What Does Your Business Value Tell You?

What Does Your Business Value Tell You?

No one wants to spend money on something they don’t need. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?

You may not — if you fall into one of two groups:

• Owners who are sure that their business exits are more than 10 years away.
• Owners who are certain that the value of their companies is miniscule compared to what they will need upon sale or transfer.

Many owners, however, look to the value of their businesses as the chief source of liquidity for their post-exit lives. We intend to leave as soon as it is feasible rather than when we are completely burned out. Therefore, most of us need to know the value of our companies now so we can be smart about creating greater business value in as short a time as possible.

Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:

1. An estimate of value establishes your starting line and distance to the finish.
   An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
2. An estimate of value tests your exit objectives.
   An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
3. An estimate of value provides important tax information.
   First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
4. An estimate of value gives owners a litmus test.
   When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal may enable owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Pursuing exit plan success all begins with a starting value.
5. An estimate of value provides an objective basis for incentive plans.
   As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can work towards a successful exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.

This is Not a Full-Blown Valuation!

We know you are thinking, “How much is this going to cost me?” But we’re only suggesting that you need an estimate of value to establish a benchmark, not the opinion of value which may precede your transfer of ownership, years from now.

Estimate of Value

An estimate of value typically:

• Costs about half as much as a standard valuation opinion,
• Is the basis for the (later and) complete valuation, but
• Lacks the supporting information contained in a written opinion of value, and
• Is used for planning only. It cannot be relied upon for tax or other purposes.

Failure to Value

On some level, we all recognize that we will leave our businesses someday. While you may not yet have a vision for the second half of your life, you do understand that the exit from your company is likely to be the largest financial transaction of your life. Does it make sense to go into that transaction and into the second part of your life without an objective understanding of your company’s value?

An estimate of value can save precious time as you build value and pursue the exit of your dreams.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisors who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools.  We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call 910-681-1420, or email Coach@LaunchGrowExit.com.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

A Race Against Time

Successful, active business owners seldom slow down. Many business owners are both great at planning (for their businesses) and terrible at planning (for themselves).  There are so many great business challenges to tackle, planning for your personal ownership future can get pushed to the back burner.  We all know that the only things likely to reduce your pace are death or terminal burn-out. This is not to imply that you are not well intentioned; quite the contrary. You may be so well intentioned that you’ve taken on more responsibility than you can possibly complete.

Today, our goal is not to alter the number of hours in your workday but to alter your mindset. To do that, let’s look at the story below.

Renaldo LeMond owned a growing hospitality services business. As business increased, he hired more employees and learned to delegate. Both these improvements freed up time to sell more, to manage more, and to grow the business more.

No matter how much Renaldo delegated, there were always additional tasks and new priorities. Renaldo’s daily activities left no time to plan. Even if he had had the time, Renaldo really didn’t know how to create a plan founded on a clear vision, backed by definite plans that created definable steps subject to deadlines and accountability.

This was Renaldo’s situation when he was approached by a would-be buyer for his business. Renaldo hadn’t actively considered selling his business, but at age 49, he was beginning to think that life after work might have something to offer. He was open to talking about and exploring the idea of selling his business because business growth, and more importantly, profitability, had been slowing for years.

Renaldo found an hour in his schedule to talk to the interested buyer. In only 60 minutes, Renaldo’s blinders were removed and his priorities were turned upside-down.

The buyer turned out to be a large national company seeking to establish a presence in Renaldo’s community. It was interested in Renaldo’s business because of its reputation as well as its broad and diversified customer base. The buyer was looking to acquire a business that could grow with little other than financial support.

Naturally, it sought a business with a good management structure because, like most buyers, it did not have its own management team to place in the business. Renaldo, however, had not attracted or retained solid management (nor had he created a plan to do so). His business lacked this most basic Value Driver.

Like many buyers, this buyer also looked for two additional Value Drivers: increasing cash flow and sustainable systems throughout the organization (from Human Resources to marketing and sales to work flow). Renaldo quickly realized that his business was a hodgepodge of separate systems each created to patch a particular problem.

