Consequently, it’s not only the business planning that needs attention, but also a coordination of their personal situation.     In many situations, the owner’s planning is more complex because of the business ownership.

Continue reading “The Small Issues Which Business Owners Need To Know About!”

Exiting Your Business- What You Need To Know and Do!

    In my last newsletter I discussed the three exit strategies business owners can use when they decide to sell their business.   As a review they are; outside sale, inside transition sale, and passive ownership.  Of course there is the liquidation sale which happens when there is no future planning. Liquidate and see what you can get, however I do not consider this an exit strategy.

So what does a blueprint for exiting your business look like?

First:  You must influence your personal company culture. Employees need to know the values and principles you have formed over the years of your business life so they understand the mission.  What needs to be communicated is how you started the company and how you built it up.  The values behind all that effort needs to be communicated to your employees, vendors, and anyone who will listen, especially potential purchasers of your business. By doing so you will gradually build a strong culture in your own organization that will remain in place whether you’re planning on being absent for a long period of time, or just a short period.     A healthy culture makes your company more attractive to buyers and sets the course for more options such as inside sale, or passive ownership.

Continue reading “Exiting Your Business- What You Need To Know and Do!”