Valuable Tips

10/4/17 10/4/17

Minimizing Threats to Business Value

Many owners and advisors talk about the importance of growing business value, and there are nearly unlimited options to help business owners do just that. But wouldn’t you agree that growing business value is pointless if you don’t know how to reduce the threats to that growth? As you prepare for an eventual exit from your business, there are several threats to business value that you need to be aware of:

· Key employees leaving the company and competing by taking customers, employees, and/or trade secrets.

· Key employees dying or otherwise leaving without a replacement.

· Data security breaches.

· Uninsured casualty loss.

· Fraud and embezzlement.

· Losses from high-risk operations.

· Any number of other economic, industry, or internal threats.

· Key employees leaving the company and competing by taking customers, employees, and/or trade secrets.

· Key employees dying or otherwise leaving without a replacement.

· Data security breaches.

· Uninsured casualty loss.

· Fraud and embezzlement.

· Losses from high-risk operations.

· Any number of other economic, industry, or internal threats.

Let’s look at three of the most common problems that minimizing business risk can position you to solve.

How Minimizing Business Risk Solves Problems

Minimizing business risk can position you to solve three problems.

1. Harm to Transferable Value

Business risk increases as you grow your business’ transferable value because a vital part of increasing transferable value is making yourself inconsequential. As key employees take the reins to grow the company, they begin to manage and develop their own relationships with key customers, employees, and vendors. This increased contact can turn ambitious key employees into risks. Unless you proactively change your role in the business, those key employees can suddenly leave the company, taking critical relationships with them. Proper planning can reduce this risk.

2. Data Security Breaches

Data security breaches can destroy customer trust, especially when sensitive information is stolen. Without customer trust, business value may plummet, making an ownership transfer unbearably difficult. Minimizing this risk maintains the trust customers have in the company, thereby protecting the business’ value from outside threats.

3. The Cost of Protecting Your Business

The third problem is one that owners often create themselves: Because they aren’t willing to pay the upfront costs to protect their businesses, they end up paying much more later to resolve problems that they could have prevented at the outset. Properly protecting against business risk costs money, and these upfront costs might tempt you to ignore risks in hopes that nothing bad happens. However, ignoring business risks can be devastatingly expensive compared to addressing them early on. An ounce of prevention is worth a pound of cure, so hiring experienced advisors to help identify and address business risks preserves and protects hard-earned business value, making a successful exit much more achievable than simply hoping nothing bad happens.

If minimizing business risk is an area in which you haven’t yet focused your attention, contact us today. We can help identify and begin to address threats to your business’ value.

Contact us today to begin identifying, prioritizing, and installing the Value Drivers your company needs for you to leave your business on your terms.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisers 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 Dallas@LaunchGrowExit.com.

9/20/17 9/20/17

How to Increase Your Business’ Value Using Value Drivers

A fundamental aspect of a successful business exit is assuring that your business has enough value to allow you to exit with financial security. This, coupled with wisely invested non-business assets, gives you the best chance to pursue the Exit Path you want on the timeline you want. Obtaining a proper, professional business valuation is the first step in determining how much your company is worth, but what happens if the valuation shows that your business isn’t worth enough to allow you to exit your business with financial security? How can you increase your business’ value if everything that’s made it successful thus far isn’t enough?

The answer lies in installing Value Drivers.

What Are Value Drivers?

Value Drivers are specific business characteristics that drive growth. While each business is unique, there are six areas of your business that, with focus and a little time, can have the greatest impact on your company’s value.

1. Next-generation management.

2. Operating systems demonstrated to increase cash flow sustainability.

3. Demonstrated scalability.

4. Diversified customer base.

5. Proven growth strategy.

6. Recurring revenue that is sustainable and resistant to commoditization.

The existence of next-generation management appears first because it is the most important Value Driver. The others are ordered by how likely they are to affect business value.

Why Establishing Value Drivers Matters

Growing business value and cash flow can help you close the gap between what your business is currently worth and what it must be worth to satisfy your exit goals. Thus, growing business value and cash flow is key to your ability to exit when you want and for the money you need.

Beyond the enormous benefit of being able to leave on your own terms, there are other benefits of identifying and enhancing Value Drivers:

· Perspective. Identifying and enhancing Value Drivers can help you view your business through the eyes of a prospective buyer or another successor owner, such as a business-active child. This helps you overcome sentimental attachments to your company and decisions that only benefit you personally.

· Action. Because you’ve already set your goals and determined how much your business is worth, you know how much and how quickly growth needs to occur. (If you have not yet set business-exit goals or obtained an estimate of value, contact us to get started.)

· Triage. By identifying Value Drivers in your business, you can concentrate your efforts (and management’s efforts) on areas that need the greatest improvement. Your business is obviously successful, but even the best-run businesses have areas that need improvement.

Contact us today to begin identifying, prioritizing, and installing the Value Drivers your company needs for you to leave your business on your terms.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

9/7/17 9/7/17

An Estimate of Future Company Cash Flow

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. Free cash flow is the portion of the annual net cash flow from operating activities that remains available for discretionary purposes after the business has met its basic financial obligations. In this discussion, the “discretionary purpose” is the buyer’s purchase of or return on investment for the owner’s interest in the company.

If you are contemplating a sale to insiders, remember that they likely do not have enough cash to finance the purchase. It may be the future cash flow of your business (once you leave it) that funds your buy out. As you can see, in transfers to insiders, cash flow can be both the measure and the means of ownership transfer. As such, it is important to estimate future cash flow as accurately as possible. This is not a “back of the napkin” exercise; a thorough analysis will give you more confidence in your plans for the future.

Once you have an accurate professional estimate of future cash flow, you can assess various Exit Paths, and your advisors can design an exit strategy that puts as much of that cash flow as possible in your pocket. Accurate cash flow estimates can also minimize the taxes you pay upon an ownership transfer. Remember, every dollar the IRS takes is one dollar less paid to you, regardless of whether the buyer or seller pays the tax.

Let’s assume for a moment that the company’s cash flow estimate indicates that it cannot support all of your Exit Objectives. You will then explore alternatives to your original plan and answer important questions:

· Should you delay your departure date?

· Should you focus your attention on a third-party sale and, if so, are a higher purchase price and/or more cash upfront possible?

· Should you shift your focus to building cash flow and business value before you begin to sell ownership?

Securing an accurate estimate of future cash flow can help prevent you from choosing a dead-end Exit Path. It can give you confidence that you are on the right track or uncover areas that require more work before you can exit the business. For most owners, calculating estimated future cash flow is an integral part of creating a successful Exit Plan.

