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Top Excuses Owners Use to Avoid Exit Planning

Top Excuses Owners Use to Avoid Exit Planning

Like every owner, you will one day exit your business, voluntarily or involuntarily. On that day, you will want to attain certain business and personal objectives: The first (and usually prerequisite to all others) is financial security.

Believe it or not, most owners do absolutely nothing to consciously plan and systematically move toward the all-important goal of financial security. Anecdotally, the four most common excuses owners use to justify delaying and eventually ignoring Exit Planning are as follows:

  1. The business isn’t worth enough to meet my financial needs. When it is, I’ll think about leaving.
  2. I will be required to work for a new owner for years.
  3. I don’t need to plan. When the business is ready, a buyer will find me.
  4. This business is my life! I can’t imagine my life without it!

Today, let’s look at the first hurdle that prevents most owners from making the necessary plans to cash out of their businesses and move on to the next stage of their lives.

Excuse 1: The Business Isn’t Worth Enough to Meet My Financial Needs. When It Is, I’ll Think About Leaving.

This is a common and relatively reasonable assumption: Why spend time, effort, and money to plan to leave your business when you cannot do so today? Why not wait until it is at least theoretically possible to leave to begin the Exit Planning Process? Consider the following example:

At age 45, Jerry Rowling dreamed of the day he could leave his company. The past five years that Jerry had spent trimming fat, watching every dime, and developing new marketing strategies on a shoestring budget had taken their toll. Nevertheless, Jerry kept his nose to the grindstone, fully confident that if he worked hard enough, the exit he dreamed of would take care of itself.

Fast forward five more years: Jerry has remained stagnant, dreaming more frequently but doing nothing to bring about the day he could walk out the door. What had changed was that Jerry had reached his 50th birthday, a benchmark he had set years earlier as the day he’d leave the business behind.

During the five years Jerry spent working in rather than on his business, he missed the opportunity to do the following:

  • Clearly establish his personal Exit Objectives and goals.
  • Create an Exit Plan (based on his goals) that would identify the most productive actions he could take to create and protect value, and to do so in the most tax-efficient way possible.
  • Drive up business value to the point where he could sell, pay taxes, and exit with the amount of cash necessary to achieve financial security.

What owners know to be true but often fail to act on is that growing value usually does not occur unless owners focus their efforts on deliberate actions that move their companies measurably toward their goals. In failing to act on what they know, owners don’t create or implement Exit Plans and thus are never able to exit on their terms.

Do You Have a Plan?

Avoiding planning not only puts your future financial security at risk but also overlooks your company’s need to grow in value efficiently and quickly in carefully targeted areas. Growing and protecting value is at the core of Exit Planning. To identify where and how to spend precious company resources (i.e., your time and money) to make the greatest impact is a key Exit Planning task. It is just as important as identifying and implementing strategies to minimize both current taxes and the tax bill when you transfer your company.

It makes sense to start planning for your eventual exit now, because you have to plan (and consistently take purposeful actions to implement your plan) regardless of the state of the economy. The simple reality is that most owners don’t plan; therefore, most owners are never able to leave their businesses in style.

Excuse 2: I Will Be Required to Work for a New Owner for Years.

If one of an owner’s Exit Objectives is to leave the business as soon as possible, he or she needs to direct the Exit Planning Advisor to make that a prerequisite of any sale. Some buyers require sellers to stay on after closing, but if the management team is strong, most require the former owner to remain only for short transition period, usually no more than a few months.

If the company’s management team consists only of an owner who wants to leave as soon as possible, the former owner should plan on working for the new owner for a couple of years. If the owner’s exit is still several years away, then there’s work to do.

The best way for owners to assure that they don’t become employees for a new owner is to make themselves an unnecessary expense by creating a management team that has proven its ability and motivation to make the company profitable.

Excuse 3: I Don’t Need to Plan. When the Business Is Ready, a Buyer Will Find Me.

One of the hard lessons of the Great Recession of 2008–2011 is that the timing of an exit depends on a vibrant economy with active buyers, a company with strong cash flow, and an owner ready to sell. These factors seldom exist in equal measure at the same time.