Finally, the buyer asked Renaldo to describe his plans for growing the business. Renaldo had none. What this buyer and Renaldo now understood was that this business revolved around Renaldo.

As Renaldo left the meeting, he expected that, given his company’s deficiencies, he would receive a low offer from the buyer. He waited weeks but no low offer was forthcoming. In fact, the buyer simply disappeared.

The message to all of us is clear: Unless a business is ready to be sold, many buyers, especially financial buyers, are not interested. They have neither the time nor the in-house talent to correct deficiencies. The look for (and pay top dollar for) businesses that are poised for ownership transition.

It is a fact of life for owners that unless you work on your business, rather than in your business, you will never find time to plan for your future and for the future of the business.

Is there a way to change your priorities before your 60 minutes with a prospective buyer? Of course. You simply acquire new knowledge (about Exit Planning) and apply it to your life.

Exit Planning requires time: time not only to create the plan but also time to implement it and to achieve measurable results. That timeline may be considerably longer than you anticipate because, in creating an Exit Plan, you need to rely on others who are also busy (minimally an attorney, CPA, and financial planning professional). Additionally, you can not anticipate all of the issues that might arise, and it is unlikely that everyone you work with is as motivated or experienced as you are. Finally, and inevitably, not everything will go as planned.

Exit Planning encompasses all sorts of planning: your growth, strategic, tactical and ownership succession planning for your business, as well as your personal financial, and estate planning. By wrapping business, estate, and personal (or family) planning into one process, Exit Planning is all-encompassing rather than a subset of the planning that you are sure you will one day undertake. In short, there is much to do.

It may be helpful here to recognize that planning, properly undertaken, can help enrich your business as well as your personal life. According to Brian Tracy, "A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power." And, in the case of Exit Planning, it works, too.

So You’re Never Leaving…Got A Plan For That?

We hear it all the time.  Do any of these sound familiar?

“I’m never leaving my business.  I love what I do.”
“I don’t intend to exit my business.  I plan on working until the very end.”
“I can’t leave my business.  I wouldn’t know what to do with myself!”

These are valid positions for a business owner to hold.  But they could be vulnerable if there is not a plan to go along with the sentiment.  Staying in your business forever requires planning to make it a successful experience.

If you have a similar intention to continue on with your business indefinitely, we suggest you develop a thoughtful plan to maximize your likelihood of success.  Consider your objectives in this way:

· You have no departure date in mind, but is there a year (or an age) when you might not be able to keep up your current pace?

· Continued work means continued income, but what is your family’s income needs if/when you are not able to work?

· You plan to hold onto your ownership, but when your ownership does eventually end (and we can guarantee that it will someday), who will be the next owner?

It is inappropriate to suggest that you, the creator of a business, should exit before you choose. But the reality is that a plan to stay still requires a plan.  Think through the consequences of not planning for a successful “stay” and evaluate whether you are comfortable with the best and worst possible outcomes.  This kind of self-evaluation may help reduce the tendency to procrastinate under the mistaken assumption that planning and action can be delayed or ignored.  It prompts many owners to take action to stay in control of their own future.

Exit planning begins when owners understand their ultimate objectives and what they have to do to pursue them. An owner who has a preference about what should happen to his or her business, employees, family, ownership, business reputation or legacy should take control in order to shape a successful future.  

Start by thinking through the various paths that you, your ownership and your business might take and deciding which of those paths are appealing to you and which are not. 

It may sound like a contradiction, but we use a systematic process to help business owners develop and implement a successful Exit Plan, even those who don’t intend to exit.  If you plan to stay in your business indefinitely, or if you hope to exit soon, contact us today to get started.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisors who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools.  We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call 910-681-1420, or email Coach@LaunchGrowExit.com.

Fraud: Do You Know It When You See It?

The subject of employee dishonesty is a delicate one. Owners generally want to trust their employees, and given all the other battles owners fight on a daily basis, they are often not as vigilant as they can or should be. Vigilance requires an investment of time and money in return for an uncertain payoff.