For more information about obtaining an accurate cash flow estimate, contact us today. We can help guide you through the process.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

8/16/17 8/16/17

Why Setting Goals Is Important, Even If They Change

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. Having the foresight to set actionable goals combined with the flexibility to change them when necessary gives you the freedom to pursue your vision of a successful business exit.

Let’s look at three reasons why setting goals is so important, even though they might change.

1. Establishes Your Target

Setting goals allows you to establish a target that defines what a successful exit looks like for you, your family, and your business. By establishing the why behind exiting your business, you can discover how you can get to that point, giving you a reason to pursue those goals and putting yourself on the path toward Exit Planning success.

2. Provides a Road Map

Setting goals helps you develop a road map for how to achieve your goals. Knowing the terrain that stands between you and a successful business exit gives you the chance and confidence to properly prepare for the journey. This takes much of the initial anxiety about Exit Planning out of the equation by showing you that you can achieve your goals if you take the first steps toward approaching them systematically. Like an adventurist crossing the country on foot, you need to have a general idea for where you want to end up so that you can bring the appropriate tools and follow the best path to get there.

Setting goals also helps you track where you are on your journey toward Exit Planning success. Having an appreciation for where you are on the path toward your exit goals can encourage you to stay the course when times are good and refocus if things get bumpy.

3. Addresses Conflicts Before They Do Damage

A common mistake owners make when setting goals is assuming that their goals will mesh smoothly with their overall plans. However, goals can conflict with one another, and sometimes, those conflicts can derail even the best-intended Exit Plans. This is where the concept of flexibility plays an important role. For example, say you wanted to sell your company to a third party in five years for $5 million. Five years go by, and you find a buyer willing to pay you $5 million, but with some caveats: The buyer is shutting down local operations, will lay off all of your employees with no severance, and your brand name will be absorbed by the buyer’s conglomerate, never to be spoken of again.

While this example may seem extreme, many owners find that as they begin the process of exiting their businesses, some of their goals don’t jive with each other. Fortunately, our Exit Planning process accounts for situations like this by giving you a template for setting goals: Establish your foundational goal (exiting with financial security), your baseline goals (exiting when you choose, exiting for the money you want, and transferring the business to whom you choose), and any number of value-based goals (e.g., keeping your legacy alive, keeping the business in your home town). Setting goals early lets you find and address conflicting goals, dramatically improving the probability of both resolving them and exiting successfully. Knowing your goals allows you to see when they are in conflict and make an informed decision about which to keep and which to change.

If you’re unsure which goals are most important to you or whether your goals are realistic, contact us today. We can help you begin the process of identifying, prioritizing, and achieving your goals.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

8/3/17 8/3/17

Protect Against the Pain of Exiting Your Business

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.

Whether you’re looking to exit your business in 10 months, 10 years, or never, one fact governs them all: All business owners—even the hardest working, most dedicated workaholics—will exit their businesses someday. Whether by choice, death, or otherwise, you need to be able to answer the question, “What will happen to me, my business, and my family upon my business exit?” While this may seem like a heady, rhetorical question, the consequences of planning have real effects on the things you care about most. How can you address this question with a concrete, actionable answer?

In our experience, the answer to that question is a thoughtful and systematic Exit Planning process. Let’s briefly look at the steps you can take to address the needs you, your company, and your family have as you approach your business exit.

Establish Goals

Establishing goals gives your process a target to work toward. Establish one foundational goal, three universal goals, and a variety of values-based goals. The foundational goal, exiting with financial security, will serve as the standard by which you measure every decision you make as you exit. The three universal goals—exit date, chosen successor, and getting the money you want—guide the specific strategies you use to exit. Values-based goals allow you to pursue your business exit while doing what you think is right for yourself, your family, your business, and your community.

Quantify Business and Personal Resources

To get what you want in the future, you need to know what you have today. Establish your business’ value and determine how much you have in non-business assets. These numbers will give you an idea about how much money you need from the sale or transfer of your business to exit with financial security.

Maximize and Protect Business Value

Focus on growing and protecting business value to give yourself the best chance to leave your business when you want, for the money you need, and to the person you choose.

Sell or Transfer Ownership

If a third-party sale is the strategy that will allow you to accomplish all of your established goals, you’ll need to prepare yourself and your company well in advance of the sale. Don’t delay in creating an experienced Deal Team and making sure your company is the one that the greatest number of buyers will want to acquire. If keeping the business in the family or with key employees is most important to you, prepare yourself, your company, and your team for an insider transfer. You may want to investigate creative methods to finance a sale, make sure that your chosen successor can run the business without you, and avoid conflicts among business-active and non-business-active children.

Ensure Business Continuity

Though many owners live to enjoy a successful exit, some do not. Protect your family and business if you die or become permanently incapacitated prior to the full implementation of your Exit Plan. This is especially important for owners who never plan on exiting the business, because it gives their families, employees, and customers peace of mind that they will be protected if something horrible happens.

Coordinate Your Estate

Tune your estate plan to the same key as your lifetime plan for your business, your family, and any charitable organizations you wish to benefit. Protect your assets and your family from the risk of creditor claims where possible. Balance your estate among children who are active in the business (and will someday own it) and those who have taken another path.

Where to Start?

Planning for your exit maximizes value, minimizes risk, and keeps you in control until you’ve achieved financial security. Of course, you’re not required to do everything alone. After all, you’re the owner of a successful business with countless responsibilities on your plate. Start with the areas that you feel are most critical.

There’s a good chance that you felt alone in the early days of your business. You don’t have to be alone as you prepare for a successful exit. If you’d like to talk more about how to begin the process of planning for an exit on your timeline and terms, contact us today.

We can help you decide which plan to approach first. Contact us today to get started.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

7/19/17 7/19/17

Which Comes First? Estate Planning or Exit Planning?

A successful business Exit Plan achieves three important owner goals:

1. Financial Security: The business sale or transfer provides the amount of income the owner and owner’s family need after the owner’s exit.

2. The Right Person: The owner chooses his or her successor (children, key employees, co-owners, or a third party).

3. Income Tax Minimization: The owner minimizes the amount of cash the government takes out of his or her pocket.

A successful estate plan achieves three important personal goals:

1. Financial Security: For the decedent’s heirs.

2. The Right Person: The decedent (rather than the state) chooses who receives his or her estate assets.

3. Estate Tax Minimization: Reduces the government’s bite, leaving more funds for the decedent’s heirs.

A successful business Exit Plan achieves three important owner goals:

1. Financial Security: The business sale or transfer provides the amount of income the owner and owner’s family need after the owner’s exit.

