The Final Act! The Day Will Come! Part 2

In part-one of this article, I mentioned how purchasers will prefer to buy a business where everything looks good and there are no apparent problems. Smart and neat operations will attract serious buyers; however, this is only one part that is needed to achieve your selling objectives.

There should be no hidden problems or secrets which can jeopardize the purchase. Any undesirable factor not disclosed to the purchaser can lead to a non-sale, or at the very least, something they can use as a negotiating tool. The fact that a deal has fallen apart, is not only frustrating, but will cost you money, time, and distraction from your business.

An owner who unknowingly discloses secrets or situations in their business can end up becoming a deal breaker. Issues which are known need to be dealt with to have the best chance of a good sale. Since there may be issues which are unknown the best answer to this is to search for the problems in advance and take care of them. Think of this the same way you would treat the sale of your home. You would normally fix up, repaint, and clean up before you put the home on the market. You should do the same thing with your business.

Not only would you want your physical location to be clean and tidy, but this also flows over to the other parts of your business, such as accounting, financing, marketing material, department procedure manuals, and an array of other business items. Prepared written policies and procedures are a great selling point for a prospective buyer. Remember, when someone is interested in your business, it’s their team that inspects every aspect of your business in doing their due diligence. This is a micro inspection of all aspects of your business, so it will pay to make sure there isn’t a bunch of dirty secrets hanging around.

FIRST IMPRESSIONS AND PHYSICAL APPEAL
The first time a prospective buyer visits your company they make value judgements. They will observe everything from your reception area to your signage in and on the building. If the impression they get is positive, they will want to investigate your company more. You don’t want to lose their interest based on visual appeal of your business. No matter how good your business seems to do on paper, the prospective buyer may lose interest based on your first impressions.

This observation doesn’t end with just the building. Your premises, marketing literature, dress attire of you employees, uniforms, office settings, rubbish areas and a host of other areas should be updated and tidy. Continue reading “The Final Act! The Day Will Come! Part 2”

Good Luck You Are Now In Business! Now What?

Chances are that the moment you started your company you felt the need to be in charge of everything (the control thing).  Tasks such as ordering stationary, trips to Staples, talking to the utility company, dictating messages and a sundry of other things. You did pretty much everything including the bookkeeping, sweeping the floors and taking out the garbage. 

 You were proud of your new business and wanted to make sure it did well from the very start and in in every aspect of your business. Even if it meant you had to work 80 hours a week to keep it going to be successful.   

 Then you started to make more money, enough to hire employees to help you grow the business.  As you moved forward so did your business commitments.    Your mindset however, is control, just like when you started the business.   A natural reaction since you started and created your business, the tendency is to protect it, this is your baby! 

THE NEEDED CHANGE IN MINDSET! 

The problem comes when you have to change your mindset as an entrepreneur. When you started your business, you had a talent and believed that your talent could make you profit and grow your business. However, as your business and commitment to the business grows, there needs to be a new way of thinking on how you should run the business.  

 For example; I have a brother who is a great mechanic.   If he were to open his business, he would be the best mechanic you could find.  His work would be impeccable, and everyone would enjoy working with him.  However, the minute my brother had to start thinking strategically about how to lessen his working hours, grow new markets, start a branding campaign, hire people to do some of his tasks, he would become very stressed and would definitely lose interest in running his business.  He is a great mechanic but didn’t think about the other parts of running a business.  All he ever wanted was a place to go paycheckand a position. Little did he realize that it would take more than being a good mechanic to run a business.   He didn’t realize that some of the things he liked to do would have to take a back seat or be delegated to someone else, so he could focus on the details that will allow him to grow his business.    

Continue reading “Good Luck You Are Now In Business! Now What?”

Business Succession Planning Is  A Necessity For Every Business! 

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:  

  1. What if I die or become very sick?  
  2. What if I lose my key person or key group?  
  3. What if don’t want to do this any longer?  
  4. What if there is an economic downturn and I can’t recoup?   

Other areas of concern are:  

  1. If I want to sell, when do I sell?  
  2. What is the business worth?  
  3. Does the senior management want to leave and retire, or stay active?  
  4. Can the main group of owners afford to retire without creating a cash flow crunch?  
  5. 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! “

Shift Corporate Income For Your Personal Retirement! 

 If you own a business, using a split dollar life insurance plan can help you shift business income to you on a tax effective basis, without involving other employees!

 Split dollar life insurance refers to the concept of two or more parties splitting the benefits and costs of a life insurance policy, such as the premium, death benefit and cash value.   

The most common type of split dollar life arrangement involves an employer and the employee or owners, with one part owning the policy, one or both parties’ contribution to the annual premium, but both parties having a vested interest in the policy benefits.   

Split dollar plans are inexpensive and easy to administer as an executive benefit arrangement.   

Here is how it works:  

One party establishes a cash value life insurance contract under the ownership of the key executive.   

The employer receives a “collateral assignment” against the policy, entitling the corporation  to receive the lesser of the policy cash value or the outstanding loan balance.   The loan is based on the premiums contributed by the company.   The same assignment entitles the employer to a portion of the policy death benefit, equal to the outstanding loan balance.   

 The key executive pays the taxes each year on the foregone interest on the loan from the corporation to pay the premium.   

At some point in the future, the split dollar arrangement terminates when the employer’s loan is repaid (typically from the policies cash value), leaving the executive “free and clear” ownership of the accumulated gain in the life insurance policy.   

 The executive can access the accumulated gains in the policy by borrowing against it, which will typically allow for tax-free access to the values.  The policy loan is repaid to the insurance company at the death of the executive, and any residual death benefit is paid to the executives’ named beneficiaries.  

Split dollar is an easier benefit to implement than deferred compensation, and less expensive for the employer.   

 Advantages:   

  • Easy account entries 
  • Recovery of the cost for the employer 
  • Performance objectives to trigger the funding for employer 
  • Very little if any impact on company balance sheet 
  • A “golden handcuffs” for the employer and ability to set restrictions when cash value can be accessed  

 Today’s newer types of life insurance policies enhance the benefits of a split dollar plan  Continue reading “Shift Corporate Income For Your Personal Retirement! “

Business Valuation After The 2017 Tax Cut And Jobs Act

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”

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.