In the past, I have compared the attributes of sales to third parties to those of transfers to insiders. I looked at the often-overlooked risk involved in third party sales and the equally overlooked benefit of owner control and payoff in insider transfers.

I concede that, without planning and a well-designed strategy, sales are risky whether to a third party or to family members or group of employees. What I hope to demonstrate in this article is that owners can reduce their risk if they (with the help of skilled advisors) carefully design and implement a transfer to insiders.

Here are the essential elements of that strategy.

Time

A transfer to insiders takes time—to plan, to implement and to pay for. Typically the more time owners take to transfer the company, the less risk they incur and more money they receive from the new owners. For that reason, the first question an owner must answer is: Am I willing to take time (typically 3-8 years) to execute and complete an insider transfer? If the answer is no, then don’t even consider this type of plan.

Defined Owner Objectives

If owners are willing to devote the time necessary for this exit, they then must define their objectives. These may include:

• Financial security and independence;
• Departure/retirement by a chosen date;
• Keeping the family legacy or company culture intact;
• Rewarding key employees; or
• Taking the business to the next level—on someone else’s dime.In the well designed plan, these objectives are met before control is transfered.

Cash Flow

Healthy cash flow is critical to any sale. No buyer, (whether outside third party or insider) wants to buy a company with anemic cash flow. In a transfer to insiders, however, cash flow assumes gargantuan importance because it is the sole source, initially, of the money you’ll be receiving.

Growth In Business Value

Like healthy cash flow, buyers look (and pay top dollar) for companies that continue to grow in value. In transfers to insiders, only if value continues to grow does the ownership transfer occur. For this reason, it is vitally important that owners contemplating an insider sale install and cultivate their companies’ value drivers before and during their exit transition.

Capable Management Desiring Ownership

Having in place a motivated management team capable of replacing you, over time, in business operations is hugely valuable to any buyer. In a transfer to insiders, the insider(s) must also want to be a owner(s) and be willing to sign personally for any acquisition financing or ongoing company debt.

Minimize Taxes

No owner wants to pay more taxes than absolutely necessary. In an insider transfer it is imperative that you and your advisors structure the sale to minimize taxes on the company’s cash flow (pre-tax income) Without planning the cash flow is taxed twice—once when the insider receives it (as the new owner) and pays a tax and pays you what is left to purchase the company from you (and again when you pay a tax on the proceeds you receive). Part of tax planning is to have the company’s cash flow taxed but once. Considerable tax planning and structuring is necessary to accomplish this—but it’s worth the time and trouble as it can save a third or more of the cash flow from being taxed twice. This means you can receive more money more quickly and thereby reduce risk of non-payment.

Regulated and Incremental Transfer of Ownership

One of the most important advantages of the well-designed insider transfer plan is that it gives the owner the ability to regulate how, when and the amount of ownership transferred to insiders. If company performance falters, employees stumble or if the owner decides to sell to a third party, the well-designed plan keeps the owner in the driver’s seat.

Control

A fundamental design element of an insider transfer is to keep the owner in control of the company until he or she receives the entire sale price. There are many ways to accomplish this depending on the specific situation.

Minimize Risk

Business owners take risks every day. They don’t, however, like to put their own and their families’ future financial security at risk. For this reason, good plan design minimizes risk through strategies to maintain voting and operational control in the hands of the owner and shift operational business risk from the owner’s shoulders to that of the incoming owners.

Written Road Map

A successful transfer plan must be described in a written document and communicated clearly (and regularly) to the eventual owners. If the plan is not in writing, it simply is not credible and neither you, nor your insider, will take it seriously. More importantly, the written plan is the playbook for your exit that you’ll use to coordinate your actions with those of your advisors (thus reducing delay and cost). That plan also lays out a timeline and provides accountability—who will do what, when—for all participants, including the owner!

Education (yours)

You need to know more about insider exits because, unlike the sale to outsiders, you will be intimately involved, indeed, you will control the business and the exit process until you’ve gotten all of your dough.

If you’d like to discuss any one of them or transfer planning in general, please give me a call.