We suspect that some owners believe that waiting for a future economic tide to bring back well-financed buyers involves little to no risk. However, this type of passivity is fraught with danger:

  • What if a qualified buyer doesn’t show up?
  • What happens if, when the owner is ready to sell,
    • the mergers and acquisitions market is dormant?
    • the owner’s industry niche has fallen out of favor?
    • a national competitor moves into the owner’s territory?
    • the business and/or the economy is in decline or worse?
    • the owner’s health and/or personal circumstances unexpectedly deteriorate?
  • What happens if the economic tide doesn’t return at all or at least not for many years?

Excuse 4: This Business Is My Life! I Can’t Imagine My Life Without It!

We all know business owners whose belly fires have gone cold and whose animating goals have grown stale. Nonetheless, they hang on to their businesses because they can’t imagine their post-exit lives without them. We also know owners who remain energized and involved with their companies until they die. Both types will leave their businesses eventually.

If owners still are passionately engaged with their businesses and happily making a difference in their lives and the lives of others, they should not exit just to exit. However, if the passion that once burned brightly has turned to cold ash, it’s time to act while there’s still time.

To start Exit Planning only when the end is near fails to exploit the majority of Exit Planning’s benefits. Exit Planning involves building business value, cash flow, and resiliency so that the business prospers regardless of who owns it or what that owner’s Exit Objectives are. Exit Planning involves protecting value and minimizing taxes, both of which are valuable endeavors regardless of an owner’s specific Exit Objectives. When departure day dawns, owners who have planned their exits are better positioned to achieve all of their business and financial objectives.

Final Thoughts

Certainly, the decision to sell the business you created and nurtured is an intensely personal one. No one can tell you when to exit your business or what to do with the rest of your life. Having worked with other owners, we can help guide you through the process of preparing for the biggest financial event of your life. We can help you consider all of the factors associated with exiting your business and help you complete your Exit Objectives.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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What Is Your Business Really Worth?

What Is Your Business Really Worth?

For many owners, the answer to one question determines whether they can leave their companies: “How much money will I get when I sell?”

This question is critical and answering it is Step Two of The Seven Step Exit Planning Process™. Realistically, you can’t exit your business unless you achieve financial independence, and the primary source of that independence is likely to be the funds you receive for your business when you leave.

Let’s look at fictional owner Ron Nee, the owner of Landscaping Supply Company, to see why getting a valuation well before your exit date is so important.

For years, Ron figured he could sell his business for more than enough money to retire comfortably. He based that belief on his understanding of his industry’s valuation rule of thumb: a percentage of gross revenue. Using that rule, Ron calculated that his company was worth about $2 million—more than enough to finance his post-exit life.

When Ron decided that it was time to sell and met with a transaction intermediary, he learned that the rule-of-thumb approach didn’t apply. Ron discovered that buyers for the company would base their offers on cash flow rather than on revenues (the basis for Ron’s estimate).

Because Ron relied on an incorrect assumption about the value of his business, he had wasted valuable time coasting along to his exit date. Had he retained a professional to estimate value or provide a range of likely sale prices before he was ready to exit, he could have spent his time focused on increasing the value of his business.

How Can Owners Avoid Ron’s Predicament?

Ron Nee failed in a critical aspect of ownership: knowing the value of his business. By not getting a professional valuation or estimate of value, he never knew how far away he was from exiting. He had no accurate information on which to base a plan to grow value.

Benefits of Valuation

An accurate valuation of the business does the following.

  • It objectively tells owners how much value they need to add to the business.
  • It gives owners the ability to monitor their progress toward their ultimate financial objective. For example, if Ron had discovered that his business was worth $1.5 million (pre-tax) instead of $2 million, he could have created and implemented a plan to increase the business’ value to $2 million by the time he wanted to exit. His plan could have included interim goals and laid out strategies to achieve each interim goal.
  • It determines whether and when owners can reach their Exit Objectives.
  • It provides a basis for estimating and minimizing tax consequences of Exit Path alternatives.

Whether owners are ready to exit their businesses today, tomorrow, or in 10 years, they need more than a thumbnail sketch (i.e., a rule of thumb) of value. An experienced appraiser should be able to answer the question, “Can my company be sold today for enough money, after tax, to allow me to reach all of my Exit Objectives?” If the answer is no, owners can use that knowledge as the basis for a plan to build business value.

