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Maximizing the Value of Your Business: by D. L. Hayden
|SOUTHPORT, CT –/ -- DiversityBusiness.com /- If you plan to leave your business one day in the near future and expect to obtain as many dollars possible from a sale, you are a prime candidate for an Exit Plan. Whether this may be one year, or ten years up the road, the planning process must begin today.
Some refer to this process simply as Succession Planning, but this is a misnomer for it implies a transfer within a family unit; possibly a second generation. An Exit Plan is far more encompassing. Exit Planning takes into account not only transfers between family members, but a sale to a third party or possibly a transfer to targeted members within a company. As a business owner there may be more than one answer to the burning question; what is an Exit Plan? To some the answer may be self-evident. But for others in the business arena, they often take the Ostrich approach and allow nature to take its course, hoping the problem, if they realize there is a problem, will go away.
Exit Planning is a systematic approach for a business owner to transition away from their business on their own terms, not those dictated by someone else. At the same time this process should be designed to increase the value of the company and cause the most after tax dollars to remain in an owner’s pocket.
Every business owner has an Exit Plan. If the strategy is formalized, the decision of when the owner leaves the business will be voluntary. Without a plan, the ultimate scheme may consist of carrying the owner away on a gurney and the business will simply fold, or at best be worth no more than the value of the tangible assets: real estate, accounts receivables, etc., with the employees all losing their jobs. Millions of dollars could evaporate through this approach if proper departure preparations are not accomplished, with most of the value remaining on an absent trading table for lack of planning. Either way, someday every owner will leave their business. The choices will be if the Exit is on the owner’s terms or that of someone else.
According to the SBA, there are about 12 million closely held businesses in the United States. About 4.4 million of those businesses are successful and about 40%, 2 million, of these businesses are dealing with ownership and transfer issues at any given time. Additional statistics show that 33% of affluent owners plan to sell to a third party; 33% plan to sell to family members; 18% plan to sell to their employees; and 16% plan to close their doors. The projected number of affluent owners planning to retire in 2008 is about 400,000. So, within the United States over the next five years a significant number of owner run companies will change hands. The unfortunate mistake that many will make will be that most will not have taken the necessary steps to prepare for the transition from the ownership role. That’s the rub. That’s why a plan for an owner to say goodbye to a business they have poured their heart and soul into becomes so important.
The reasons for failing to plan are varied. First and foremost owners tell themselves that they are simply too busy. They believe that they are so busy running a business that they do not have the time to make preparations to move on to something else. All their efforts are spent working IN their business rather than working ON it.
Also, a business owner may be unsure of where or how to start an Exit Planning process. Whom do they see first? Where do they begin this process? These are legitimate concerns that must be addressed.
The difference between having an Exit Plan, or no plan at all, can mean the difference in huge amounts of cash that will remain unclaimed instead of within the owner, or his family’s, pocket when the business is ultimate transferred. With proper information, guidance, and preparation the additional dollars would be those of the seller’s when they decide to transfer out. If the Exit Planning process begins sooner rather than later, they would be in the driver’s seat to maximize the benefits and evade a sad and often too common fate; the exchange of a company for less than full value.
An important measure of any plan is the attention paid to Value Drivers. “What are Value Drivers?” you might ask. “And why are they so critical to my company?” Value Drivers are the various characteristics of a business that buy-out experts believe propel a business's value upward and for which they are willing to pay top dollar. It is vital to know about these elements if you want to maximize cash and successfully exit your business. These are essential characteristics that both help to reduce risk to the buyer and improve the return to the seller.
Driving the value of a business upward is a necessary step once it is determined that your company is inadequate to satisfy the financial retirement objectives you have established. To improve business value, those elements must be targeted that professionals realize make a business more valuable to someone willing to pay top dollar.
Value Drivers come in two varieties: generic, which are common to all industries, and those that are industry specific. The generic type are: a stable and motivated management team; operating systems that improve sustainability of cash flows; operating profit margins at least as good as industry average; a solid, diversified customer base; facility appearance consistent with asking price; a realistic growth strategy; effective financial controls; and good and improving cash flow.
An industry may also have specific or unique Value Drivers. For example, if you have a manufacturing company, a potential purchaser would look at the size and strength of the customers, the number of inventory turns per year, gross profit ratios, or the level of technical expertise that management and the sales force possesses.
Value Driver tools and techniques could be used to motivate and keep key people. Tools such as: stock option; purchase or bonus plans subject to forfeiture if a key employee leaves prematurely; non-qualified deferred compensation plans with vesting to encourage key personnel to stay; a richer benefit package; or a defined exit strategy that includes key people. All these tools should be designed not just to motivate and keep your top people, an essential Value Driver itself, but as a reward based on their efforts and success in inducing business value upward.
