Many business owners facing imminent exit have the enviable but difficult choice of either selling the business to an outside third party and achieving their financial objectives or, conversely, transferring the business to loyal motivated key employees or family. This is nothing more, or less, than a clash of exit objectives.

Take John Conover for example. His automotive after-market business had succeeded beyond his wildest dreams. Just as he had started to think about throttling back, a respected and much larger competitor approached John with a purchase price that would meet all of John’s exit dreams and needs. John hesitated because he really wanted to sell the business to his management team, a group of three capable, loyal, long-term employees, one of whom was his son.

A sale to this group, however, presented one simple problem: they did not have enough money. Conover was stuck between the proverbial rock and hard place. His objectives seemed hopelessly conflicted. Should he pursue a course that pleased his pocketbook or follow his heart?

This problem is not uncommon in businesses with sufficient value to attract third party cash buyers. A clash of objectives can affect any business. The important lesson that John Conover learned and that other business owners can learn is that, once all of the options that an experienced advisor can suggest are understood and weighed, seemingly conflicting exit objectives become compatible.

In this case, the would-be buyer was more than eager, even insistent, that the current management team stay with the business through the sale process. Because of the buyer’s greater size, it could offer the key employees greater income and benefits than could John’s company. Further John wanted to reward — in cash — both his business-active child and the key employees as well as several long term employees for whom ownership was not practical or advisable.

To his son, John gave about ten percent of the value of the company using readily available estate planning techniques. Thus, John’s son was poised and funded to begin his own company (should he not remain with the new owner) on solid financial footing. To his key employees, John gave deferred compensation benefits that, if they stayed with the new owner, provided them financial benefits without assuming the risk of operating a business.

Upon reflection, John realized that what he had wanted for his key employees was not so much to give them ownership of the business as to reward them for the value they added to the company. He also realized that in transferring the business to his son and employees, not only would he not receive cash, but they would potentially receive a mountain of debt in return for owning a closely-held business. (Hardly a risk-free transaction!) By gifting to his son and providing deferred compensation to his key employees, John not only attained his financial and departure objectives while minimizing his risk, but he also provided a generous bonus to his key employees and a jumpstart to his son’s new business, while helping to minimize their risk as well.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

Have something to add? Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

Stan Briggs was perplexed and that’s why he told his advisor, “My son, Patrick, has worked in the business for the last twelve years. In that time, the business has tripled its revenues and its profits. I’ve started to think about scaling back my activity and I realize how important it is (for my own retirement income) that Patrick be motivated to continue to grow the company profitably. Since I’d like to have him own the business someday, is there a way to start transferring it to him now? It seems unfair to make him pay for all of the business value since he created so much of it and since he is so important to my financial security. My son, of course, agrees wholeheartedly with this analysis but I’m not so sure that his mother and sister are on the same page. What issues do I need to consider?”

Equal vs. Fair
First, Stan must determine if his son is already paying for the business now through “sweat equity” (lower compensation than he could have earned elsewhere, more working hours and greater risk). If so, any reduction in the purchase price is not a gift but rather recognition of Patrick’s contribution.

Second, are Patrick’s efforts adding value to the business? If so, should Patrick have to pay for his efforts by receiving a reduced share of Stan’s ultimate estate?

Third, if Patrick’s involvement in the business is critical to Stan’s retirement, Stan should consider tying his son to the business using “golden handcuffs,” such as awarding ownership if Patrick stays to run the business — and the business stays profitable.

Fourth, in many business — owning families, every child is offered the opportunity for involvement in — and ultimately ownership of—the family business. Many times, however, only one child forgoes the allure of the “outside world” to commit to working in the sometimes uncertain and illiquid world of a closely-held business. (Not to mention that having you for a boss should be worth something!)

Lastly, analyze the transfer issue in light of your own exit objectives. Be certain that any transfer to children will satisfy your exit objectives. Explore with your advisors other issues and concerns that may arise as you begin to transfer ownership to a child. For example, how much money will you need after you leave your business? What, if anything, needs to be done for your key employees or for your other children? Temper and qualify all transfers to children in light of your over-arching exit objectives. In short, make certain the transfer of ownership to a child is also a good business and retirement decision.