Cost

The scope and cost of hiring an appraiser or business intermediary vary substantially. For example, if an owner is several years away from a transfer of ownership, a full-blown valuation may be unnecessary. Instead, that owner needs a value approximation (or range of likely sale prices). If an owner is ready to exit and plans to sell to a third party, a transaction intermediary can prepare a range of likely sale prices. If that owner plans to transfer the company to employees or family members, a certified business appraiser can prepare a “calculation of value.”

Estimates of value, thorough evaluations, and marketability appraisals all have their places. Don’t skimp on obtaining the valuation you need, but don’t secure a more precise valuation before you need it.

What If?

Finally, let’s return to Ron’s situation: What might have happened had Ron obtained a business appraisal and learned—well before his target exit date—that his company would likely sell for a price that would meet his financial objective? Should he have taken immediate action to sell? What would you do if you learned that you could exit your business today for an amount of after-tax cash that would meet all of your financial objectives? How would know that your business’ value is 60, 75, or 110% of what it needs to affect your actions? Life offers no guarantees regarding your health or longevity, and volatile economies can provide an excellent reminder that there are plenty of circumstances beyond your control. For all of these reasons, knowing the value of your company is a fundamental, indispensable element of sound decision-making.

For more details about how we can help you value your business, contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Avoiding Disasters in Insider Transfers

Avoiding Disasters in Insider Transfers

Steve Smith was no different than millions of other baby-boomer business owners in that the thought of leaving his business was never far from his mind, no matter how far away his exit might have been. He daydreamed about transferring the business to his oldest daughter and perhaps to a member of his management team, yet he couldn’t gauge their passion for owning a business and hadn’t tested their management skills.

And, of course, they had no money.

Steve’s company was his economic and financial lifeline. Without its income, his ability to use the business to accumulate wealth, the ability to sell his interest to a buyer who had cash, and a plan, Steve’s wishes would never come true. To Steve, it was obvious that if he ever wanted to exit his business in style, he needed to wait for a white-knight buyer to appear on his doorstep bearing saddlebags of cash. So, Steve did what many other owners in his position do: nothing.

If you think that transferring your business to your children or management team is inherently risky, you are right.

Insider transfers are risky for three reasons:

  1. Insiders have no money
  2. Successors’ management/ownership skills and commitment to ownership may be untested
  3. Owners lose control of the business if they make the transfer before they are completely cashed out.

On the other hand, the possible benefits of an insider transfer include the following:

  1. Keeping the business in the owner’s family or extending the owner’s legacy through his or her hand-picked management group.
  2. Motivating, retaining, and rewarding key employees.
  3. Reaping more after-tax money than a third-party transfer.
  4. Retaining control until all, or most, of the purchase price, is received.
  5. Remaining active in the business while gradually reducing day-to-day responsibilities.
  6. Providing time for owners to build up personal assets (via distributions of cash) before their exits.

The trick is to design a plan that minimizes risk so owners can reap all of the potential benefits. Let’s first look at how that might be done.

1. Insiders have no money; therefore, it is too risky to sell to them. That’s true if owners don’t design a transfer strategy that puts money in the insiders’ pockets as they increase the value of the company. Owners have to work steadily and effectively to build cash flow (the source of all cash outs) through (a) the installation of Value Drivers and (b) careful planning to minimize taxation years in advance of the transfer.

Unless owners carefully plan to avoid it, cash flow can be taxed twice. This double tax, sometimes totaling more than 50% of the total payout, can spell disaster for many internal transfers. However, through effective tax planning, much of this tax burden can be legally avoided.

Finally, owners and their advisors, including a certified business appraiser, should use a modest but defensible valuation for the company. By using a lower value as the purchase price, the size of the tax will be correspondingly reduced. The difference between what owners will receive from the sale of the business at a lower price and what owners want to be paid after they leave the business is “made good” through a number of different techniques to extract cash from the company after the owner leaves it.