Email milton@texasgulfgroup.com for a copy of “22 Value Questions Every Owner-Manager Should Answer” put “22 Questions” in the subject line.

Milton D. Schopper, Principal, Texas Gulf Group, has been helping Houston’s business owners in the areas of exit planning, strategic planning, CEO peer group facilitation and executive coaching since 1997.

p 713.569.0001, email milton@texasgulfgroup.com

In the last article we mentioned that we would recommend simple steps, that when taken, will put you on a path to define your financial future and to start to get yourself and your business ready for the day you sell or transfer it. We promised to help you to do that by suggesting a series of achievable steps that you could take to change your focus to working on, rather than just working in your business.

When we have made these recommendations in the past, despite our assurance that these steps would be simple and effective, we sensed a collective groan and grumbling, “So, on top of everything else I’m doing to keep my business afloat and to take advantage of new market opportunities, you want me to plan my exit? I really cannot work any harder than I am today.”

Point well taken! So let’s clarify: we are not suggesting that you work harder. We are suggesting that you work smarter. We suggest that every action you take to exploit new opportunities or every cut you make to create a leaner and meaner company, that you do so while asking: How does this action get me any closer to my goal of leaving when I want, for the amount of money I want, and leaving the company to the successor I choose?

If you can remember, when you started your company you had a vision of what you wanted it to be: what it would look like, how many employees you’d have, the quality of its product or service, etc. Dreaming was fun. A lot of the fun evaporated, however, when you got down into the trenches dealing with customer complaints, employee issues, truculent bankers and uncooperative vendors.

For a moment, we ask that you sideline these day-to-day concerns and tap into the same energy you used to create your business to now create a vision of your life after the sale. What will you do? Fulfill a lifetime dream of sailing the seven seas? Start a charitable foundation? Start a new business? We want you to inject some of the fun of dreaming back into your life by thinking about your life after you leave your company. The path you take from this day to the day of your exit is yours alone and creating that path can seem overwhelming. As we noted in the last article, rather than tackle the entire process, let’s commit to do only two things:

1.     Break your distant goal of exiting your company in style and into manageable goals.

2.     Create a list of small action steps for each goal, with deadlines that, when put together, are the beginnings of the road map to your exit.

If you’d like to jumpstart this process by making yourself accountable for your performance, take a third action: Choose an advisor who can help you create a roadmap for your exit and, most importantly, see that it is followed, on your timetable. Unless owners take these three steps, it is rare for them to be able to maintain the momentum and discipline to see their plan come to a happy end.

Goal One: Make your company more valuable.

As Michael Gerber wrote in The E-Myth Revisited: Why Most Small Business Don’t Work and What to Do About It “there is ultimately only one reason to create a business of your own, and that is to sell it!” Great! But how do you deal with the apparent inconsistency of thinking about leaving your business when you’ve got a business to run?

The fact is that these two activities are completely compatible and actually support one another when you think about them in terms of the four value building areas listed below. Here’s how to get started, break down this monumental and ever-present goal into discrete steps. Sit down and list the areas that you believe should be addressed before your company could be put on the market. As guidance, concentrate your efforts in four areas:

1.     Maximizing Cash Flow

2.     Preserving and Protecting Value

3.     Creating and Maximizing Value

4.     Reassessing Strategic Objectives

Think about each of these areas for 10 to 20 minutes. Make lists of tasks to accomplish in each category and jot down a target completion date for each task. For example, under the category of “cash flow” many owners list items related to tracking cash flow, reassessing their business models, projecting future cash flow and creating realistic strategies for long-term growth. Ask yourself:

·       Do I know what my cash flow is? If not, quantify cash flow for the last three years and work with your CPA, CFO or Controller to understand what cash flow consists of. Email me for our primer “Cash is King” milton@texasgulfgroup.com for a description of cash flow and its importance.

·       Can I project cash flow for this year and next year?

Action Item for Goal One.

If you’d like help with this project, call or email us and ask for the 16-question pamphlet titled “Meeting Today’s Business Challenges.” Once you complete it, we will send you an assessment (based on your rating of importance) of the greatest opportunities to increase your business’s value.