2. The Right Person: The owner chooses his or her successor (children, key employees, co-owners, or a third party).

3. Income Tax Minimization: The owner minimizes the amount of cash the government takes out of his or her pocket.

A successful estate plan achieves three important personal goals:

1. Financial Security: For the decedent’s heirs.

2. The Right Person: The decedent (rather than the state) chooses who receives his or her estate assets.

3. Estate Tax Minimization: Reduces the government’s bite, leaving more funds for the decedent’s heirs.

Once owners see that the two processes share the same goals, they can appreciate how to leverage the time and money they spend developing their Exit Plans into the design of their estate plans.

For example, when owners engage in Exit Planning, they most likely determine their objectives and secure an estimate of value on their businesses before they start working to create greater business value. In securing an estimate of value, owners possess a piece of information that’s critical to both their business continuity plans and estate plans.

Thinking of Exit Planning and estate planning in tandem allows you to ask relevant questions to bring your entire picture into focus:

· If you do not exit the business on the planned business-exit date, how will you provide your family with the same income stream your family would have enjoyed if you had?

· How can you make sure that your business retains its previously determined value?

· Regardless of whether your Exit Plan involves transferring part of the business to your children, does your estate plan reflect and implement your wishes if you do not survive?

· If you die before exiting the business, can you be certain that your family will still receive the full value of the business? (This question is especially important to answer for sole owners. Sole owners are unlikely to have a Buy-Sell Agreement because there are no remaining co-owners to purchase and/or continue the business.)

While estate plans can manage these issues, owners must determine whether their estate plans address these issues.

Another goal of The BEI Seven Step Exit Planning Process™ is to protect assets from creditor attack during an owner’s lifetime and minimize tax consequences upon a transfer of ownership. You must ask yourself the following: Does my estate plan work to minimize creditor risk for both me and my heirs? It is possible to achieve these goals through both Exit and estate plans.

It is worth repeating that owners must devote the same energy and analysis to lifetime transfers (benefiting themselves) as they do to a transfer occurring at their death (benefiting their families). Since planning exits from both business and life are based on the same premises, it can be relatively easy to develop a consistent outcome.

The following two facts may help you determine which plan to undertake first:

1. Estate taxes are easier to avoid than income taxes.

2. Estate Planning techniques often involve funding from life insurance proceeds (which pay in cash upon death), whereas Exit Planning techniques often involve the owner’s own funds (accumulated over decades).

There isn’t one categorically correct answer to the “Estate or Exit Planning?” question. In the end, you must act on both fronts, since a failure to act in either case creates lasting problems not only for you but also for your business and family.

We can help you decide which plan to approach first. Contact us today to get started.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

7/5/17 7/5/17

Death and Taxes vs. Preserving Wealth: The Final Exit Planning Contest

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™:

1. How much wealth do you want when you exit your company? (Additionally, for parents, how much wealth do you want your children to have?)

2. How long before you leave your company?

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 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™:

1. How much wealth do you want when you exit your company? (Additionally, for parents, how much wealth do you want your children to have?)

2. How long before you leave your company?

Using your answers as guideposts, you and your advisors can choose the planning technique that will best preserve your wealth, provide for your family, and minimize your tax bill. Let’s look at how one fictional owner used wealth preservation techniques to do exactly that.

George recognized that he’d waited too long to begin gifting part of his company to his kids. A week earlier, George’s CPA told him that, based on the company’s pre-tax cash flow of $2 million per year, his company could be worth as much as $12 million to a third party.

After recovering from the shock of this realization, George understood that (a) he didn’t need nearly that much cash to retire in style and (b) if he didn’t transfer at least half the value of his business before selling, his family could be looking at millions in gift or estate taxes.

To remedy this situation, George and his Exit Planning Advisor did the following:

· Hired a certified business appraiser to assign a conservative but supportable value to the company.

Result: Based on tax case law and valuation principles applicable to George’s situation, the appraiser valued the transfer of a 49% minority interest (i.e., less than controlling) at $4 million. In her opinion, the appropriate minority discount was 35% of the full fair market value (assumed to be $12 million) of the stock. Using the 35% discount, George could give away nearly half of the company to his children (a gift valued at approximately $4 million) and would pay no gift tax (based on a law that provided for a $5 million lifetime gift-tax exemption). While George was happy with the idea of not paying a tax, he didn’t relish using most of his lifetime gift- and estate-tax exemption, and wanted a better answer. So, he took another step to avoid needlessly wasting this valuable exemption.

· Created a grantor-retained annuity trust (GRAT). (See “GRAT Note” at the end of this article for more-detailed information.)

Result: By using a GRAT—perhaps the most useful piece of the wealth preservation puzzle—George would avoid using a significant part of his $5 million lifetime gift tax exclusion and would still give almost 50% of the company to his children.

Through wealth preservation planning performed well in advance of his exit, George was able to:

· Transfer nearly one-half of his business, with a fair market value of $9–12 million, to his children over four years (a time frame George chose) using little or none of his lifetime exemption.

· Receive all of the cash flow from the company during that four-year period, because the annuity payment to George was designed to equal the amount of cash flow expected from the stock transferred into the GRAT (George needed this income to achieve his financial security Exit Objective).

· Transfer the trust asset, nearly one-half of the company, to trusts for his children, completely free of any gift tax.

George established these trusts when he created the GRAT to carry out his wishes regarding when (and whether) his children would receive money from those trusts.

Techniques such as GRATs and the careful use of minority discounts (as well as many other estate tax–avoidance techniques) only work as intended if they are put in place well before you exit your business. These techniques also work well when two objectives—in this case, George’s financial security and his desire to provide for his family—must be achieved in tandem.

We can provide you with additional information about transferring wealth to children and/or protecting as much wealth as legally permissible from unnecessary taxation. Contact us today.

GRAT Note

In this note, we provide additional details about how and why a GRAT can help achieve an owner’s twin objectives: financial security and providing for one’s family.

A GRAT is an irrevocable trust into which the business owner (and the trustee of the GRAT) transfers some of his or her stock. The GRAT must make a fixed payment (i.e., annuity) to the owner each year for a predetermined number of years. At the end of that period, any stock remaining is transferred to the owner’s children.

Stock transferred into a GRAT is treated as a gift. The amount of that gift is the value of the asset transferred minus the present value of the annuity that the owner will continue to receive. (George’s advisors made sure that the present value of the annuity paid out over four years almost equaled the value of the stock transferred into the GRAT. In doing so, George gave only a nominal and non-taxable gift.)