2. Successors’ management/ownership skills are untested. If the successors’ ownership skills are untested, owners should create a written plan to systematically transition management and ownership responsibilities to their successor(s), beginning today. The transition period, during which owners test both their assumptions and their successors’ skills, usually takes several years to complete.

3. Losing control before being cashed out. This only happens if owners and their advisors fail to implement a transfer strategy designed to keep the owner in control until he or she receives the full sale price for the business. In a properly crafted plan, owners keep control through a well-designed and incremental sale of the company based on improving company cash flow over time.

There are four keys to reducing the risks of an insider transfer:

  1. Plan the transfer well in advance of your desired exit date. Executing an insider transfer takes longer than executing a sale to a third party.
  2. Implement value-building activities, which are just as—if not more—important to an insider transfer as they are to a sale to a third party.
  3. Design the plan to be tax-sensitive.
  4. Write the plan down and hold advisors accountable.

We have the experience and know-how to help you implement those keys and unlock the doors to your successful exit. Please contact us today to get started on your insider transfer today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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The Essential Business Agreement: A Business-Continuity Agreement Among Owners

The Essential Business Agreement: A Business-Continuity Agreement Among Owners

If you co-own your business, the business-continuity agreement (or buy-sell agreement) is one of the most important documents that you will sign. If you have a buy-sell agreement that is out-of-date, not reviewed, or focuses on the wrong issues, it may be worse than having no agreement at all.

Let’s start with a hypothetical case study that illustrates the importance of drafting a buy-sell agreement that anticipates and provides for all transfer events (lifetime transfers, disability, or death).

George Acme’s son-in-law, Tom Gardner, had been with George’s company for over 20 years. Tom had gradually assumed an operational-management role, was the acting CEO, and had purchased 25% of George’s ownership over the years—mostly at a low value, in recognition of his valuable services. Everyone acknowledged that Tom would one day own the company and carry on Acme’s fine traditions.

However, that was before George died and Tom’s sister-in-law, Babette, became the executor of the estate. Babette told Tom that she would either sell him the balance of the company—at full fair market value and for cash—or would sell the business to the highest bidder.

Only later did she realize that without Tom’s cooperation, the business was unlikely to sell. No buyer wants a disgruntled minority co-owner, especially when he’s the current CEO.

Tom and Babette disagreed about the company’s value, who was in control, and successor ownership. All of these issues would have best been discussed and resolved before George’s death. Had Tom and George created a buy-sell agreement, the business would have transferred at a fair price to the benefit of all concerned. Now, because Tom and Babette weren’t talking—except through their lawyers—it was unlikely that Acme could even keep its doors open.

Lifetime or Death Events

The buy-sell agreement controls the transfer of ownership in a business when certain lifetime or death events occur. Typically, the trigger events include the death of an owner, a sale and transfer of stock from one owner to another, or a sale to an outside party. A buy-sell agreement can also describe owners’ agreements about how transfers will take place after lifetime transfer events occur, such as an owner’s permanent and total disability, termination of employment, retirement, bankruptcy, divorce, and/or a business dispute among the owners.

Assume George didn’t die. Instead, one of his co-owners wanted to exit. How would they agree on value and buyout terms or design the transfer? Without a buy-sell agreement agreed to in advance, one owner’s desire to exit can transform longtime co-owners into adversaries, based on disagreements about valuing the company and setting the terms of purchase. The buy-sell agreement sets the valuation method and the terms of the purchase, and outlines the tax plan.

A buyout during an owner’s lifetime is similar in design and consequence to the sale of the entire company to a third party. The value of the business and the terms of the sale (payment, security, etc.) will be negotiated. However, in internal transfers, hard-nosed negotiation tactics and disputes about value and payments can quickly destroy friendships, company culture, or even the value of the business.

The best way to avoid this is to agree in advance on the method of appraising value and payment terms when all of the co-owners are on the same page, looking out for the ultimate welfare of the company, and don’t know whether they will ultimately be a buyer or a seller. During each of these events, the buy-sell agreement may require the business or remaining owners to purchase the departing owner’s stock, give an option to the business or the remaining owners to buy that ownership interest, or give the departing owner the option to require the company to buy his or her ownership interest.