Here’s one example of a typical fraud scenario:

Lou Spencer’s CFO, Marty Jacks, had been with Lou’s company for 15 years. While Lou reviewed company financial reports and often the accounts receivable aging report, he let Marty handle the day-to-day financial operations. To say that Lou was surprised when one of his vendors mentioned that he’d run into Marty on the floor of a Las Vegas casino at 4:00 a.m. would be an understatement. As far as Lou knew, Marty spent every weekend at home or camping with his family.

Rather than confront Marty immediately, Lou casually asked his golf partner (a CPA who also happened to be a Certified Fraud Examiner) about employee theft.

• The CPA listed more ways to steal than Lou could imagine, but Lou did remember:
• Creating fictitious vendors or employees.
• Stealing inventory.
• Giving oneself undisclosed and unauthorized pay raises.
• “Lapping” or taking payment from one customer and applying it to another’s account.

The CPA explained to Lou the three conditions present in any fraud situation: motive, opportunity and rationalization.

“Has anyone run into financial difficulties?” he asked. “Maybe a sick kid? The unemployment of a spouse or even the readjustment of payments on a home loan?” Lou could not think of anyone in those situations.

Lou understood the “opportunity” factor immediately. He admitted that because he trusted Marty implicitly he was not reviewing every report carefully. Marty certainly had opportunity.

Rationalization: Lou was fairly confident that his employees—including Marty—were satisfied with their salary and benefit packages. Except for an occasional afternoon of golf, Lou believed he worked as hard as any of them.

The CPA suggested that before acting, Lou retain a fraud analyst to conduct a fraud audit. At a minimum, Lou should review his financial statements and this time, rather than focus on the decline in revenues, look for any anomaly or anything that “bucks the trend.” Lou returned to an empty office to do exactly that.

What Lou discovered caused him to call his golf buddy to schedule a meeting about a Fraud Deterrence Audit. Lou swallowed hard as he signed an engagement letter for an audit that would cost his $20M company between $20,000 and $25,000.

After several weeks of review, the CPA laid out the situation for Lou. Marty had a gambling habit (motive). Over the past 18 months, Marty had set up numerous bogus vendor accounts and had siphoned off almost $1 million to these accounts (opportunity). When Marty started pulling small amounts of cash out without Lou noticing, Marty decided that since Lou didn’t miss the cash, Lou could do without it (rationalization).

Armed with the facts, Lou fired Marty. There was no way to recover the money, so Lou and the Fraud Examiner concentrated instead on ways to prevent this scenario from reoccurring.

There are sub-specialties in accounting that include the Certified Fraud Deterrence Analyst and Certified Financial and Forensic Accountant.  These advisors have knowledge and expertise that go beyond financial statement review.  They have a unique way of looking at your business operations and activities.

These fraud detection professionals might suggest that you first look for any anomalies in the company’s financial reports. Are there exceptions to trends over time? To do this, prepare two spreadsheets.

• On the first spreadsheet, enter the last five years’ income statements expressed both in dollars and as a percentage of gross revenues. Using that report, investigate any significant changes in income as well as significant changes in the expenses as a percentage of income.

• On a second spreadsheet enter your company’s balance sheets for the past five years. Using this report, compute the accounts receivable turnover and collection days for each year as well as inventory turnover. Again, investigate any significant changes.

Next, a professional might recommend that you change the schedule for running and reviewing reports. Lou’s new CFO (hired only after a thorough background check) should provide Lou with reports on a weekly, rather than monthly, basis, and occasionally on days that she is not expecting to have to deliver reports.

A third suggestion might be that owners should carve out time to carefully review those reports without distraction.  Give them the attention they deserve.

Lastly, a professional may advise that owners ask their CPAs to conduct a quick Financial Statement Overview. Many owners think they know how to read these Statements, but CPAs can teach owners what to look for and what the numbers mean.

A qualified Fraud Examiner will propose a number of changes tailored to your particular company and they should follow up on an agreed upon schedule to make sure that all changes have been implemented and that there are no new opportunities for fraud.