The key to a GRAT’s success is to transfer an asset that appreciates in value and/or produces income in excess of 120% of the federal midterm interest rate, which fluctuates monthly.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/21/17 6/21/17

Business Continuity Planning for Co-Owners

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. Fewer still give thought to one day leaving the business—even on friendly terms. Indeed, most exits are not precipitated by a disagreement among co-owners; instead, owners leave for a variety of reasons and simply want to do so with their share of business value.

Remember: One day, you will leave your business.

Over time, in business as in marriage, partners can grow apart. We’ve all witnessed the resentments, discord, and wastefulness of a friend’s needlessly nasty divorce. Business divorces can be equally unpleasant, but with an added twist: Owners may be unable to leave the business, or force a partner to leave, without appropriate tax and legal planning.

When an owner or co-owner wants out, what will happen? Chances are that when owners and co-owners turn to the company’s Buy-Sell Agreement, they will find that it is woefully out of date. They also may find that it controls the terms of their exits from their businesses not only upon death but also during the owner’s lifetime.

If you haven’t looked over your company’s Buy-Sell Agreement since you signed it, dust it off and check at least four key provisions:

1. Lifetime and death transfers of ownership:

· When must an owner sell or offer to sell?

· When must a co-owner (or the company) buy, and when does the co-owner or company have the option to buy?

1. How will the value of the company and the value of a departing owner’s interest be determined?

2. Does the agreement mandate the use of an independently determined fair market value at the time of transfer? If not, the valuation will favor either the buyer or seller. It will not treat co-owners evenhandedly.

3. What are the terms (length, down payment, interest, and guarantees) of the buyout?

We generally assume that Buy-Sell Agreements control the transfer of an owner’s interest when he or she dies or becomes disabled. However, they usually do much more, and if owners don’t appreciate how much more, disaster looms. Consider the following scenario:

At his annual physical, Steve Hughes complained that he was bone-tired. After a battery of tests, Steve’s doctor observed that, while there was nothing physically amiss, Steve did seem depressed. After some introspection, Steve was able to articulate that he had no interest in continuing as a partner in his successful CPA firm. Like many owners, Steve had lost the passion and commitment to the business that still stoked his younger co-owners. He decided to sell out before his partners demanded it.

Steve broke the news of his departure to his two partners and noted that their Buy-Sell Agreement controlled only a buyout at death and an option for the company to buy Steve’s stock if he were to sell it to a third party. Attempting to sell a partial interest to a third party is always a difficult proposition, but economic challenges made that course of action impossible.

Steve and his partners were left in a classic dilemma: The remaining shareholders wanted to purchase the departing shareholder’s interest so that future stock appreciation—due solely to their efforts—would be fully available to them. Conversely, because the profits of a closely held corporation are either accumulated by the company or distributed to the active shareholders in the form of salaries, bonuses, and other perks, the departing shareholder (now an inactive owner) rarely receives significant income in the form of distributions or dividends.

Naturally, Steve wanted and needed maximum value for his interest, while his co-owners were convinced that the company’s cash flow could not support Steve’s buyout.

In light of this scenario, owners must examine their business continuity agreements immediately: If the owner is the one leaving, is the agreement as fair as it would be if the owner were the one left behind?

When you sit across the bargaining table from your business partner(s) for the first time, you will want that table set with a fair valuation method, a thoughtfully designed lifetime buyout provision (that may well reduce the cash flow required for a buyout by 20–30%), and manageable payment provisions. Since it is exceedingly difficult to design these provisions when the buyer and seller are at the bargaining table, owners should agree to and document the valuation, cash flow, and tax and payment provisions long before potential discord and differences of outlook arise.

Your first step toward avoiding the problems described in this article is to conduct a thorough review of your business continuity agreement, and we are happy to help you do so. If you would like a more extensive checklist and additional information about this most important of all business documents, please contact us.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

6/13/17 6/13/17

Maintain Control, Save on Taxes, and Set Fair Value Using a Buy-Sell Agreement

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.

Controls Transfers

A Buy-Sell Agreement can control all transfers of business ownership to the benefit of both the owner wishing to transfer ownership and the owners who want to acquire ownership. This agreement can assure that a selling owner (or his or her estate) is selling for fair value and under terms and conditions that are acceptable to all parties. Further, the agreement assures remaining owners that any transfers of ownership must be at least offered to them. This eliminates the potential for an outside party or a co-owner’s spouse or children to assume ownership of the business, all of which could negatively affect the company’s management, control, and value.

A Valuation for All Reasons

A Buy-Sell Agreement sets forth an agreed-upon method of valuing the business that applies to all transfers.

Owners’ valuations of their own businesses may be much different than the IRS’s or a co-owner’s. If owners rely on a “stated value” or a formula-based value, they may run into difficulties with both the IRS and other owners, because value in privately owned businesses changes often and rapidly. If Buy-Sell Agreements are not revised every year, their valuation formulas will favor either the buyer or the seller, and provide ample opportunity for disputes. Owners can avoid this by requiring a value determination from a certified business appraiser, but even that provision needs to be drafted carefully.

Similarly, if co-owners buy a living co-owner’s interest, the value of the selling owner’s interest will likely be lower in the buying co-owners’ opinion than the seller’s. However, if their Buy-Sell Agreement requires the involvement of a business appraiser, they can avoid this impasse.

It is best to agree—today—on a method of valuing the business when no owner knows which side of the transfer table he or she will be sitting on. Not knowing whether you will be a buyer or a seller tends to ensure that all owners work to protect the interests of both the buyer and seller.

If owners don’t have an existing, binding process for valuing the business, ideally using a credentialed business appraiser, they can expect disagreements when one of the owners leaves the business. We strongly recommend that owners take the reins and design a valuation appraisal process suitable for their companies, and we would be happy to help you do so.

The Fine Print

In a Buy-Sell Agreement, owners can fix the terms and conditions of any transfer of ownership, including interest rate, length of buyout period, and security. In addition, it often is possible to provide the funding for future ownership acquisition, either during an owner’s lifetime or after death.

Finally, Saving on Income Taxes

Buy-Sell Agreements should be drafted to anticipate the likeliest transfer event: the sale of an ownership interest from one owner to another. While they require additional planning and document drafting, intra-owner sales can be designed to save as much as 30% of the company’s cash flow from taxation. For example, if the purchase price is $1 million, the cash flow required to pay a departing owner could be reduced by $300,000 or more. To repeat, this does take additional tax planning—but the result is well worth it.

We’ve made our case about the importance of establishing a proper Buy-Sell Agreement, and now we want to help you do it. Contact us today and we can begin creating a Buy-Sell Agreement that covers all of your business wants and needs.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

5/17/17 5/17/17

Preparing for the Worst: Business-Continuity Planning for Sole Owners

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.

