It’s likely that few people, if any, have ever told you, “You need to make yourself less important,” regarding your business. But sophisticated buyers look for businesses that can operate without their owners. Unless your goal is to sell or transfer your business, and then stay with the business as a subordinate to assure a smooth transition, you’ll need to train a management staff that can run the business without you. This is the most important Value Driver you’ll install, and for many owners, it’s the hardest, because they aren’t prepared to expend the emotional and mental energy required to remove themselves from their businesses. There are countless technical strategies to making yourself inconsequential to your business, many of which we’ve discussed in previous newsletters. But just as important as the technical aspects are the mental and emotional aspects, so let’s look at some of the common mental and emotional roadblocks you might face as you make yourself inconsequential.
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.
Setting goals is critically important to owners who begin Exit Planning. Without goals, even the strongest processes fail, because they have no purpose to work toward. Your goals are what guide your process toward a successful exit, and without them, you’ll find yourself spinning your wheels in the mud of indecision. While setting goals is the most important thing you do as you begin your business exit journey, it doesn’t mean that you have to know exactly where you’ll end up after you exit your business. Goals can and often must change to give you the best chance to exit your business on your terms. Business exits are rarely all-or-nothing propositions.
You know how things work in terms of starting and running a successful business. You’ve hired the right people, offered a useful product or service, and developed high-quality relationships with your customers and vendors. None of these things magically appeared out of thin air: You most likely followed a proven process, mixed in with your own creative problem solving, to build a successful business. The same adherence to process that applies to starting and running a successful business applies to a successful business exit.
A successful business Exit Plan achieves three important owner goals: Financial Security: The business sale or transfer provides the amount of income the owner and owner’s family need after the owner’s exit. The Right Person: The owner chooses his or her successor (children, key employees, co-owners, or a third party). Income Tax Minimization: The owner minimizes the amount of cash the government takes out of his or her pocket.
Full disclosure: Wealth preservation planning can’t help any of us cheat death, but it can help business owners avoid taxes and achieve financial security. The ideal Exit Plan (one that provides the business exit you desire) includes a strategy to help you preserve your hard-earned wealth from unnecessary taxation when it is transferred to your family. However, to preserve wealth, business owners must take steps before they actually have wealth. In other words, to realize all of the potential benefits of various wealth preservation techniques, owners must make plans before they convert the value of their businesses to cash. The foundation for wealth preservation planning is found in the answers to two of the questions in Step One of The BEI Seven Step Exit Planning Process™:
Imagine that on the eve of your wedding, you make a plan to divorce your spouse, on friendly terms, in about 15 years. During those 15 years, you agree to work diligently and successfully to build a business. On the preordained day that your marriage ends, you announce that you are willing to give your soon-to-be ex-spouse one-half of your company’s business value in cash. Additionally, you let your ex-spouse value your company, because those are the terms of the agreement the two of you signed a year after you were married. Though this scenario may seem ridiculous, you may have done something quite similar in your business with your co-owners. Few owners begin working together with an expectation of future acrimony, much less litigation.
There is a strong case for creating a Buy-Sell Agreement for co-owned businesses. If owners agree about how to appraise business value and set the terms of payment in advance of any transfer event, they can avoid the heated and often damaging negotiations that can occur when one owner leaves the company. In this issue, we continue making our case for Buy-Sell Agreements by outlining several other advantages of a well-drafted and recently reviewed Buy-Sell Agreement.
Contemplating one’s own demise can be challenging but is paramount to sole owners and their businesses. Consider the fictional Harry Withers, the 54-year-old owner of Withering Hikes, a chain of seven retail apparel stores for outdoor enthusiasts on the Western Slope of the Rocky Mountains. One day, Harry disappeared while scouting new hiking trails.
Business experts may mention "Value Drivers" as if everyone knows what they are, how they work, and where their impact will be greatest. It can be difficult or frustrating to know that building business value is a frequent topic of discussion, but actually building value is sometimes easier said than done.