Remove the Guesswork

The buy-sell agreement should provide a clear picture to a departing shareholder regarding how much money he or she will receive and how often. Likewise, the remaining shareholders should know the extent and duration of their buyout obligations in advance. This allows both parties to plan their respective futures.

The buy-sell can and should establish the value of the stock, set the terms and conditions of the buyout, and give additional protection to all owners. In short, the buy-sell agreement is intended to protect all owners by telling each to whom they can sell, at which price, and under which terms and restrictions.

In This Case, Nothing Is Better Than Something

As we stated at the outset, an out-of-date buy-sell agreement is often worse than no agreement. Out-of-date agreements may require an owner to buy or sell based on inaccurate values or terms that may have made sense during boom times but can mortally wound the business in tough times.

We urge you to review your buy-sell agreement at least annually as part of your annual planning meeting with your advisors. At a minimum, ask the following:

  • Does it reflect when I want to depart?
  • Does it give me the amount of cash I need to be financially secure?
  • Is it designed to minimize income taxes to the seller and the buyer in the event of any type of ownership transfer during my lifetime?

If your buy-sell agreement is well-drafted and conscientiously updated for changes in ownership, value, and other circumstances, there aren’t many disadvantages.

We’d like to help you create and consistently update your buy-sell agreements to reflect your most current wants and needs. Contact us today to begin building a buy-sell agreement that can handle any kind of transfer event.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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10 Questions Top Advisors Ask Every Business Owner They Meet

10 Questions Top Advisors Ask Every Business Owner They Meet

  1. How do you see your involvement in your business changing or evolving in the future?
  2. What’s your next great adventure after you leave your business?
  3. What obstacles are you seeing that could derail your business or personal goals in the coming years?
  4. What role does your business need to play in helping you achieve financial freedom?
  5. What is your plan for your ownership interest in your business: do you plan to pass ownership along, or arrange for a sale someday?
  6. What method or methods have you used to assess the value of your business, and how confident are you in that process?
  7. Given your (buyer or successor) plans, have you thought about who the best leader for your business might be?
  8. Tell me about what will happen with your customers, your vendors, your employees, and your competitors if something happens to you.
  9. What planning suggestions have other business advisors given you to prepare for the future ownership of your business?
  10. What do you see as your greatest challenge when you think about planning for the future?

BONUS QUESTIONS:

  • What other questions should I be asking?
  • How can I help you and your business be more successful?

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Working Backward: 3 Questions to Ask About Your Planning

Working Backward: 3 Questions to Ask About Your Planning

Do you remember trying to solve a complex maze as a child? You’d start at the beginning, trace a line toward what you thought was the correct path to the end, only to run headlong into a wall. So, you’d start again, only to run into a different wall. But then, someone who had experience solving complex mazes may have suggested, “Start at the end: It’ll take you through the correct path to the beginning.”

When planning for your business’s future, starting at the end is a valid strategy. “The end,” in this case, maybe a well-formed plan to fulfill your unique personal wishes: what happens to the business, your target successor, and your family if you die. Few people like to plan for their deaths, but there is power in planning. Rather than death having the final say in how you and your business are remembered, you can position yourself to have the last word with proper planning.

If you choose to work backward in your planning, it’s still wise to consider setting goals and determining any monetary gaps you may have between what you have and what you need to fulfill those goals. Once you’ve established those facts, you should ask yourself three questions as you work backward to impact your future.

Can My Business Continue Without Me?

Many business owners fund their lifestyles with money accrued from their businesses. Whether that comes in the form of a salary, perks, or stock and benefits, the business is the foundation upon which many owners build their lives and their families’ lives. For these owners, continued business success is crucial to maintaining the lifestyle they want.

The wall you might run into in navigating this maze is that your business relies on you for success. That is, without you, the business would at best struggle and at worst fail. This often implies that you cannot take long vacations; cannot face long-term, debilitating illness; and, of course, cannot die prematurely, lest your business suffers the consequences. While you may have control over your vacation time, unexpected illness or death is less controllable.

Ask yourself: “Can my business thrive without me?” Unless you’ve had the freedom to take a long break from work—without checking in and without any issues while you were gone—recently, chances are, you are indispensable to your business. If your business cannot continue without you, you might be placing your employees and family members at peril.