Using Advisors
When considering a transfer of your business to a child, don’t underestimate the value of using experienced consultants and advisors. Their counsel, experience and input is perhaps never more important than when dealing with your own family. The need for independent, non-emotionally-charged advice can be critical. Having worked with other family businesses, these consultants along with your other advisors can offer practical advice.

Decision Framework
First determine the level of contribution your business-active child has made to the value of the business. Second, determine the contribution that child must continue to make to ensure the achievement of your exit objectives. Those determinations can form the basis of what is “fair” with respect to both the business-active child and the other children. Third, use your advisors to help explain, guide and implement the transfer of the business and even act as the “sacrificial lamb” when necessary.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

Have something to add? Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

Let’s review the four areas where business owners who want to both survive in today’s economic climate and emerge from it poised for growth (or sale) can focus their energies. As you may recall, those areas are:

• Preserving and Protecting Value
• Identifying Value and Cash Flow
• Creating Revenue
• Creating Value

Most owners are currently waist-deep in the first area: cutting expenses and minimizing risk and taxes in order to protect their companies. For that reason, we kick off this more detailed discussion of each area by focusing on the final one: creating value. While this may seem exactly backwards, it is not. While you are busy cutting expenses and minimizing risk and taxes, we want you to keep your eye on your endgame: someday leaving your business for an amount of money that will enable you to live the rest of your life in style. The actions you take today must not only preserve value, but must ultimately create value for a future owner.

Even the most pessimistic among us acknowledge that these tough times will not last forever. We may never return to the days of an over-heated M&A market, but once credit loosens and confidence returns, good companies will sell. Will your company be one of them?

Demographically, we know that the future holds many more sellers than buyers. What we don’t know is how this crisis has affected that imbalance between the number of sellers and the number of buyers. We suspect that the market’s inability to support business sales over the past few months has put the sale plans of many owners on hold. We also suspect that many owners are not having a whole lot of fun getting lean and mean. If those two assumptions are true, when this market turns around, there will be a host of owners scrambling for their exits. If (or when) that happens, only the “best” companies will sell.

What can you do today to prepare for tomorrow’s scramble for the exit? Re-examine and realign your objectives to adjust to today’s realities.

Assuming, as we do, that the most effective strategies for dealing with this crisis are those that address short-term challenges and support long-term goals, let’s revisit your long-term goals:

Successor

Most owners have a preferred successor in mind: a child (or children), a key management team, a third party or an ESOP. We encourage all owners to re-examine their choices. You may, for example, feel that your only viable exit strategy is to just not leave the business; that a sale to an outside party is just not in the cards — now or in the future. That feeling may very well not be accurate, especially given the changes in the Small Business Administration loan programs promoted by the Obama Administration.

Departure Date

As we mentioned above, the current economy has forced many owners to postpone their exit dates. We encourage you to talk candidly with your advisors about how to re-set your exit clock including in that discussion the fact that for most owners, their sale dates do not equal their retirement dates. (Most buyers require sellers to work past their closing dates to ensure that the company continues to perform.)

Financial Security

Most owners have some idea of the amount of money they need (from both the sale of their businesses and from other investments) to fund a comfortable “life after sale.” (If you don’t know that dollar amount, ask your financial planner for a financial needs analysis today.)

What you may have overlooked in your focus on surviving today’s challenges, is that both the amount you can expect from the sale/transfer of your company and the value of your other investments have changed. Every owner should be working closely with his or her financial advisor not only to re-assess the make-up and performance of non-business assets, but also to establish a new benchmark of the value of your business today.

Long-Term Growth

In addition to your desires about successor, departure date and definition of financial security, we think you should include long-term growth in your short-term decisions about expenses and risk. As you prune expenses – especially in management – make sure those cutbacks don’t prevent new growth. This can only be done if you have a good sense of where you want to take your company as the recession wanes.

Try to keep in mind that future owners (of whatever stripe) will not be interested in investing millions of dollars in a company that either does not have a motivated management team or in one whose management team is not willing to stay on after the sale.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

Have something to add? Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

If you contemplate transferring your business to an insider (employees, children or co-owner) and you want to get paid the value of your business, then, generally speaking, the value of your business cannot exceed four times the true cash flow of the business. We have defined true cash flow as the amount of pre-tax money distributed to owners via salary, bonus, distributions from the company such as S-distributions, and rental payments in excess of fair market rental value of the equipment or building used in the business. Let’s look at how cash flow determines the sale price to insiders.

Christine Roberts, owner of three floral shops, desired to sell each of her shops to each of the three store managers. The total “true cash flow” was $250,000 per year and Christine wanted $1.5 million, pre-tax, for her three businesses which, in total, grossed approximately $1.5 million. She had heard that one times gross revenue was a fair way to value her type of a business and $1.5 million happened to be what she needed to meet her financial exit objectives.

Let’s assume that Christine’s employees want to buy her business. Let’s further assume that these employees share a trait common to most employees including, probably, yours: They don’t have enough money. That cold sober fact limits the purchase price Christina can look forward to receiving.

The reason Christine’s prospects are limited include:

1. The payments Christina’s employees make must come from the business. Her employees do not have enough money, nor can they borrow — without exit planning — the purchase price. These employees take the post-sale cash flow of $250,000 deduct taxes from that distribution and then pay Christine the net after-tax proceeds of approximately $150,000 per year ($250,000 cash flow less 40 percent in combined federal & state taxes equals $150,000 of net after tax cash flow).*

2. Christine pays a capital gains tax upon receipt of the $150,000.

3. It will take Christine ten years to receive full payment of the $1.5 million purchase price. This, of course, assumes that Christine is willing to wait ten years for full payment (an assumption no sane business owner would make).

4. And let’s not forget interest. Assuming that Christine would insist upon being paid interest on this long term promissory note, consider that a $1.5 million promissory note using an eight percent interest rate (compounded monthly) and limiting total payments to $150,000 would take just over 10 years to pay.

The bottom line: Cash flow cannot support a purchase price at the level desired by the owner. However, if the purchase price is reduced to $1 million then the length of time is reduced to just under seven years. If that time period is still too long, Christine can employ other exit planning tools and designs as well as the more realistic purchase price not only to reduce the timeframe to perhaps four to five years (or even less in some circumstances) but also to receive the full purchase price. How? We’ll explore that topic in a future post. For now, remember that the future cash flow of your business determines — and — limits what you can expect to receive if you sell your business to an insider.

* Tax rates vary depending upon applicable federal and state taxes.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

Have something to add? Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

It may not be uncommon for a business owner to hear that one of his friends sold her business for a “six times multiple.” That owner’s first question to his own advisors typically is, “Can I get the same type of multiple if I sell my business?” The answer is “Yes and No.” To understand these answers, we need to understand exactly what is being multiplied. To begin, let’s turn to our favorite item to be multiplied: cash.

One of the favorite phrases of investment bankers, and sellers of all kinds, is, “Cash is King.” After all, when one is selling anything, cash can remove the seller’s risk in the transaction. When selling a business to a cash buyer, that buyer wants to know exactly how much cash the business is producing.

What the buyer wants and needs is a slight variation on our favorite phrase, “Cash flow is King.” In fact, few cash buyers are willing to part with their money unless they see an increasing stream of cash flowing from the business, both historically and prospectively — after they acquire your company. Let’s explores the definition and importance of cash flow when selling a business to an outside third party cash buyer.

The Importance of Cash Flow
The frenetic period of consolidation is over. Mergers and acquisitions activity is down as much as 80 percent from 2006. During the heyday of consolidation, companies used their own publicly-traded stock to aggressively pursue the acquisition of similar companies. This aggressive activity led to payment of multiples of earnings — sometimes of future earnings — that today seem stratospheric in our more sober business world.