Internal forensic reviews, systems of checks and balances and a watchful owner are not signs of mistrust – they are signs of a healthy strong company.  You may sleep better at night and position yourself and your business for a successful future if you take some of these steps.  Do you need to have a conversation about detecting or preventing fraud in your business?  Contact us to get help accessing the resources and information that you need.

Either You Have It, or You Don't

Business owners planning for a successful future should always begin by identifying and understanding their primary objectives for themselves, their families, their ownership and their businesses.  Key objectives include:

• The date you wish to exit;
• The amount of cash you want upon exit; and
• Your choice of successor.

For this coaching tip, let’s look carefully at that second objective: How much cash must your ownership of the business deliver in order to enjoy a financially secure post-business life? For most owners this is a great starting point for determining when, or if, they can leave their businesses on their own timeline and on their own terms.

The Issues

Joan was the 58-year old owner of Oleander Data Analytics, Inc. She had engaged her financial advisor to:

• Set a realistic assumption for a rate of return on her investments;
• Research actuarial information to determine average life expectancies for both she and her spouse; and
• Help her and her spouse agree on and establish an acceptable post-exit annual income amount.

As part of this process, Joan and her advisor reached the critical question whose answer would determine Joan’s ability to retire on her terms: What must the value of Joan’s business be if Joan is to leave, as she desires, at age 63?

Like Joan, your resources are likely both in the business and outside of it. You need to know the value of both so you can determine if there is a gap between the amount of money you will need in the future and the amount you have today. If you have enough to secure your financial future, your planning will go in one direction.  If you don’t have enough for complete financial freedom, your planning will go in another direction.  Both scenarios are fine, but you’ll want to know which one fits your situation.  Any gap must be quantified and—to exit successfully—you must create and implement strategies to close that gap. Most owners retain an experienced financial planner to help with this project.

The Process

Joan and her advisor used the following process:

First: Joan and her spouse agreed on their future annual income needs.

Second: Joan and her advisor, using their agreed-upon estimate of a projected rate of return, calculated how much Joan’s non-business investment assets would be worth at Joan’s desired exit date.

Third: Joan’s advisor calculated the amount of investment capital needed to pay Joan and her spouse the target income per year for the duration of their lives (based upon current actuarial tables and assumed reasonable, maybe even conservative, investment returns). This amount needed to be net of taxes, since Joan intended to use it for spending.

The Bottom Line

When the business falls short of the value needed to achieve your financial targets, you should consider working with a business coach to build business value that achieves your goals.  When the business value meets your needs, you turn your attention to other goals and objectives, such as taking care of loyal employees, leaving a legacy in your industry and your community, focusing on the “What’s next?” question.  You either have it or you don’t.  Keep in mind that neither circumstance eliminates the need for planning.

Contact our firm for help in organizing the right advisors to determine your business’s current value and the gap (if any) between what you have today and what you’ll need in order to exit on your terms. We can help you to understand your ultimate objectives and what you must have (and must do) to reach them.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisors who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools.  We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call 910-681-1420, or email Coach@LaunchGrowExit.com.

Is the Bank with You or Against You?

Many business owners have mixed feelings about their banks and their banking representatives. They are unsure about whether they can be completely honest about their business without a negative impact on the bank relationship.

On a daily basis, you do not spend much time thinking about your banking relationship. When the time comes to tell the bank you’re planning to exit your business, or when you need money, however, you may experience feelings ranging from mild anxiety to outright dread.

Why? We've been conditioned to believe that bankers say "no" far more often than they say yes. That may or may not be true but bankers make money by saying yes. When they turn down a lending opportunity, they just don't lose money.

Like all other businesses, banks are eager to continue mutually beneficial relationships. If the sale or transfer of your business is unlikely to disturb that relationship, your banker is (or should be) vested in helping you execute that transfer. It should come as no surprise that smart banks value the relationship even if you are no longer part of it.

How to Answer the Question

Let’s look at two sale situations our firm has been involved in to clarify our point.