Do I Have a Successor Who Could Run the Business in My Stead?

Successful businesses tend to have several employees who could keep the business afloat for a short time if something were to happen to the owner. We call these people key employees. However, relying on key employees to take over at the drop of a hat can be risky. Key employees may be good at their specific tasks but struggle with ownership responsibilities. More commonly, they may not want ownership responsibilities, even if it means more money and influence. Some key employees simply want to be key employees.

Ask yourself: “Do I have someone who can take over the business right now if necessary?” This means either having an internal successor trained and groomed to take over, or having a plan to bring in outside talent to take over. If you don’t, it can be much harder to prepare your business for when you leave it, whether by choice or otherwise. If your business doesn’t have a next in command available, your family, employees, and business might suffer if anything were to happen to you.

If Something Happened to Me and My Business Sold for Full Value, Could My Family Keep Their Quality of Life?

People you care about (family, employees, charities) probably rely heavily on your business’s success to fund their lifestyles. If you were to suddenly leave the business—especially due to illness or death—those people may suddenly lose the means to fund those lifestyles.

Ask yourself: “Will the people I care about most continue to thrive without me?” While it’s impossible to replace your presence, with proper planning, it is possible to continue providing for the people you care about most, regardless of what happens to you.

Working backward can set the groundwork for planning for your business’ future, with or without you. If you’d like to discuss these three questions or any other questions you might have regarding the futures of yourself, your business, or your family, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Why Defining Goals Is Important and How to Do It

Why Defining Goals Is Important and How to Do It

Planning for a successful business future is an exercise in foresight and commitment. Without foresight, it may be difficult for you to determine what success means to you. Without commitment, even the best-laid plans will fall by the wayside. For everyone involved in the process of planning for a successful future, defining your goals is the foundation.

When talking about goals, many business owners share some commonalities. Many owners want to be in control of their destinies. Many want their businesses to reach certain cash flow or revenue benchmarks. But unless you can clearly articulate what your goals are, they can stumble into some unexpected and unwanted scenarios. Consider the story of two partners who fell into this trap.

What happens when goals get misaligned

Bruce and Jeff Skaggs spent 20 years turning a passion project into generational wealth. Their high-end clothing line had grown from a two-person outfit headquartered in Jeff’s basement to a $50 million brand. With Bruce in charge of design and Jeff as the company’s rainmaker, Skaggs Couture afforded Bruce and Jeff a life of comfort for themselves and the people they cared about, including their workers.

Bruce and Jeff took pride in giving each employee a yearly $9,000 stipend to use as each employee saw fit, on top of the above-average salaries they offered each employee. Bruce and Jeff also provided employees with pieces of their newest designs, which used only the highest-end fabrics and leathers. Their generosity helped attract the best employees.

As Bruce and Jeff grew older, they decided that they wanted to sell the company to an outside party. They had no shortage of suitors and chose to negotiate with the one that offered them the most money, well over the $50 million it was worth. As they and their advisors negotiated with the buyer, Bruce and Jeff became more horrified by what the buyer intended to do.

The buyer said that they intended to eliminate the employee stipend entirely. They wanted to move production overseas and introduce a lower-quality, lower-priced line of clothing to attract a wider swath of consumers. They also proposed enacting what they called “hiring efficiencies” that would maximize shareholder value and increase Skaggs Couture’s bottom line.

Bruce and Jeff discovered how important the culture they’d built had become to them. They didn’t want to sell the business for top dollar if it meant harming the employees who had gotten them there. So, they took the business off the market, determined to restart from square one.

Though this scenario is fairly common, it’s also avoidable. Bruce and Jeff assumed that the buyer they worked with would continue the business just as they had, which is why they chose the highest offer. While money is important, it’s rarely the only important thing for business owners.

A different strategy that Bruce and Jeff could have used was to establish two different goals before pursuing a buyer.

Foundational goal

The foundational goal is how much money an owner must have to achieve financial security. In Bruce and Jeff’s situation, $25 million apiece seemed like more than enough money to assure financial security. However, had they accurately determined this number instead of guessing, they may have found that a buyer who may have offered less but may have run the company similar to how they did, which would have prevented them from pulling out of a deal at the 11th hour.

