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Escape Plan: Business Ownership Exit Strategies That Really Work

There are many independent businesses in the US. The Census Bureau estimated in 2016 that there were about 7.7 million establishments across the country where at least one paid employee worked. But with more than 32.5 million businesses in the United States, it turns out those offices, stores, and factories are in the minority when it comes to where people conduct business. The far bigger share is the percentage of those so-called “nonemployer” businesses in the country. It’s about 25 million businesses or 76.2%. That includes sole proprietors who set up shop in their home or at a shared office space but also includes people who work as independent contractors, consultants, or freelancers for larger businesses.

Whether you have one or one hundred employees, your business is a huge part of your life and running it can be challenging. In fact, most business owners consider getting the day-to-day and year-to-year tasks done a small victory. Making profits in the industry involves eventually showing a good cash flow and a bottom-line profit. In this kind of thinking, entrepreneurs also find out that, at some stage in the future, they will build and execute their exit strategies. Sadly, not all have this chance. The key is to build a business that someone will want to buy, which means it is financeable.

It is a fact that none of us can anticipate the future, but having a strategy in place that foresees future developments and situations can help one gain economic gains that are expected to occur in the future. This rule applies to the sale of businesses. If the owner of the company has an escape plan in motion, opportunities might not be overlooked as easily as they could without a plan. The exit plan is intended as a tool to get the owner to think about the future and serve as a guide once arriving at the point of exiting. This is why having a written exit plan is always important to have.

What’s in it for Business Owners?

It’s always beneficial to be proactive in business, especially now! Do you remember the time you saw an item on sale for a large amount off and you did not buy it only to realize a month later you should have made the purchase? Alternatively, did you ever buy an asset that was more valuable to a purchaser a month or a year ago than it is today (i.e. securities, commodities, or real estate)? Many of them can contribute to circumstances like this. If either the buyer or seller should have expected the scenario, today they would be better off economically.

There are different types of exit strategies to pick from. Many business start-ups set their targets with an initial public offering. Although this is a respectable and worthy objective, it is unlikely to happen to any of us. The majority of exits from the business include the purchase or selling of a business. It is crucial to have a realistic target when designing an exit strategy. However, this does not mean that does not mean an IPO is unreasonable for everyone, but the business owner should think about possible alternatives to their primary goal or their intended exit. 
Here is a discussion of the various types of business exits or selling agreements that can be made:

1) Sale of a Business – A business is sold to an individual, group of individuals, or an entity. Doing this, the business owner receives cash or an equivalent for the business. However, it can be difficult to find a ready, willing, and able buyer to purchase the business.
2) Acquisition – Similar to the “Sale of a Business” exit, but usually involves an outright purchase of another company. You receive cash right away, but you must find a ready, willing, and able buyer that wants to acquire your business and add to their business.
3) Merger – In this type of exit, the business joins with an existing company. As with a sale of a business, you get cash, stock, or a cash equivalent, but you join in with new partners and may suffer a partial or complete loss of control of your business. A Buy-Sell Agreement is used for the future exit strategy

Steps Toward a Smooth Exit

1. Getting Started
Since we cannot predict the future, it is necessary for the business owner to follow a “what if” attitude when thinking about exit plans. It’s a really clear logic. To pursue this, ask “What if” or “What should I do if” and then name or state a scenario. Examples: What do I do if my company is expanding rapidly in the next five years? What happens if the country hits a depression? If the type of wording of the thought is not relevant, this sort of thinking helps the business owner to cover a wide variety of contingencies and to plan accordingly.
While it can be helpful to list multiple contingencies, you cannot prepare for every possibility that occurs. It is more important to pick the most important scenarios from the several anticipated possibilities. Establish a document detailing the actions and procedures to be implemented in the case of any contingency arising. 
Each exit strategy should take into account various considerations, such as market, competitiveness, owner’s capital & priorities, and any other related intangibles. Also, the right plan takes into account the objectives of all involved people.

2. The Homework
The homework consists of reviewing any existing agreements you have with partners, shareholders, and others who are involved in the organization. The agreement may consist of articles of incorporation, by-laws, and buy/sell agreements. The exit plan must conform to the existing agreements or it could defeat the plan. If you don’t have any existing agreements between shareholders and partners, now may be the best time to create one in conformity with the plan you want to follow.
Important Note: A buy/sell agreement is the most significant legal document a business can have that encompasses exit strategies.

3. Shaping The Plan
The remainder of the outline should be completed after the homework has been finished. The strategy does not actually have to be complex or even well written in order to be successful as scenarios occur. The most effective strategies are those that are most carefully thought out, so it pays to consider at this point.

The Goal – It is important to define a goal. Obviously, the main goal in any exit plan is to achieve the best results. These results may include reviewing the biggest monetary gain, the smoothest transition into the next generation, paying the least taxes, or to create a retirement plan.

The People – Next it is important to choose the players to be involved in the exit plan. Decide what partners or key people will handle what or what you would like them to do. When the time comes, the people named may not be willing to do the task, so be wary of this situation and always keep your plan up to date and current.

