Making financial decisions has never been easy for business owners. When given a choice, the tyranny of the urgent usually wins over the severity of the important.
Imagine there are two problems you can attack. The first one involved a rental instrument being issued to the wrong student. You figure it will take about 45 minutes to straighten out the mess – annoying, but you can handle it. The second issue regards having the previously postponed conversation with your key manager about your succession plan – important, but complicated. Which one do you take care of first?
If you’re like most business owners, you take care of the issue which you have more control of. In this case, that is the rental problem, which may not be the best decision.
If you’re like most MI business owners, your store represents 80 percent-plus of your net worth. As such, this will be the most important financial decision of your professional life. Because the process is so complex, it’s no surprise that most owners experience excessive anxiety when trying to figure out how to transition ownership. Anxiety and complexity always results in delays.
The mind game begins like this: “One day I’ll exit the business by choice, or be forced to exit because of failing health. Still, I have plenty of time to figure out what to do. After all, how difficult can this be? I’ll just leave the details to my accountant and lawyer.” Of course, it’s never that simple.
In my January 2018 MMR column I wrote about exiting a business from the buyer’s perspective. In my June column I’ll focus on the flip side of the coin; selling your business from the owner’s perspective.
There are only three ways to exit your business
1: Inside sale – sell to a family member or key manager(s) or employees.
2: Outside sale – sell to a third party, a competitor or strategic buyer.
3: Liquidate your inventory – planned or unplanned.
Remember that your goal is to maximize the value of your business today, so one day you can sell it profitably. When having exit planning conversations with your professional advisors, family, and friends, here are a few tips you’ll need to know to stay in control, a prerequisite for making timely and better decisions.
TIME MATTERS
Some of your succession planning goals can be accomplished in months, while other goals can take years.
1: Identifying, training, motivating, and retaining your key managers can easily take several years.
2: Taking pre-tax annual profits off the table and diversifying your investments in a 401(k) is a five-year-plus goal.
3: Deciding on who your successor(s) will be and making sure he, she, or they will continue growing the business is usually a multi-year effort.
Questions for your advisor: How much time is required to implement the strategies you are recommending? Are the strategies you are recommending aligned with my personal values?
PERSONAL & BUSINESS READINESS
Separating yourself from your business may be harder than you think. Ask yourself the following questions:
1: Are you emotionally ready to separate from your business?
2: Do you know what you will be doing after you transition your business?
3: Do you know what your monthly income need is to be financially healthy?
Questions for your advisor: What is the minimum I need to sell the business for to support I and my partner for the rest of our lives? How can I best de-risk my business from death, divorce, disability, and departure in order to maximize the future sale?
BUSINESS VALUATION
If you own a portfolio of investments, your monthly statements will tell you the current value. Do you know how much your business is worth? Business valuation is half science, half art. Here are three common methods.
Multiple of discretionary earnings method is a common method used for small business owners. It’s calculated by earnings (bottom line) and goodwill, times a multiplier. Adjusted book value is added to this number. Adjusted book value is the measure of a company’s valuation after liabilities and assets are adjusted to reflect true fair market value. Asset valuation focuses on the fair market value of its total assets minus its total liabilities.
Market valuation attempts to determine the appraisal value of a business based on the selling price of other like businesses.
STOCK SALE VS. ASSET SALE
The seller wants to sell the business as a stock sale, the buyer wants an asset sale.
Have your attorney and accountant explain the pros and cons of both methods. Generally speaking, the seller usually wants to exit with a stock sale for the tax benefits, versus selling the assets of the business. On the other hand, the buyer wants to purchase the assets for greater tax benefits and reduced liability of future claims against the company.
The takeaway? A few important principles can keep you in control of the conversation. When you’re in control, it’s full steam ahead. Let me know if you have any questions.