Values-based goals

Values-based goals are “soft” goals, such as protecting employees, leaving a legacy, or contributing to the community. Though these goals may be considered “soft,” they can produce hard consequences if you overlook them. Like many owners, Bruce and Jeff overlooked their values-based goals until they saw the stark consequences of ignoring them. Instead of having the freedom to leave their business on their terms, they had to start all over because of how important it was to them for the company to protect its employees and continue producing only high-quality products.

Defining goals is the first step of a planning process that can set you up for future success. If you’d like help beginning this process accurately, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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If You Love What You Do, Why Should You Make Plans to Leave?

If You Love What You Do, Why Should You Make Plans to Leave?

Many business owners love the companies they’ve founded, whether it’s because of the work they do, the changes they affect, the money their companies provide, or something else. When you carve out a comfort zone within your business, you might question why you would want to plan for your business exit. Today, we’ll look at a few reasons why owners who love their companies should still make plans to leave.

Post-business life usually doesn’t get cheaper

For many business owners who intend to leave their businesses before they die, financial security is an absolute must. While you run the business, you pull a salary. You might use perks like company vehicles, insurance, and travel. Perhaps you take advantage of your personal clout as a successful business owner. Once you exit the business—by choice, death, or otherwise—those things tend to go away.

A strange but relatively common mind-set for business owners is the idea that they can cut back on their spending once they’ve exited. This is almost never the case. If you exit by choice, you’ll likely spend at least 75–90% of what you spent when you owned the business. You may want to travel, or lavish your family with gifts, or set your grandchildren up for college: all without the safety net of a steady income provided by the business.

In short, post-business life is usually as costly as life before the exit. Even if you don’t intend to exit for 5–10 years (which is what many owners say they intend to do), you’ll likely need to know whether you can maintain your current lifestyle once you do leave.

You can begin to determine your financial situation in a few ways. You can establish your goals and estimate what it will cost to achieve those goals. You can determine the gap between the money you have and the money you need to achieve those goals. You can also compare that gap to the company’s current value, then begin installing Value Drivers that allow you to sell or transfer the business for the amount you want and need.

All of this requires time. So, even if you love your company and don’t see yourself leaving for several years, or even decades, it’s likely in your interest to start planning for that eventuality. Because post-business life usually doesn’t get cheaper.

Planning lets you focus primarily on what you love

Many business owners often find themselves doing things they never imagined doing within their businesses. Some of those unexpected activities are things they’d rather not be doing. For example, an introverted owner might find that she needs to be the face of the company. A key focus of planning is finding the best people for the right job so that you don’t have to be everything to everyone.

A common way to do this is to find or train next-level managers. Next-level managers take on many of the responsibilities you likely find yourself stuck with. Oftentimes, those next-level managers can handle those responsibilities better than you can, if for no other reason than you simply aren’t too passionate about those responsibilities.

The flip side of this coin is that with proper planning, you can position yourself to do only the things you truly want to do: the things you likely started the business to do in the first place. This can make ownership even more fulfilling and can let you focus on the things you enjoy as you begin to wind down your ownership.

Life goes on

About 10% of owners say that they want to die at their desks. Surely, planning is unnecessary for them, right?

That’s usually not true. Even owners who plan to die at their desks often have people or causes they care about that the business directly affects. You may have family members who rely on the business to maintain their lifestyles. Without proper planning, what happens to them? You may want to assure that after you die, your employees still have jobs (or a safety net that gives them time to find new ones). What happens to them without proper planning?

Even if you plan to die at your desk, planning for future success can still be valuable to you. You can install business continuity plans that can give people you care about direction regarding what happens to the business once you die. You can install next-level managers whose goals and managing styles line up with your values-based goals. You can even help your family continue to maintain their lifestyles without the business.

If you’d like to discuss specific strategies you can use to address these issues, please contact us today.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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An Estimate of Future Company Cash Flow

An Estimate of Future Company Cash Flow

Cash flow is one of the most important factors in a business exit. Today, we look at why securing a professional estimate of your company’s cash flow is crucial to the success of your Exit Plan. All buyers, whether an outside third party or an insider (family member, co-owner, or key employee), will use cash flow as a way of measuring or confirming the value of the companies they buy.