The Business Valuation – Valuation of the company is also important. It is important to identify a company or professional that has expertise in this specialized area. A poor valuation by a business broker can lead to selling the business for a price short of what it should be. An entire lifetime of hard work and sacrifice should not be devalued by means of a shoddy valuation; it would not be fair to you or those around you. Valuation of a company should take place every year because the results and value-added drivers of operation are important to the overall value of the business.

Due Diligence – Potential due diligence issues then need to be addressed. Due diligence is the process of ensuring the accuracy and completeness of assertions. It is best to address the issues now rather than wait until the exit. Items such as obsolete inventory, family members on the payroll, and real estate all need to be dealt with and thought of before the business is put it for sale. An issue in due diligence can result in a deal-breaker when your exit plan is put in action.

Conclusion
Being proactive in business pays, especially pays when you are dealing with an exit strategy. Dealing with the issues that come up now can eliminate lost opportunity, headaches, and problems that may not be able to be solved when the exit occurs. Therefore, it is important to have an exit plan at all stages of a business. If you like, please contact the professionals at the Center for further assistance in your business and tax needs. The professionals at the Center specialize in exit strategies for private companies. Financial, legal, and tax advice is provided in developing exit strategies.

Author’s Note: “I have worked with Bart Basi on transactions for over ten years and I wanted to share his latest article.” – Chris Curtin

Bart A. Basi
Dr. Bart A. Basi is an expert on closely held enterprises. He is an attorney, a Certified Public Accountant, and the Senior Advisor of the Center for Financial, Legal & Tax Planning, Inc. He is a member of the American Bar Association’s Tax Committees on Closely-Held Businesses and Business Planning.

Marcus S. Renwick
Marcus Renwick is an attorney and the Director of Research and Publications with the firm

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Top 4 Practical Succession Planning Tips Every Business Should Follow

A good business should have a vision, and a succession strategy should be considered when the time is right to sustain the owner’s legacy. There are several aspects that have an effect on the overall performance of the succession plan and its execution, but below are four realistic tips to remember when preparing the succession of your business.

1. Define the Succession Plan’s Goals

As a business owner, what is the most important thing to you in the succession planning process? Is it financial stability for your family or continuing employment for productive team members? What about maintaining local ownership versus integrating with a larger company? After setting the targets, the CPA will assist in setting up a succession plan that can make your goals easier to achieve.

2. Ensure a Willing Seller/Willing Buyer Scenario

Many business owners expect that children or other family members may choose to inherit their business. They also dream that a bigger corporation would want to purchase the whole enterprise. All of these situations are based on assumptions. Thus, start by holding realistic negotiations with everyone you’d like to be involved in the future of your business. After these discussions, it is much easier to plan a transition that encourages an honest appraisal of potential choices and requisite planning.

3. Plan Efficient Financial and Tax Terms

After investing a lot in a profitable business, most business owners are terrified at the idea of selling away their business. But there are a lot of tax benefits for gifts. Accountants and business consultants of CRI are able to assist you in the definition of the right tax maximization techniques for your succession plan—as well as in the supervision of the financial transaction necessary for the succession of your business.

4. Review and Update The Succession Plan

Changes will take place, thus you should revise your succession plans accordingly. Please review it periodically, or at least semi-annually. This is to reflect improvements in your personal life, business model, staff, competitors, and economic factors. Just be sure that if the client base shifts, the succession plan protects consumer and distributor communications in the event of a drastic transition.

Bottom Line

Succession planning is critical to any business’ long-term success. Realism and preparation are two keys to the success of a succession plan. For more details, visit our related succession planning video blog. Remember that planning now has the potential to pay off exponentially later. Therefore, contact the CPAs of CRI with any questions.

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Selling Your Business: 6 Year-End Steps You Must Know

A profitable business opportunity sometimes comes around but does not work because the owner of the business has not properly planned a sales strategy, developed a tax plan, streamlined finances, and made arrangements for the partners or relatives involved.
Whether you are ready to sell your business now or in the future, important steps should be implemented to make your business more salable. Potential buyers will weigh purchasing your business against other investment opportunities. 
If you are planning to sell your business this year, consider following these steps:

  • Determine the accurate value of your business
  • Don’t hesitate to seek legal and financial expertise
  • Tie up loose ends
  • Document your offers
  • Separate your personal expenses from the business
  • Organize and prepare the paperwork

Taking these six steps will also help your business stand out from the other poorly presented companies for sales. We advise using Professionals Advisors, but we hope these six steps will take you to the right direction in selling your business.

Step 1: Clean up Your Books

Are your monthly financials completed by the 15th of the following month? Are you comfortable that the P&L, Balance Sheet, AR, and AP are accurate and truly represent the overall status of your business? Do NOT run your business by only eyeballing the checkbook. The balance Sheet is critical as many businesses have errors in the Balance Sheet or they do not tie in with the tax returns. Borrowing money is Balance Sheet-driven which means buying a company is Balance Sheet-driven.