Time Deadline for Goal One.

Request the pamphlet today. Based on the direction provided by your response, a more complete action plan can be created and implementation should begin within 90 days. In the next article, we will explain how to tackle another manageable, but important piece of the Exit Planning process. Until then, we hope you’ll give serious thought to working on, not just in your business and put some skin in the game by taking time to list what you and your company need to do to make it valuable and, ultimately, more saleable. If you’d like help in this process, don’t hesitate to call.

Email milton@texasgulfgroup.com for a copy of “22 Value Questions Every Owner-Manager Should Answer” put “22 Questions” in the subject line.

Milton D. Schopper, Principal, Texas Gulf Group, Houston, Texas. Office 713-569-0001 email milton@texasgulfgroup.com. Milton has been helping Houston’s business owners in the areas of exit planning, strategic planning, CEO peer group facilitation and executive coaching since 1997.

Today let’s take a hard look at how we can change our businesses in one simple way: avoid the mistake we made last year and in every year before that: procrastination. Specifically, if all owners know that someday they’ll leave their companies, why then do they do nothing to plan for that day?

In working with business owners over the course of my career, I’ve found that most owners put off planning their exits because practically they can’t get their arms around the scope of the project. According to Alina Tugend (see “The Popular Practice of Putting things Off” in Shortcuts, The New York Times January 30, 2009) “People procrastinate when they’re not confident that they can complete a project.” To most owners, an exit is something they can address later, when they have more time—a time that never seems to occur.

Because exiting a business is truly a distant, not immediate goal, years go by and business cycles spin round and round, and the “day of departure” seems—and is—as far away as ever. When most owners finally decide to leave they can’t because they never started the exit process.

The state of the economy during 2009 gave many owners ample reason to do nothing about planning their business exits. Would-be sellers were directly challenged by the stranglehold on credit available for buyer financing, and decreases in cash flow for most businesses—which led directly to decreases in business value and reduced M&A activity. If only the very best and most prepared companies were able to sell, many owners reasoned, “Why should I spend time planning my exit?”

Decide to Decide. “You may delay, but time will not.” — Benjamin Franklin

Owners use many reasons to justify their inaction and in doing so decide not to decide. Some owners postpone their decision for another year. Others will decide to make a decision about leaving when the economy and the M&A market improve. If postponement or delay is your choice, ask yourself:

·       Will my company be ready for sale when that yet-to-be-decided day dawns?

·       Will my company stand out from the hundreds of thousands of others on the market?

·       Will I be able to attract a buyer willing to pay a premium price for my company?

·       If you believe the business is as ready as it will ever be, but it doesn’t fetch an offer sufficient to provide you with financial security, what then?

Remember, even in active M&A years, the reality is that no more than half of the businesses on the market sell. Any M&A advisor will tell you that the main reason for this is that most businesses are not ready to be sold when the owner is ready to sell. Those businesses that do sell—even during difficult economic times—have owners who have figured out how to get their companies ready to sell.

Decide to Start.

Lee Iacocca summed up the importance of just getting started, “So what do we do? Anything. Something. So long as we just don’t sit there. If we screw it up, start over. Try something else. If we wait until we’ve satisfied all the uncertainties, it may be too late.” Applying Mr. Iacocca’s sentiment to Exit Planning, the message is: you don’t have to do everything at once to get yourself and business ready for transition. Doing so will likely be overwhelming and discourage you from even starting. You do need to start by creating a series of discrete, achievable steps and then take them: one by one. If the steps aren’t the right ones, you can modify them as necessary.

In the next article we will discuss several simple and effective steps you can take to make this the year you work on your business instead of in your business.

Email Milton at milton@texasgulfgroup.com for a copy of “22 value questions every owner-manager should answer”. Put “22 questions” in the subject line.

Milton D. Schopper, Principal, Texas Gulf Group, Houston, Texas. Office 713-569-0001 email milton@texasgulfgroup.com. Milton has been helping Houston’s business owners in the areas of exit planning, strategic planning, CEO peer group facilitation and executive coaching since 1997.