The first was a sale to a third party in which the entire purchase price was paid in cash at closing. In this scenario, we helped our client find a bank that was willing to finance the purchase at the sales price the client wanted. This transaction was supported by an SBA 10 year loan at a fixed interest rate of 5.375%.  The business sold for $2.4M and 90% of the value was in goodwill.

In the second scenario, we have a client who decided to purchase shares from his partner so he could transfer ownership to his family.  The owner’s family works in the business and the son wants to continue running the company when his Dad retires next year.  The family used an SBA loan along with partner financing to purchase the shares from the business partner.  The bank’s capital made the long-term estate plan work.  Cornerstone also helped the client develop a governance strategy to minimize potential family disputes later on.

Again, the banks want your business and will help you make sure your plan and your buyer meet certain standards. 

Where to Go Next?

Don’t be intimidated by the bank. Let us work with you to identify all of the steps that will help you secure bank financing successfully and without stress or anxiety.  Your banker is ultimately a member of your team of trusted advisors, when the relationship is working well.

For more information about the role of bank financing in your plans for the future, and what the bank will require or request, contact us and we are ready to help you today.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisors who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools.  We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. 

Unintended Consequences

Stephen Manicek sat quietly and stared out the window of his car as it sat parked in the parking lot of Mayfaire Business Park. Until a few minutes ago, he had been president of his distribution company, 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?

After his father’s death, Stephen had received 49 percent of the stock in the family business. Another 49 percent share went to his sister. The remaining two percent—the swing vote—was held by their mother.

Stephen’s father had brought him into the business early and taught him well. After the founder’s death, Stephen assumed all responsibilities for sales and became the key man in the business.

His sister, Clara, handled the bookkeeping and other administrative matters. Her husband managed the warehouse employees.

Despite ups and downs in the economy, the business thrived under Stephen’s stewardship. It had a long-standing tradition of excellent customer service and a good reputation in the industry because the elder Manicek had pioneered automation and distribution efficiency and tracking processes in the industry.

Because of his dedication to the business, Stephen had not spent much time nurturing family relationships. His relationship with his mother was not as close as that of his sister. As their mother aged, she became increasingly susceptible to the influences of her daughter. Family friction developed. A confrontation was inevitable.

Stephen had always assumed that his superior abilities and position as president and board chairman would enable him to prevail in any family dispute about the business. He was wrong. After many months of conflict over company strategy and financial performance, Stephen’s sister called a special meeting of the board of directors, Stephen was removed from his posts, fired as an employee, and given three months of severance pay—after 20 years in the business.

Stephen naturally felt victimized...but not so much by his sister and mother as by his deceased father. By failing in the most important remaining task in his life—to plan his estate—the elder Manicek made his son an unintended victim.

Stephen sat in his car and tried to understand where things had gone so terribly wrong.

The unfavorable business transition experiences described above may have been avoided had Stephen’s father asked—and answered with the help of an experienced business advisor—six critical questions.

1. How can I provide for an equitable distribution of my estate among my children?

2. Who should control and eventually own the family business?

3. How can I use my business to fuel the growth of my estate outside of my business interests?

4. How do I provide for my family’s income needs, especially those of my spouse and dependent children, after my death?

5. How can I help preserve my assets from the claims of creditors during my lifetime and at my death?

6. How can I minimize estate taxes?

Thoughtful answers to these questions, followed by appropriate decisions, actions and implementation, may well prevent a similar experience in other business families and support a smoother business transition for all parties involved. Family harmony and the preservation of family relationships on a long-term basis continue to be top priorities of founding patriarchs and matriarchs of successful business families. The answers to these questions often permeate most or all of the decisions a business owner makes regarding the future of the business. Leaving these questions unanswered can create a myriad of unintended consequences.

If you have any questions about how a well-conceived estate plan interacts with a comprehensive plan for the future of a family business, please contact us to discuss your particular situation. Our Business Advisors work with our clients’ financial advisors, accountants and attorneys to ensure your company has an Exit Plan that meets your objectives.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisors who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools. We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization.