Value Drivers: Establishing Realistic Growth Strategies

Buyers tend to pay premium prices for companies that have developed realistic strategies for growth. This growth strategy must be communicated to a potential buyer so that the buyer can see specific reasons why cash flow (and the business itself) should grow after it is acquired. The growth strategy is illustrated in pro forma statements that are used by buyers (and their investment bankers) to create a discounted future cash flow valuation of your company.

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Key Employees Series: Part 3- Phantom Stock Plan: The Stock Plan That Isn’t

When an owner decides to financially motivate a key employee (or management in general), his first question should be, “Can this employee increase the value of my business in a measurable way?” If the employee in question is a sales manager and the answer yes, then the owner designs an incentive plan to motivate the sales manager to behave in a way that fosters an increase in business value. This may seem elemental, but it is not. Too often we see stock awarded to a sales manager when a cash-based plan directed at increasing sales is not only more effective but also more appreciated. Let’s look at how one owner solved the problem of matching the incentive to his desired result. During an annual performance review, Tom Sugar’s Chief Operating Officer expressed an interest in owning part of the company. Tom was really not interested in taking on a co-owner because he eventually wanted to transfer his company to his daughter. He didn’t want to sell or bonus stock but he didn’t want to lose his key employee. Tom was at an impasse. His CPA had told him that it rarely made sense to mix ownership among family and employees. On the other hand, […]

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Key Employees Series: Part 2- Incentive Plans

Experts and laymen agree that one constant of successful companies is a stable, motivated management team. This quality not only contributes to corporate success, it is also key to the business owner’s successful business exit. Should you decide to sell your business to a third party, you’ll discover that potential buyers place significant value on the strength of your management team—if that management team can be expected to remain after you have left the business. Similarly, if you contemplate selling the business to family (or to employees), the likelihood of being paid for the business after you’ve left can be entirely dependent on the strength of your remaining management team. In short, capable management remaining with the company can be the key to getting top dollar for your business. Without such management your exit may be more difficult. One of the many factors involved in creating, motivating and keeping good management is the creation of a properly designed incentive plan for key employees. To be successful, an incentive plan must motivate the management team to increase the value of the company in a measurable way. Only by increasing company value do employees receive the incentive (ownership or cash). Successful plans share four […]

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Key Employees Series: Part 1- Handcuffing Key Employees To Your Company

There are four characteristics of a successful Employee Incentive Plan. Namely, such plans should: Be specific, not arbitrary, and be in writing; Be tied to performance standards; Make substantial bonuses; and Handcuff the key employee to the business. In this issue we focus on the last characteristic; handcuffing the key employees to the business. The goal of the handcuff is to keep the employee with the company the day after and even years after the bonus is awarded. To help achieve this goal, owners and their advisors typically incorporate several techniques into a stock purchase or non-qualified deferred compensation plan. Vesting Schedule First, a vesting schedule handcuffs employees to the company for a time period necessary to become entitled to the bonus awarded. I prefer a continual or rolling vesting schedule in which a single vesting schedule is applied separately to each year’s contribution. Using this schedule, an employee is handcuffed to the company for a long period of time because the key employee is never fully vested in the most recent contribution. Let’s assume that a lump sum award is assigned to an employee: one-half of which is given immediately and the other half subject to a five-year vesting […]

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Six Reasons You Need A Certified Business Valuation

For business owners, paying non-essential professional fees is nearly as unpalatable as paying unnecessary taxes. If you are convinced that you don’t require the services of a certified valuation analyst to value your company, this will not be your favorite issue of this newsletter. This issue (and an open mind) may, however, help you avoid an unpleasant encounter with the IRS and help you to reap all of the value of your life’s work.

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Cash Flow Forecasting: The Ultimate Reality Check

Why is cash flow is so important to third party buyers, and by extension, to sellers of closely held companies? In short, a seller must demonstrate an increasing stream of cash flow from the business. Without a healthy cash flow, a buyer may pass over the opportunity to buy your business in favor of purchasing a “good” company with less risk.

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What Is Your Business Really Worth?

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

This question is indeed critical, and answering it is the second step 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 a valuation—well before your exit date—is so important.

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The Importance of Shifting Core Duties Prior to Your Exit

To illustrate the importance of shifting core duties prior to your exit, let’s introduce Will Tryon, our hypothetical business owner of a thriving pre-cast manufacturing company. When Will began thinking about who he should transfer management responsibilities to and which responsibilities should be transferred first, he quickly became overwhelmed because the degree of responsibilities he held as the company’s owner were complex and ingrained in his everyday routine.

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Creating Value in Your Business to Get Top Dollar When You Leave It

Did you ever wonder why one business has buyers lined up willing to pay top dollar while another sits on the market for months, or even years? What do buyers look for in a prospective business acquisition? There are many opinions about what attributes or characteristics buyers seek, but here’s what we know: the characteristics buyers seek must exist before the sale process even begins and it is your job as the owner to create value within your business prior to the sale. We call characteristics that impact value “Value Drivers.” Walk A Mile In A Buyer’s Shoes To get an idea of the importance of Value Drivers when preparing to sell your business, it is important to put on the buyer’s shoes for a minute. Let’s look at a hypothetical case study that illustrates how a buyer might compare two similar companies with a different emphasis on value drivers. The A Factor Company has EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $2 million, an owner who runs the business and the systems and processes that create growth. The A Factor Company doesn’t have a real management team in place and the owner generates a majority of its […]

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Buy/ Sell Agreement Series: Part 3- Is Your Buy-Sell Agreement Current?