Take a good look at your own business. Have you initiated an incentive system that is (a) substantial in the eyes of the key employee (b) has defined performance standards of which the attainment by the key employee not only results in a bonus to them, but also increases the value of the company (c) is part of a written plan communicated to the employee, and (d) ties the key person to the business by making it difficult for him to leave the business without forfeiting significant financial benefits.
It bears repeating that Value Drivers must be the focus of market price enhancement because that's what professional buyers deem important. And if professional dealmakers judge these as important they most likely are. After all, they should know, considering the experience they possess in analyzing what advances a company's value.
How would someone implement Value Drivers in a business? The first step to learn more about Value Drivers is by contacting an Exit Planning specialist. Talk to their advisory team members: the financial or insurance professional, the CPA, the business consultant, or the attorney.
Study your business about one-half day per month. Peer at it through the eyes of someone that might be interested in acquiring it. What would you see that might cause you to pay top dollar for the business? What are the drawbacks that would cause someone to pay far less? Answer these questions honestly and look both at what your business is doing, as well as at what it should be doing. Viewing your business in this fashion is what is meant by working ON your business, not just IN it. Through an increase of knowledge, working with capable advisors, and, most importantly, understanding what the business will need to become more valuable will work to your advantage, and put into place the elements that are needed to propel the value upward.
There may be nothing worse for a business than to have its owner suddenly die, especially if it's your company. Exit Planning is vitally important to a company. Without a well thought out survival plan, the consequences to employees, customers and most importantly, your own family and estate are grim. Don't believe for an instant that your estate will escape notice of your business creditors.
Key employees must remain on board after your demise. Ownership agreements or other provisions must be worked out ahead of time for these people to continue to run the company. Compensation can be tied directly to company profitability and continued success. Consider a substantial retention bonus for remaining with the company that can be funded with insurance and can be accessed in case of your death.
Notify your banker of your Exit Plan. Consider meeting with him to discuss the provisions. Make certain your creditors are comfortable with the planning and ask them if there are arrangements they would like to see in place.
As part of an Exit Plan create a written document that spells out: (1) who should take on the responsibility of running the business; (2) whether the business should be sold and if so to whom, whether it should continue or be liquidated; and (3) provisions who the heirs must consult regarding the sale, continuation or liquidation of the company.
So, where does someone begin? The first step is to make sure that any Exit Plan keeps the business owner in full control of the outcome. Hire an Exit Planning Specialist to guide you along the way. The Exit Planning process should begin by answering several simple questions. As you answer each of these, the planning process will start to take shape.
When do you plan to retire and how much money will you need to live on after retirement? How much is your business worth in cash today? What is the best way to maximize the income stream generated from ownership in your business? How could you sell your business to a third party and pay the least amount of tax? How would a transfer of a business to family members, co-owners, or employees be made, but at the same time pay the least possible tax and enjoy the maximum financial gain? If something unexpected happens, such as your death, do you have a continuity plan for your business? If unexpected events occur, have you provided a means to secure finances for those in your family that are left behind?
Answering these questions honestly should cause a business owner to pause and reflect, but it also requires action. These appear to be very simple questions but when you dig beneath the surface you will find they are somewhat misleading because the answers will be exceedingly vague, unless an Exit Planning specialist is available to guide your path. Creation and implementation of an Exit Plan could be the most important business and financial event of your life.
Launched in 1999, DiversityBusiness, with over 50,000 members, is the largest organization of diversity owned businesses throughout the United States that provide goods and services to Fortune 1000 companies, government agencies, and colleges and universities. DiversityBusiness provides research and data collection services for diversity including the "Top 50 Organizations for Multicultural Business Opportunities", "Top 500 Diversity Owned Companies in America", and others. Its research has been recognized and published by Forbes Magazine, Business Week and thousands of other print and internet publications. The site has gained national recognition and has won numerous awards for its content and design. DiversityBusiness reaches more diverse suppliers and communicates more information to them on a more frequent basis then all other organizations combined. We also communicate with mainstream businesses, government agencies and educational institutions with information related to diversity. Our magazine reaches over 300,000 readers, a monthly e-newsletter that reaches 2.4 million, and website visitors of 1.2 million a month. It is a leading provider of Supplier Diversity management tools and has the most widely distributed Diversity magazine in the United States. DiversityBusiness.com is produced by Computer Consulting Associates International Inc. (CCAii.com) of Southport, CT. Founded in 1980.
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