Step 2: Understand your Books 

One reason many businesses don’t follow step one is that many times financial numbers are not that meaningful to business owners. Financials are only a useful tool if understood and utilized correctly. If you don’t fully understand your books, don’t hesitate to get some help. 
Also, make sure the data is presented to you in a useful format. Many businesses have too many general ledger accounts to be meaningful. Use sub-accounts to clean up the clutter. Review expense items as a percent of sales. Track the change in percentage of key expense accounts and manage them accordingly.

Step 3: Identify Accounts Receivable Issues

Many businesses have liquidity issues. One of the easiest ways to find the “low hanging fruit” is to take a hard look at your accounts receivable (A/R). What percent of your A/R is over 60 days old? 90 days old? Recently, a client at our urging reduced their largest customer’s 60+ days A/R by $100,000 even though sales had increased. This cash increase reduced their yearly borrowing costs by over $35,000.

Step 4: Address Inventory Issues 

Inventory is another area where businesses waste a lot of cash. Check your turnover on stocked items. You need to evaluate the ttems that you hold for more than 90 days, whether for different re-order or manufacturing levels. 
Any inventory that is older than 180 days needs special attention. I have heard many arguments about this “great deal” clients made buying goods. However, inventory is described as a “wasting” asset. Besides consuming precious working capital, it also generates additional storage, insurance, and handling costs. Unless inventory turns and solid profits are realized-Liquidate!

Step 5: Surplus Equipment 

Entrepreneurs are great accumulators of “stuff”. I am not a psychologist, but I think it provides business owners with some measure of comfort to see all the bulldozers, trailers, forklifts, and tanks that they own. Bottom line is that if an asset does not earn your business profits compensatory to its value, it is a drain on cash flow. Again, liquidate!

Step 6: Analyze Lead Sources 

I believe much money is wasted on fixed-cost advertising (yellow pages, newspapers, radio, etc.). I understand it is important to have a presence and a clear message in the marketplace, but when was the last time you researched the source of your new clients. 
You might be better served by cultivating more referral sources. Know your true sources and costs to secure and keep clients. Bankers Advocate utilizes overseas Virtual Assistances to keep our costs way down.

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Business Appraisal? Two View Points

Recently I read an article in “Inc.” magazine espousing why a business valuation is less than important (https://www.inc.com/david-lonsdale/why-a-valuation-is-less-important-than-you-think.html). Then a week later in “Forbes Magazine” is an article stating that to build value you should value your business (https://www.forbes.com/sites/steveparrish/2012/08/14/if-you-value-your-business-you-should-value-your-business/#66390fd4e57a).
Read here for the Post from Nick on our sister site:
https://www.businessappraisalflorida.com/blog/business-appraisal-two-view-points/

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Timing Your Business Exit or Business Sale (Part 2 of 3)

In our first post on exiting business ownership timing, we highlighted how selling your business at the “right” time exists at the intersection of proper preparedness and these three timing conditions:

  1. The economy is expanding
  2. The business is growing
  3. The owner is ready personally and financially

In part one, we discussed how the economy has cycled through expansion and contraction in each of the last three decades. The sweet spot (expansion phase) for exiting at the top occurred approximately mid-decade in the 1980s, 1990s, and 2000s, while the same decades started and ended at a low point (contraction phase).

If the economy follows the same cyclical path in this decade and the next, we have a sweet spot in three to five years from now, followed by a contraction near 2020, and another sweet spot near 2025.

2. The Business is Growing
The second condition – the business is growing – represents another timing opportunity to prepare for and exploit if we are selling at the top. The good news is that an expanding economy should lead to business growth. As they say, “a rising tide raises all ships.” Taking advantage of this condition, however, holds its own timing and preparation strategies.

Timing:
Because the other side’s Gang of 5 (potential buyers, bankers, appraisers, accountants, and attorneys) view business value three parts history and three parts future, the best strategy is to time the exit before the business reaches the top of its next growth curve. More specifically, the business should demonstrate three years of documented historic growth and three years of reasonable future projections.

Preparation:
Start by creating the three-year look back (due diligence documentation) – the future of the business needs to show related to growth. There are countless items to address (use this link for a look at a standard Due Diligence Request List), but the most important question in terms of growth the owner needs to answer in three years from now is: “What led to the growth, and how do I know it will continue in the foreseeable future?”

Create a Business Development Dashboard
A Business Development Dashboard is a relatively simple yet powerful tool that answers that important question.

Using an accounting program or hiring an advisor fluent in Excel, create a spreadsheet listing all of the various marketing initiatives the business uses or will add in the immediate future. Note: This list could be quite different today compared to three years ago. Today, internet/social media marketing can benefit nearly every business. Contact us for an unbiased review of your current platforms and strategies.

For each activity, track the number of leads, revenue, margin, and cost per lead generated on a periodic basis (could be daily, weekly, or monthly depending on the business).
In no time at all, the owner will not only be making wiser decisions about how to grow but will also have detailed the history of growth and the basis for future projections.

In conclusion, imagine it is 2015, and the economy is “right,” the business’ numbers are up in each of the last three years, and the buyer asks that fateful question: “What led to the growth, and how do I know it will continue in the foreseeable future?” Answer: The owner delivers an impressive, compelling, and credible detailed analysis.

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