While there are many definitions of cash flow, the one that we often use is free cash flow. Free cash flow is the portion of the annual net cash flow from operating activities that remains available for discretionary purposes after the business has met its basic financial obligations. In this discussion, the “discretionary purpose” is the buyer’s purchase of or return on investment for the owner’s interest in the company.

If you are contemplating a sale to insiders, remember that they likely do not have enough cash to finance the purchase. It may be the future cash flow of your business (once you leave it) that funds your buy out. As you can see, in transfers to insiders, cash flow can be both the measure and the means of ownership transfer. As such, it is important to estimate future cash flow as accurately as possible. This is not a “back of the napkin” exercise; a thorough analysis will give you more confidence in your plans for the future.

Once you have an accurate professional estimate of future cash flow, you can assess various Exit Paths, and your advisors can design an exit strategy that puts as much of that cash flow as possible in your pocket. Accurate cash flow estimates can also minimize the taxes you pay upon an ownership transfer. Remember, every dollar the IRS takes is one dollar less paid to you, regardless of whether the buyer or seller pays the tax.

Let’s assume for a moment that the company’s cash flow estimate indicates that it cannot support all of your Exit Objectives. You will then explore alternatives to your original plan and answer important questions:

  • Should you delay your departure date?
  • Should you focus your attention on a third-party sale and, if so, are a higher purchase price and/or more cash upfront possible?
  • Should you shift your focus to building cash flow and business value before you begin to sell ownership?

Securing an accurate estimate of future cash flow can help prevent you from choosing a dead-end Exit Path. It can give you confidence that you are on the right track or uncover areas that require more work before you can exit the business. For most owners, calculating estimated future cash flow is an integral part of creating a successful Exit Plan.

For more information about obtaining an accurate cash flow estimate, contact us today. We can help guide you through the process.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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Setting Exit Goals for the New Year

Setting Exit Goals for the New Year

With the new year upon us, many people have begun their journeys to fulfill their New Year’s resolutions. For business owners, it’s no different. Between creating goals for the business to achieve and assuring that the business keeps growing, owners will have much to consider this year. One of the goals most commonly shared by owners is to successfully exit their businesses over the next 10 years. Most business owners have a sense of how much longer they want to remain as owners of their businesses, and the new year is a perfect time to take control of the planning that can make the future successful.

In our experience, it usually takes a typical owner of a small to medium-sized business 5–10 years to implement an Exit Plan. That means that for many owners looking to exit their businesses within the next 5–10 years, their best chance at a successful business exit begins today.

As owners set out to begin creating a written Exit Plan, they may want to know that the most successful owners tend to establish their goals before they begin implementing a process. There are usually three types of goals that we see owners set as they begin the process behind their business exits:

  1. Foundational Goal: When planning a business exit, the foundational goal is financial independence. This means transferring ownership and receiving enough money to not have to work again unless you choose.
  2. Universal Goals: Universal goals are goals that nearly all owners aim to achieve. They include leaving the business when they want, for the money they need, and to the person or people they choose.
  3. Values-Based Goals: Perhaps the most influential type of goals, values-based goals are goals that revolve around your personal values and ethics. Examples include making sure the business isn’t shut down locally or maintaining a company culture after you leave. Often, owners don’t even realize they have values-based goals until late in their Exit Planning process, at which point it may be too late to address them.

Identifying the goals that are most important to you gives you the best opportunity to create a plan that addresses those goals. It also gives you a chance to see whether you have conflicting exit goals. Because a business exit usually affects more people than just the business owner, you may find, as you plan, that some of your initial goals stand at odds with other goals. By setting your goals before implementing a process to achieve them, you can determine which goals are most important and decide how to manage any conflicts in what you think will help you exit your business on your terms.

If you’d like to discuss your goals for your business exit and the steps that follow to create a thoughtful plan for the future of your ownership, please contact us today. We can help you map the things that you believe will be most conducive to the success of your business, your family, and yourself as you approach your business exit.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by the Business Enterprise Institute, Inc., and presented to you by our firm.  We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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