After several months of fruitless searching, Harry’s family opened probate proceedings only to find that Harry’s once-thriving business also had disappeared. However, Withering Hikes’s disappearance was far more typical than Harry’s. Because Harry had dreamed of selling his company at 60, he had given little thought to what would happen to his business if something happened to him. Thus, Withering Hikes died of all-too-common causes—human error and neglect—setting off a chain reaction of ever-worsening consequences for Harry’s family and business:

1. Harry’s key employees left the company for jobs with more certain futures. They feared that neither Withering Hikes nor their salaries would continue without Harry at the helm.

2. The departure of key employees meant that there was no one to manage the business. Total chaos reigned, and revenue took an immediate and irreversible nosedive. Longtime customers grew uneasy with what they perceived to be a rudderless ship and took their business to Harry’s competitors. Further, the company’s vendors demanded cash payments, cash that the company no longer generated.

3. Harry’s bank saw the drop in revenues and decided to call in the company’s debt, debt Harry had personally guaranteed.

4. Because Harry left no instructions or recommendations about who could run the business, who could offer advice, or even what to do with the business should something happen to him, both his business and family suffered.

Withering Hikes didn’t just wither away; it fell off a cliff. It could not survive without its top employees or Harry’s leadership.

The point of reviewing this list of mortal blows is to demonstrate that business-continuity planning is vitally important to owners’ companies and families. Without a well-considered business survival plan, the consequences for owners’ employees, customers, and, most importantly, family and estate are dire (estates rarely escape the notice of business creditors).

Fortunately, there is a process that sole owners can quickly and easily use to help avoid the type of business collapse that Withering Hikes experienced.

First, sole owners must motivate top employees to stay on after their demises by creating financially meaningful incentive compensation plans for them that vest over time. Creating a plan that provides these employees a substantial bonus (called a stay bonus) for remaining with the company beyond an owner’s demise is a strong strategy. The company can usually fund the stay bonus with life insurance on the owner’s life. This funded stay bonus provides designated employees with a cash bonus (usually about 50% of annual compensation) and a salary guarantee if those employees stay (typically 12–18 months) after the owner’s death. The sole owner’s job is to communicate these actions to these employees and assure them that he or she has made additional plans to ensure the continuation of the business.

Second, sole owners should alert their banks about their continuity plans. Meeting with a banker to discuss the arrangements made and showing him or her that the necessary insurance funding to implement these plans is in place can allow an ownership transfer to proceed smoothly. Additionally, it is wise to determine whether major creditors are comfortable with the succession plan. Sole owners should ask major creditors which arrangements they would like to see in place.

Third, create a written plan that does the following:

1. Names the person(s) who will take on the responsibility of running the business.

2. States whether the business should be continued, liquidated, or sold (if so, to whom).

3. Names the resources heirs should consult regarding the company’s sale, continuation, or liquidation.

Finally, sole owners should work closely with a capable insurance professional to assure that the necessary insurance is purchased by the proper entity (the owner, the owner’s trust, or the business) for the right reason and the right amount.

Creating a contingency plan for your company should you depart unexpectedly is a vital part of your overall Exit Planning process. Failing to do so invites the kind of disaster that befell Withering Hikes, Harry’s employees, and his family.

Our expertise in crafting business-continuity plans that work can help you be prepared for the unexpected. Contact us today to learn more about how to begin creating a contingency plan for your solely owned business.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

5/4/17 5/4/17

The Essential Business Agreement: A Business-Continuity Agreement Among Owners

If you co-own your business, the business-continuity agreement (or buy-sell agreement) is one of the most important documents that you will sign. If you have a buy-sell agreement that is out-of-date, not reviewed, or focuses on the wrong issues, it may be worse than having no agreement at all.

Let’s start with a hypothetical case study that illustrates the importance of drafting a buy-sell agreement that anticipates and provides for all transfer events (lifetime transfers, disability, or death).

George Acme’s son-in-law, Tom Gardner, had been with George’s company for over 20 years. Tom had gradually assumed an operational-management role, was the acting CEO, and had purchased 25% of George’s ownership over the years—mostly at a low value, in recognition of his valuable services. Everyone acknowledged that Tom would one day own the company and carry on Acme’s fine traditions.

However, that was before George died and Tom’s sister-in-law, Babette, became the executor of the estate. Babette told Tom that she would either sell him the balance of the company—at full fair market value and for cash—or would sell the business to the highest bidder.

Only later did she realize that without Tom’s cooperation, the business was unlikely to sell. No buyer wants a disgruntled minority co-owner, especially when he’s the current CEO.

Tom and Babette disagreed about the company’s value, who was in control, and successor ownership. All of these issues would have best been discussed and resolved before George’s death. Had Tom and George created a buy-sell agreement, the business would have transferred at a fair price to the benefit of all concerned. Now, because Tom and Babette weren’t talking—except through their lawyers—it was unlikely that Acme could even keep its doors open.

Lifetime or Death Events

The buy-sell agreement controls the transfer of ownership in a business when certain lifetime or death events occur. Typically, the trigger events include the death of an owner, a sale and transfer of stock from one owner to another, or a sale to an outside party. A buy-sell agreement can also describe owners’ agreements about how transfers will take place after lifetime transfer events occur, such as an owner’s permanent and total disability, termination of employment, retirement, bankruptcy, divorce, and/or a business dispute among the owners.

Assume George didn’t die. Instead, one of his co-owners wanted to exit. How would they agree on value and buyout terms or design the transfer? Without a buy-sell agreement agreed to in advance, one owner’s desire to exit can transform longtime co-owners into adversaries, based on disagreements about valuing the company and setting the terms of purchase. The buy-sell agreement sets the valuation method and the terms of the purchase, and outlines the tax plan.

A buyout during an owner’s lifetime is similar in design and consequence to the sale of the entire company to a third party. The value of the business and the terms of the sale (payment, security, etc.) will be negotiated. However, in internal transfers, hard-nosed negotiation tactics and disputes about value and payments can quickly destroy friendships, company culture, or even the value of the business.

The best way to avoid this is to agree in advance on the method of appraising value and payment terms when all of the co-owners are on the same page, looking out for the ultimate welfare of the company, and don’t know whether they will ultimately be a buyer or a seller. During each of these events, the buy-sell agreement may require the business or remaining owners to purchase the departing owner’s stock, give an option to the business or the remaining owners to buy that ownership interest, or give the departing owner the option to require the company to buy his or her ownership interest.

Remove the Guesswork

The buy-sell agreement should provide a clear picture to a departing shareholder regarding how much money he or she will receive and how often. Likewise, the remaining shareholders should know the extent and duration of their buyout obligations in advance. This allows both parties to plan their respective futures.

The buy-sell can and should establish the value of the stock, set the terms and conditions of the buyout, and give additional protection to all owners. In short, the buy-sell agreement is intended to protect all owners by telling each to whom they can sell, at which price, and under which terms and restrictions.

In This Case, Nothing Is Better Than Something

As we stated at the outset, an out-of-date buy-sell agreement is often worse than no agreement. Out-of-date agreements may require an owner to buy or sell based on inaccurate values or terms that may have made sense during boom times but can mortally wound the business in tough times.

We urge you to review your buy-sell agreement at least annually as part of your annual planning meeting with your advisors. At a minimum, ask the following:

· Does it reflect when I want to depart?

· Does it give me the amount of cash I need to be financially secure?

· Is it designed to minimize income taxes to the seller and the buyer in the event of any type of ownership transfer during my lifetime?

If your buy-sell agreement is well drafted and conscientiously updated for changes in ownership, value, and other circumstances, there aren’t many disadvantages.

We’d like to help you create and consistently update your buy-sell agreements to reflect your most current wants and needs. Contact us today to begin building a buy-sell agreement that can handle any kind of transfer event.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

4/19/17 4/19/17

Avoiding Disasters in Insider Transfers

Steve Smith was no different than millions of other baby-boomer business owners in that the thought of leaving his business was never far from his mind, no matter how far away his exit might have been. He daydreamed about transferring the business to his oldest daughter and perhaps to a member of his management team, yet he couldn’t gauge their passion for owning a business and hadn’t tested their management skills.

And, of course, they had no money.

Steve’s company was his economic and financial lifeline. Without its income, his ability to use the business to accumulate wealth, the ability to sell his interest to a buyer who had cash, and a plan, Steve’s wishes would never come true. To Steve, it was obvious that if he ever wanted to exit his business in style, he needed to wait for a white-knight buyer to appear on his doorstep bearing saddlebags of cash. So, Steve did what many other owners in his position do: nothing.

And, of course, they had no money.

If you think that transferring your business to your children or management team is inherently risky, you are right.

Insider transfers are risky for three reasons:

1. Insiders have no money

2. Successors’ management/ownership skills and commitment to ownership may be untested

3. Owners lose control of the business if they make the transfer before they are completely cashed out.

On the other hand, the possible benefits of an insider transfer include the following:

1. Keeping the business in the owner’s family or extending the owner’s legacy through his or her hand-picked management group.

2. Motivating, retaining, and rewarding key employees.

3. Reaping more after-tax money than a third-party transfer.

4. Retaining control until all, or most, of the purchase price is received.

5. Remaining active in the business while gradually reducing day-to-day responsibilities.

6. Providing time for owners to build up personal assets (via distributions of cash) before their exits.

The trick is to design a plan that minimizes risk so owners can reap all of the potential benefits. Let’s first look at how that might be done.

1. Insiders have no money; therefore, it is too risky to sell to them. That’s true if owners don’t design a transfer strategy that puts money in the insiders’ pockets as they increase the value of the company. Owners have to work steadily and effectively to build cash flow (the source of all cash outs) through (a) the installation of Value Drivers and (b) careful planning to minimize taxation years in advance of the transfer.

Unless owners carefully plan to avoid it, cash flow can be taxed twice. This double tax, sometimes totaling more than 50% of the total payout, can spell disaster for many internal transfers. However, through effective tax planning, much of this tax burden can be legally avoided.

Finally, owners and their advisors, including a certified business appraiser, should use a modest but defensible valuation for the company. By using a lower value as the purchase price, the size of the tax will be correspondingly reduced. The difference between what owners will receive from the sale of the business at a lower price and what owners want to be paid after they leave the business is “made good” through a number of different techniques to extract cash from the company after the owner leaves it.

2. Successors’ management/ownership skills are untested. If the successors’ ownership skills are untested, owners should create a written plan to systematically transition management and ownership responsibilities to their successor(s), beginning today. The transition period, during which owners test both their assumptions and their successors’ skills, usually takes several years to complete.

3. Losing control before being cashed out. This only happens if owners and their advisors fail to implement a transfer strategy designed to keep the owner in control until he or she receives the full sale price for the business. In a properly crafted plan, owners keep control through a well-designed and incremental sale of the company based on improving company cash flow over time.

There are four keys to reducing the risks of an insider transfer:

1. Plan the transfer well in advance of your desired exit date. Executing an insider transfer takes longer than executing a sale to a third party.

2. Implement value-building activities, which are just as—if not more—important to an insider transfer as they are to a sale to a third party.

3. Design the plan to be tax-sensitive.

4. Write the plan down and hold advisors accountable.

We have the experience and know-how to help you implement those keys and unlock the doors to your successful exit. Please contact us today to get started on your insider transfer today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

4/5/17 4/5/17

Elements of a Plan to Sell to Insiders

Today, we discuss the essential elements of a plan owners use to transfer a business to insiders that keep the owner in control until he or she is paid the sale price. If you suspect that the children, key employees, or co-owners you would pick to succeed you do not have the funds to cash you out, consider the following 10 elements that make insider transfers successful.

Element 1: Time

A transfer to insiders takes time: time to plan, time to implement, and time for successors to pay the departing owner. Typically, the more time owners take to transfer the company, the less risk they incur and more money they receive from the new owners.

Thus, the first question an owner must answer is, “Am I willing to take time (typically three to eight years) to execute and complete an insider transfer (while maintaining control)?” If the answer is no, then it is probably best to consider other Exit Paths.

Element 2: Defined Owner Objectives

If owners are willing to devote the time necessary to transfer the business to insiders, they also must define and/or quantify their objectives. These may include the following.

· Financial security and independence.

· Departure/retirement by a chosen date.

· Keeping family legacy or company culture intact.

· Rewarding key employees.

· Taking the business to the next level on someone else’s dime.

In a well-designed transfer plan, these objectives are met before control is transferred.

Element 3: 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. However, in a transfer to insiders, cash flow assumes gargantuan importance, because initially, it is the major, if not sole, source of an owner’s sale proceeds.

Element 4: Growth in Business Value

Like healthy cash flow, buyers look and pay top dollar for companies that have the potential to grow in value. In transfers to insiders, ownership transfers generally occur only if cash flow continues to grow. Thus, it is vitally important that owners contemplating an insider transfer install and cultivate Value Drivers before and during their exit transition. (For a quick refresher on Value Drivers, please contact us for one of our Value Drivers white papers.)

Element 5: Capable Management That Desires Ownership

Having a motivated management team capable of replacing the owner is hugely valuable to any buyer, especially when that buyer is an insider. The management team that succeeds the owner must desire ownership and be willing to sign personally for any acquisition financing or ongoing company debt. Owners often assume that their management teams want to own their companies, but sometimes, management teams balk when they realize that they have to pay for ownership. Thus, assuring that the management team not only desires ownership but is willing

Element 6: Minimize Taxes

Most owners don’t want to pay any more taxes than they are legally required to pay. Owners who are contemplating insider transfers must take special care to minimize taxes. In an insider transfer, it is imperative that owners and their advisors structure the sale of their businesses to minimize taxes on the company’s cash flow (pre-tax income), because without planning, cash flow is taxed twice: (a) once when the insider receives it (as the new owner) and then pays taxes before paying the owner to purchase the company and (b) when the owner pays taxes on the proceeds received.

One goal of tax planning is to subject the company’s cash flow to taxation only once. Accomplishing this feat takes considerable planning, but it’s worth the time and effort to save a third or more of the company’s cash flow from this type of double taxation. One-time taxation means owners receive more money more quickly and thereby reduces the risk that the exiting owner will not be paid in full.

Element 7: Regulate an Incremental Transfer of Ownership

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

Element 8: Increasing Control Means Decreasing Risk

While business owners take risks every day, they don’t relish risking their own and their families’ future financial security. Therefore, we use strategies to keep voting and operational control in the hands of the owner. This shifts operational business risk from the exiting owner to the incoming owners so that exiting owners stay in control of their companies until they receive the entire sale price. (If you’d like to talk about the many ways we accomplish this for our clients, give us a call.)

Element 9: Written Road Map With Deadlines

To succeed, we believe that owners must put their transfer plans in a written document and communicate it clearly and regularly to the eventual owners. If the plan is not in writing, it simply is not credible, and neither the owner nor his or her employees will take it seriously. More importantly, the written plan is the playbook for owners’ exits. Owners will use their written plans to coordinate their actions with those of their advisors, thus reducing delays and costs. The plan should include a timeline and provide accountability (i.e., who will do what, when) for all participants, including the owner. Without incremental, staged checkpoints, it’s nearly impossible for owners to exit on their terms. You’ll never finish a marathon if you don’t have mile-by-mile goals to meet.

Element 10: Owner Education

Owners need to understand the ins and outs of insider transfers because, unlike sales to third parties, they will control their businesses and the Exit Process until they’ve been paid in full. That education begins as you read this newsletter.

We would love to teach you more about the ins and outs of insider transfers, and share our experience and proven success in addressing these elements with you. Please contact us today to begin addressing the elements of an insider sale or to learn about which strategies we can help you implement to assure that you exit your business on your terms.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

3/22/17 3/22/17

Are You and Your Company Candidates for a Third Party Sale?

If you think that planning for the biggest financial event of your life is a good idea and prefer an approach other than “wait and see,” what can you do to make sure your company is ready to sell when you decide the time is right?

Step One: Define your Exit Objectives:

· How much cash you need to fund a financially secure post-exit life.

· When you want to leave.

· Which kind of buyer you prefer (third party or insider).

Step Two: Convert your impression of what your company is worth into an objective valuation.

Step Three: Build needed value into your company by making yourself an Inconsequential Owner.

Step Four: Sale to a third party.

Step One: Define your Exit Objectives:

· How much cash you need to fund a financially secure post-exit life.

· When you want to leave.

· Which kind of buyer you prefer (third party or insider).

Step Two: Convert your impression of what your company is worth into an objective valuation.

Step Three: Build needed value into your company by making yourself an Inconsequential Owner.

Step Four: Sale to a third party.

Generally, owners are attracted to a third-party sale (rather than a sale to insiders, such as family members, co-owners, or employees) for one or more of the following reasons:

· When the market is favorable and strategic buyers are active in the marketplace, a sale to a third party can yield more cash.

· A sale to a third party usually is less risky than one to insiders.

· Sellers get their money more quickly than in a transfer to insiders.

· Insiders (children, co-owners, and employees) don’t have what it takes (usually cash and sometimes desire) to buy the company.

If these statements apply to your situation, your next step is to ask the following:

· Am I personally and financially ready to exit?

· Is my business fully prepared for my exit?

· Is the mergers and acquisitions (M&A) marketplace favorable for sellers?

To optimize the likelihood of a successful sale, owners should embark upon the sale process only if they can answer each of these questions with a confident “Yes!”

Owners should seek answers and resolutions the moment doubts about whether to exit occur. They should not wait until they are burned-out, the M&A market declines, or an unexpected event forces their hand.

· Owners should begin their own process today to assure that they take their businesses to market only when they, the business, and the market are ready. They should seek out the advice of experts and read more about the entire sale-preparation process.

· Owners should start to assemble their Deal Team by interviewing prospective advisors. Depending on the size of the company, the transaction intermediary may be an investment banker or a business broker. Owners will need to find an attorney skilled in transaction work, but if the owner’s current CPA is skilled in tax-minimization techniques, he or she may be able to work on the Deal Team. Remember, while these advisors will cost money, they should make money as well. Asking them all how they plan to do that is critical.

· Using the expertise of the Deal Team can help owners create a plan that does the following:

o Minimizes the tax consequences of the deal.

o Accounts for an owner’s willingness to remain active in the company once the deal closes.

o Determines whether the transaction will best be conducted as a controlled auction or negotiation.

o Specifies which kind of payment owners will accept.

o Includes a strategy that allows owners to focus on their companies’ profitability while the transaction occurs.

The Deal Team should also help avoid the all-too-common traps that await selling owners, including not minding the store, information leaks, prematurely rushing to market, and running off with the first buyer.

John Brown, the CEO of BEI (our Exit Planning resource partner), gives owners an important piece of advice: “Whether your company is small or large, selling it to a third party is the biggest challenge—and opportunity— of your business life. I urge you to grab hold of this opportunity. Refuse the role of bystander or bit player. Instead take center stage as an active and full participant in the sale process and you will add value and minimize uncertainty and risk.”