The business continuity agreement is the single most important document that the owners of a closely held business will ever sign. This agreement (also known as a buy-and-sell or buy-sell agreement) controls the transfer of ownership when certain events occur. These events include: the death or disability of a shareholder, an involuntary termination or retirement of a shareholder and even (yes they do happen) disputes among owners.

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Buy/Sell Agreement Series: Part 1- Do You Really Need A Buy/ Sell Agreement?

In our last issue of this Newsletter, we discussed the problems that can arise if a business continuity (buy/sell) agreement designed for one event (usually the death of a shareholder) is called upon to manage the more likely event of a shareholder’s departure during his or her lifetime. Lifetime departures may occur due to the retirement, termination, divorce or bankruptcy of an owner. While it is true that poor design or failure to update the agreement—especially in tough economic times—can create significant problems, does that mean you and your co-owners shouldn’t have one in place? In a word, NO! The business continuity agreement may be one of the most important documents that you, as a co-owner of a closely held business, will ever sign. For an idea of why, consider the case of Acme, a fictional company. George Acme’s son-in-law, Tom Gardner, had worked for George for over 20 years. Tom had gradually assumed operational management and was the acting CEO. In recognition of Tom’s contribution, George had sold Tom—mostly at a low value—25 percent of the company. Everyone expected that Tom would one day own Acme, Inc. But before that day arrived, George died and Tom’s sister-in-law became the […]

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Set Your Exit Objectives… Even If You Are Not Ready To Exit

Remember Peter Daniels, our perennial procrastinator?

In 2005 Peter Daniels wanted to leave his food processing plant in five years by selling it for enough cash to maintain a comfortable lifestyle. A quick review of the company’s financials suggested that with a current annual cash flow of $250,000, before his salary of $250,000, the company would be valued around $1 million. Peter’s advisor suggested creating and implementing a step-by-step roadmap to increase value, minimize taxes, and protect existing value from loss, and Peter agreed, but did nothing more. Peter never designed an exit plan nor did he ever implement one.

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Continuity of Ownership: The First of an Owner’s Business Continuity Concerns

Most, if not all, business owners have been approached by at least one of their advisors with the ever-popular question, “What would happen to your business if you died or became disabled?” Few business owners fail to recognize this question for the thinly-veiled pitch to buy insurance that it is. Our goal is not to discourage you from buying life or disability insurance. Far from it. Purchased in the proper amounts and for the correct reasons, life and disability insurance proceeds will, indeed, help your business to survive your sudden absence. Insurance alone, however, cannot resolve all of the three primary issues that face every business when owners go AWOL. Let’s identify the three primary continuity issues and examine possible solutions. Issue 1: Continuity of Ownership for Co-Owners The most obvious business continuity issue is: Who will succeed you in ownership? If you co-own your company, an up-to-date, adequately funded, buy/sell agreement that completely addresses all of the possible transfer issues can solve this problem. Please pay careful attention to all of the qualifiers in that last sentence. First, “up-to-date” means that the agreement reflects the current value and structure of your business. It also means that you and your […]

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The Lifetime Stay Bonus

You’ve decided to sell your company to an outside party. For a number of reasons, it is critical to keep your employees on board as you leave. Key employees’ efforts to maintain cash flow are critical to maximizing the eventual sale price of the business. They may need to shoulder extra duties as your attention may wane or become diverted to your future retirement plans. Most importantly, third-party buyers are unlikely to buy your company without the continued presence of your key employees. So, how do you ensure that your key employees will remain at their posts, even as you prepare to leave yours? One short-term incentive plan that can be set up to meet your employee incentive Exit Plan objectives is the Lifetime Stay Bonus. The Lifetime Stay Bonus not only provides recognizable incentives for your key employees to stay on board and help your business through the transition period, but they also provide a level of stability and certainty for your company and its employees to succeed. In our experience, selling owners typically have three objectives with respect to their key employees: To motivate key employees to increase the company’s cash flow in the period leading up to the sale. To keep key […]

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Select the Right Exit Path Series- Part 3: Selling to Third Party

As discussed in the previous issue of Grow and Protect Your Business, it is important to select your successor early in the Exit Planning Process. In the past two issues, we have discussed the advantages and disadvantages of transferring ownership to children and selling to other owners or employees. The last scenario that we will look at during this Exit Planning Review™ series of articles is the sale to a third party. The market has indicated that 20 percent of businesses are for sale to a third party, but only one out of four actually sells. For businesses above $10 million per year; however, the odds improve to 50 percent.1 In a retirement situation, a sale to a third party too often becomes a bargain sale – most often the only alternative to liquidation. This option becomes necessary in many situations because owners fail to create a market for their stock through sale to family members, co-owners or employees. The following are advantages to selling your business to a third party, as well the disadvantages associated with this type of exit plan. It is important to compare the advantages and disadvantages of this type of transfer scenario when choosing your […]

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Select the Right Exit Path Series- Part 1: Sale to Other Owners or Employees

As discussed in the previous issue of The Exit Planning Review™, it is important to select your successor early in the Exit Planning Process. One of the great advantages of having other owners in your business is that they can be your means for retirement. Especially with smaller businesses, a common Exit Planning technique is to have a younger individual buy into your business while you are still active. Upon your exit, the younger owner will purchase your remaining stock.

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Unintended Consequences… Without Your Transition Planning

Stephen Manicek sat quietly and stared out the window of his car as it sat parked in the parking lot of Manicek Microtek. Until a few minutes ago, he had been president of Manicek Microtek, one of the country’s largest telecommunications parts distributors. Now he was out of a job and felt he was a victim. Naturally, his first thought was to sue those responsible for his misfortune. The targets of his wrath were his younger sister and his mother. They had forced him out of the business. What should he do next? What could he do next?

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