Today’s buyers may still be anxious to acquire companies, but they are looking for what they call, “good” companies. “Good” companies have increasing cash flow, good growth potential, and strong fundamentals such as a strong management team and good operating systems. Of course, these characteristics have always been important and have always been the signs of a good company. But, given the high failure rate of recent mergers and acquisition, cash flow has never been more important. Acquiring a business with existing strong cash flow can help reduce the buyer’s risk in the transaction. So, for many sellers, getting “six times multiple” of cash flow may depend on what exactly is “cash flow.”

The Definition of Cash Flow
What is “cash flow?” Yet another favorite (albeit less succinct) saying of investment bankers is that they can get you five or six times multiple of your cash flow as a purchase price for your business. All you have to let them do is define cash flow. The devil truly is in the details, or in this case, in the definition. There are several definitions or measures of cash flow, each with a potentially significant and substantive difference. Typical measures of cash flow include:

EBIT: Earnings Before Interest and Taxes.

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

True Cash Flow: The amount of pre-tax money distributed to owners via salary, bonus, distributions from the company such as S-distributions, and rental payments in excess of fair market rental value of the equipment or building used in the business.

Each of these measures of cash flow can produce a different cash flow amount. Add to these measures, the need to recast cash flow by using “add backs” such as excess rents, salary or bonuses paid to the owner and his or her family.

Which brings us back to our original question: Can you get a six times multiple when you sell your business? Sure . . . it just depends on how you define cash flow. To determine which measurement of cash flow is appropriate for your business, look first to the measurement that the marketplace uses when selling the business to insiders. This “true cash flow” measurement reflects what your “penniless” buyers must use to pay for the business.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

Have something to add? Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

Business owners must meet the challenges presented by recent changes in the economy. What can we learn from owners and their advisors across the U.S. about which strategies are most effective? We invite you to share stories about how your company has been affected and how you are responding.

General Observations

Owners, who ran tight ships when times were flush, are navigating turbulent waters carefully, but generally successfully. That said, it certainly helps if owners operate in industries other than construction, retail, restaurant and almost anything automobile-related. Owners in those industries are being buffeted by hurricane-sized winds that threaten even the sturdiest ships.

We also have observed that owners who operate with little debt are weathering this storm better than those whose business lives depend on it. How well or how poorly companies fare also depends on the size of their capital needs, the scalability of their businesses and the proportion of fixed assets to cash flow.

In the end, however, an owner’s ability to maintain cash flow has become the ultimate measure of how the company is tolerating today’s economic challenges. For that reason, many of the strategies that owners are using to successfully wage this current battle relate directly to preserving and increasing cash flow. Let’s look at the four primary areas where owners’ efforts are resulting in a company’s survival – and even growth – in the current economy.

I. Preserving and Protecting Value

Owners across the board are protecting business value by cutting expenses. Two of the most common cost-cutting measures involve examining company financial statements with a critical eye and reviewing and analyzing compensation, employee by employee.

To protect value, owners are taking a closer look at their exposure to risk from both inside and outside their companies. Owners also are taking advantage of ways to minimize taxes under new tax rules and are re-examining how a lower business value affects their business continuity arrangements.

II. Business Value and Cash Flow

Owners are not only closely monitoring current cash flow, they are adjusting their projections of future cash flow. In addition, they are re-evaluating their companies’ value. If business value has fallen, owners are creating written plans to help address the deficiency between current value and the value that owners want (or need) when they exit.

Finally, owners who have plans to eventually transfer their companies to family members are taking advantage of lower business value to make gifts of business interest.

III. Revenue Creation

After reducing expenses and re-calculating business value, owners quickly turn to increasing revenues. First, they are evaluating the strength of their management teams and the incentive programs they use to motivate those employees. Second, they are beefing up their internal systems so that they are written and enforced. Third, they are evaluating the strength and diversity of their customer base. Finally, owners are acquiring targeted (or all of the) assets of weaker competitors.

IV. Strategic Value Creation

Owners and advisors alike agree that these tough times will not last forever. For that reason, smart owners are not ignoring their endgames: leaving their companies when they want, for the amount they want, to the successor they choose. While many owners have adjusted their target departure dates and expected sale prices, few have thought through all the consequences of those adjustments. For example, some owners are re-doing their financial needs analyses to incorporate changes in the performance, use and future of their investments outside their businesses.

Underlying the most effective strategies is a single common thread: the most effective strategies are those that address short-term challenges and support long-term goals.

Look more closely at ways you can preserve and protect value, maintain cash flow, and create revenue and value in your company.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

Have something to add? Got a different point of view, want to play devil’s advocate, or just think we’re all wet? Post your experiences or examples.

The Exit Planning process should begins by determining your goals and objectives such as:

The income you and your family will need after you leave the business; and
Who you wish to transfer the business to — whether it is children, key employees or others.
And, Exit Planning involves the determination of business value and the capability of the business to provide you and your family future cash flow. So, too, does estate planning.

Following the determination of these objectives and valuation, the process usually turns to creating more value within and for your business while implementing your lifetime exit strategy. The second stage, lifetime exiting, often takes many years to fully implement. For that reason, as you begin lifetime exit planning, it is also the perfect time to reassess your business continuity and estate plans. Why?

First you have spent the time, effort and probably money, to determine what it is that you want and need after you leave the business and what it is you have today in the form of business and other assets.

Second, if you should be so unfortunate to not survive through the lifetime exit planning process, do you not wish to provide your family with the same income stream and make sure that your business retains its value as previously determined?

For example, your exit strategy will have been based upon an income stream you wish to live on for the rest of your life. If something happens to you today, is it clear that your family will enjoy the same income stream? Or, does your estate plan need to be reexamined to help provide for your family? Also, if your exit strategy involves transferring part of the business to the children, should your estate plan not also reflect that desire? Chances are that it should be reviewed and possibly revised

Third, if you have determined that your family will not be the successor owners of your business, does it not also make sense to provide in your estate planning documents for that same type of succession should you not survive?

Fourthly, part of the Exit Planning process is to help protect your assets from creditor attack during lifetime and to minimize tax consequences upon a transfer of your ownership. Again, should you not survive, does it not make sense to design your estate plan to help minimize creditor risk, not only yours but that of your heirs? This is something that can be arranged and coordinated without significant expense. And, does it not make sense to plan for the transfer of ownership at death with as little tax consequence as possible — just as you would have insisted in any lifetime transfer?

Finally, you can leverage the time and money spent in developing a lifetime Exit Plan into the design of your estate plan.

It is worth repeating that the same analysis given to lifetime transfers (benefiting you) needs to be given to a transfer occurring at your death (benefiting your family). Since both lifetime Exit Planning and Exit Planning at death are based on the same premises (exit objectives and valuation) it can be relatively easy to develop a consistent outcome.

As you do so, you will find that the same steps you take to develop a successful lifetime transfer (developing a good management team, clarifying business strategy, developing good operating systems, focusing on creating more value for your ownership interest) should rightly be captured and incorporated in your estate planning. Exit Planning during lifetime and estate planning at death share common goals, strategies, values and therefore, should be coordinated through the joint efforts of you and your advisor team.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

The current recession has given all business owners, quite literally, pause: pause in growth, pause in hiring, pause to reconsider exactly where our companies are heading — or need to head — if we are to meet our owner-based goals.

I have discussed the many benefits of using the time afforded by today’s economic downturn to create and enhance the value drivers in your company.

The fundamental questions owners must ask are:

• Am I using this precious commodity — time — to prepare my company and myself for sale on the day that the economy revives?
• Or, on that day, will I be where I am today: wishing to sell, but buried in the everyday details of my business and doing little to chart a course toward my ultimate goal?

In addition to using your time to install and energize your company’s value drivers to prepare for sale, today’s economic recession also has given owners time to evaluate if their current business advisors are equipped to help them prepare their companies to sell.

When times are good, most owners chug along with little guidance from advisors. Owners call their lawyers when they have a problem, their accountants when the taxable year-end approaches and their financial advisors when they realize that their daughter might not get that golf scholarship. In short, most owners expect their advisors to react quickly and effectively to whatever problem they pose.

Savvy owners understand that selling/transferring their companies (the biggest financial event of their lives) for top dollar can only be accomplished through careful planning. They look for advisors who approach them with specific strategies designed to increase the value of their companies. They hire advisors who have experience navigating the often choppy Exit Planning waters. Most important in today’s market, however, is finding the advisors who can prepare your company to move immediately when the economy revives and business value and cash flow increase.

Why? Let’s look at the number of owners looking to sell their companies before the economy went south. According to a 2005 PricewaterhouseCoopers’ survey of 364 CEOs of privately held, fast-growing companies, “nearly two-thirds … plan to move on within a decade or less: 42 percent within five years, and 23 percent in five to ten years.” (“Wide Majority of Fast-Growth CEOs Likely to Move On Within Ten Years, PwC Finds.” January 31, 2005.) Add to this number those owners who will be more than ready to hang up the towel as soon as the market will pay a decent price for their companies and we can estimate that millions of owners want to sell at the market’s first sign of life.

Will you be ready to sell when the market recovers?

If you have hired skilled and experienced Exit Planning advisors, they are already sharing strategies specific to your company that you can employ today — in today’s economy and years in advance of your anticipated sale date — to increase the salability and value of your company. If your advisors aren’t skilled in Exit Planning, they probably have been mute on the subject of your exit.

Exit Planning advisors are contacting the owners they work with about:

• Increasing gross margins. Exit Planning advisors are helping owners to take advantage of today’s “pause” to increase gross margins so that when the recovery kicks in, their companies will be the first, and most successful, to rebound.
• Becoming the “Best of the Best.” Exit Planning advisors are working with owners to examine every aspect of their businesses. They are asking, “What are tough times telling you about your employees, your vendors, your customers? Are they the ones who will not only help your company to survive the tough times, but to thrive when times improve?”
• Reassessing a business exit strategy. Nearly all owners have postponed their planned business exits. Exit Planning advisors are helping owners to figure out exactly how postponing departure affects: 
  • Post-retirement income goals.
  • Choice of a successor.
  • Dependence on other sources of income.

• Protecting assets. Exit Planning advisors employ numerous strategies to help owners to protect their assets. These include:
  • Minimizing tax exposure.
  • Minimizing liability exposure (by creating multiple entities).
  • Putting plans in place to downsize — immediately — if economic conditions demand.
  • Reviewing any buy-sell agreement to make sure it includes provisions for a decrease in business value.
  • Reviewing contractual obligations of employees to ensure protection of trade secrets and to prevent competition.
  • Reviewing property and casualty insurance contracts.

I will talk in more detail about the specific strategies owners are using to both survive this recession and to position their companies for sale in future posts. In the meantime, if you have not yet heard from your advisors, it may be time to evaluate if you have hired the “best of the best.”

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

In previous posts, we have discussed importance of value drivers: the intrinsic characteristics of a company that buyers look for when deciding what company to buy and how much to pay. We’ve talked about how important value drivers are in a successful sale and consequently how it is the work of the owner (not employees) to create and to nurture them. As a quick reminder, value drivers include:

• A stable and motivated management team.
• Operating systems that improve sustainability of cash flows.
• A solid, diversified customer base.
• A realistic growth strategy.
• Effective financial controls.
• Stable and improving cash flow.

In a strong Merger & Acquisition (M&A) market, buyers compare the relative strength of your company’s value drivers to those of your competitors. In today’s M&A market, however, buyers want companies that possess all of the characteristics of a well-run business. Additionally, tighter credit forces buyers to use more of their own capital to buy businesses so they look for acquisitions that carry minimal business risk. Companies with strong value drivers in place carry less risk. Companies lacking one or more value driver(s) simply will not attract interested buyers. This harsh reality means most owners have a lot of work ahead.

Luckily, the economic forecast – at least for the foreseeable future – gives owners time to install and energize the value drivers in their companies. It also gives them time to demonstrate, over several years, the sustainability of the value drivers they create. Buyers want to know that the success or growth charted in one year can be sustained over a number of years. They bank on (and pay for) your company’s potential to grow under their ownership so they look very carefully at how long your company’s value drivers have yielded positive results.

Experienced owners know that change takes time. Really experienced owners know that positive results from those changes take even longer — likely longer than even they expect.

Whether interested in selling in the near future, or not, it makes eminent good sense for owners to concentrate on those elements of their businesses that create more cash flow, more sustainability, and more future value (aka value drivers). After all, isn’t this why you are in business?

Working on value drivers also has the benefit of increasing an owner’s flexibility. With value drivers in place, an owner can respond quickly if “things” change. “Things” include the health of the M&A market or the health of the owner, the sudden appearance of a deep-pocketed buyer, or underlying conditions in an owner’s marketplace.

Increasing flexibility also applies to Exit Planning. With a more valuable company, owners increase their “successor” options. More valuable companies are attractive to third party buyers such as Private Equity Groups and can often attract recapitalization funds.

Finally, when owners concentrate on improving their companies’ value drivers (in order to increase company value), they often explore and pursue strategies that they may have ignored in the past. For example, many owners who thought acquiring another company involved too much effort take a new look at growth through acquisition when their future financial well-being is at stake.

Installing value drivers in your company is the best thing you can do to increase both the salability of your company and its price tag, but doing so takes time. Today’s economic downturn gives you the time you need to prepare your company to sell when the M&A market recovers. When it does, will you and your company be ready?

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.

“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” — Yogi Berra

It is not always easy to interpret Yogi. In this case, perhaps he is advising you to figure out just where you are headed in your business. As you near the time when you will leave behind the daily worries and stresses of business ownership, have you defined your successful exit? Because many owners haven’t defined a successful exit, they may not know how to get there. Unless you prioritize your exit objectives, you may have too many objectives, they might conflict and you may not make much headway.

The clearest example may be Bill Wilson, a business owner who recently told me that: he wanted to leave his business within three years, be financially secure, (which meant for him to continue his current lifestyle) and transfer the business to key employees. He was ready to leave immediately.

A quick review of Bill’s personal financial statement, however, revealed that most of the income required to maintain his lifestyle would have to come from the business. His business wasn’t large enough to attract a cash buyer. And, since Bill had done no Exit Planning, his employees had no funds with which to purchase his ownership interest. A long term installment note seemed to be the only answer — a risk Bill was unwilling to take.

Contrast this last resort solution with Bill’s objectives — objectives which could have been achieved had he taken the time (well-before he wanted to leave the business) to establish and to prioritize his Exit Objectives.

If, for example, the need for financial security predominates, selling a business to a third party for cash may be the best and quickest exit path.

If, however, attracting a qualified third party is unlikely, more time may be needed to devise and to implement an exit strategy that provides both cash and a transfer to an “insider” (child or employee).

On the other hand, if transferring the business to the persons of your choice is more important than your need for financial security, and your timeline to leave the business draws near, financial security in the form of “up-front” cash must take a backseat.

As you can see, the three primary exit goals listed below must be considered simultaneously. Ask yourself which is your most important exit objective. Rank your answers from 1 (most important) to 3 (least important).

• Financial security: 1 2 3
• Transfer the business to the person of my choice: (key employees, co-owner or child) 1 2 3
• Leave the business when I want: (immediately or never) 1 2 3

Prioritizing your objectives will help you with your overall path. For example, if you want out soon with cash, but your business cannot be sold today, do you wait until market conditions improve or sell now to your employees? While prioritizing your objectives is not easy, it can make decisions like this much clearer.

One final word of advice: Solicit the input of your Advisor Team as you work through these decisions. It is a good idea to get a fresh set of eyes or an experienced mind to help you to balance these competing objectives.

Contributed by Eric Nielsen, Sunbelt Business Advisors.

Sunbelt Business Advisors offers you unbiased information you need to know about Business Exit Planning.