We'd like to add our experience and knowledge to your Deal Team, and we can help you screen candidates for other seats at the Deal Team table. If you would like more information to help you determine whether your business is a candidate for a third-party sale or your next steps in the third-party sale process, please contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

3/8/17 3/8/17

Sticking a Toe (or Two) in the Exit Planning Pool

In this issue, we attempt to dismantle the most common objections owners have to undertaking the planning necessary to exit their companies successfully. Excuses to avoid Exit Planning include the following:

1. The business isn’t worth enough to meet my financial needs. When it is, I’ll think about leaving.

2. I will be required to work for a new owner for years.

3. I don’t need to plan. When the business is ready, a buyer will find me.

4. This business is my life! I can’t imagine my life without it!

Assuming we are successful in persuading you that Exit Planning not only helps your business while you are in it but also is the best way to leave the company to the successor you choose, on the date you choose, and for the amount of cash you want, you might ask, “How do I, as an owner, jump into Exit Planning?”

1. The business isn’t worth enough to meet my financial needs. When it is, I’ll think about leaving.

2. I will be required to work for a new owner for years.

3. I don’t need to plan. When the business is ready, a buyer will find me.

4. This business is my life! I can’t imagine my life without it!

Let us suggest that one of the best places to jump in is to take some measurements.

First, owners should retain a valuation expert to perform an estimate of the company’s value to find out what it is actually worth. (If you plan to sell to a family member, co-owner, or employee, retain a certified business appraiser. If you foresee a sale to a third party, ask a business broker or investment banker for a “sale-price estimate.”) The transaction advisor an owner chooses (an investment banker if the company’s likely value is at least $5 million and a business broker for smaller businesses) should be able to give the owner a range of value for the business in today’s mergers and acquisitions (M&A) marketplace. Regardless of the state of the M&A market, though best guesses and educated opinions are nice, they are weak foundations for Exit Planning.

Second, owners should sit down with their financial advisors to figure out how much cash they will need to meet their financial goals. Tapping into the expertise of a financial advisor to help objectively analyze an owner’s future needs and make realistic, risk-sensitive assumptions about investment rates of return is paramount.
To illustrate how assumptions, rather than objective measurements, can lead owners astray, let’s look at Sam Reed, a hypothetical business owner who went into a transaction armed only with assumptions.

When Sam Reed began thinking about selling his business, he started paying close attention to what competitors were getting for their companies. He applied his industry’s rule of thumb to his company, compared his company to others, and figured that his company was worth about $20 million. He calculated that he’d take home about 75% of that after taxes. Since he needed $6 million to pay off business debt, he thought he could cash out for $9 million.

Sam hadn’t put a lot of thought into what income he’d need for a comfortable post-exit life, but figured that at his age (50), $9 million, yielding 8% per year ($700,000+ annually), would be an adequate replacement for the $850,000 salary and distributions he currently took from the business.

With the stars seemingly aligned, Sam put his company on the market. Unfortunately, Sam’s telescope was out of focus: His idea of business value was unrealistically high, given the flatness of his company’s cash flow and the state of the M&A market. The best offer on the table was $14 million, of which $11 million was in cash, leaving him with about $2 million net at closing (after taxes and debt payoff), and another $3 million in future payments.

When Sam learned from his financial advisor that the realistic return on the net proceeds ($2–5 million depending on whether he actually received the $3 million in future payments) was 4–5%, he had no alternative but to back out of the sale process.

Sam made two critical mistakes: He miscalculated the proceeds he’d receive at closing and unrealistically overestimated the rate of future investment return. He would have saved time, effort, and money if he had (1) gotten a sale-price estimate that allowed him to realistically estimate how much he would net from the sale and (2) forecasted a realistic, risk-sensitive rate of investment return (as part of a financial needs analysis). With these two pieces of information in hand, Sam could have made a more informed decision.

Many owners don’t have the luxury of time. We suggest that you at least stick your toe in the Exit Planning pool by obtaining these two simple measurements. Test your assumptions: You may be surprised by the results.

Call us so we can help you get started on a plan that can make your company more valuable today and help you achieve the future exit you desire.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/22/17 2/22/17

Building Value is the Win-Win-Win of Exit Planning

In all likelihood, you are absolutely critical to the success of your business. Without you, there is no business.

We want to fix that.

With a little luck and a lot of hard work, we can help you become an Inconsequential Owner.

At some level, all owners understand that they will someday leave the businesses they have created. Let’s assume for a moment that you leave your business permanently tomorrow. If you are an Inconsequential Owner, your exit will have no impact on the business, and that’s good for business value. Buyers pay for business value, not for the departing owner.
If you constitute a significant part of your company’s value (i.e., you are a Consequential Owner) and you have left the scene, there likely will be few buyers interested in your company, and those who are interested likely will pay significantly less than they would had you been an Inconsequential Owner.

In all likelihood, you are absolutely critical to the success of your business. Without you, there is no business.

We want to fix that.

With a little luck and a lot of hard work, we can help you become an Inconsequential Owner.

Exit Planning is a process you can use to transform yourself into an Inconsequential Owner for your sake, your family’s sake, and your company’s sake. While perhaps not the most flattering label, becoming an Inconsequential Owner not only increases your business’ value but also probably aligns with what your friends and children have been calling you for years!

All Exit Plans should answer this question: “What has to happen in my business by the time I leave it to (1) enable me (and my family) to achieve financial security and (2) allow me to move forward with the rest of my life, confident that I have been a good steward of the business?”

The details that constitute “what has to happen” are discussed in myriad newsletters, books, and white papers that we can share with you. For most owners, one of the first and most important things that “has to happen” after figuring out where they are (i.e., current business value) and where they want to go (i.e., Exit Objectives) is to create and sustain business value.
When we talk about value in the context of Exit Planning (Step Three of The Seven Step Exit Planning Process™), we divide the discussion into three areas: building value, protecting value, and minimizing income taxes. The following is a summary of each area.

Building Value

When considering building value, we first will ask, “What do you, as the owner, need to do to create a successful company that can operate without you?” Topics include developing a market focus, creating a top management team, and adopting a proper financial focus and corresponding policies.
Second, we ask, “Which characteristics will buyers pay handsomely for?” We call these characteristics Value Drivers, and they include (but aren’t limited to) the following:

· A stable and motivated management team.

· Operating systems that improve cash flow sustainability.

· Understanding and nurturing the company’s competitive advantage.

· A solid and diversified customer base.

· A realistic growth strategy.

· Effective financial controls.

· Good and improving cash flow.

Protecting Value

Protecting value relates to both internal and external threats. Instead of handling these threats as they occur, owners must identify threats and know how to avoid them before they happen. Some examples include protecting propriety information and trade secrets; preventing employees from doing harm to the business when they leave by taking customers, employees, and business relationships; and anticipating and evaluating outside threats to owners’ companies.

Minimizing Income Taxes

The lifeblood of every business—and therefore the best indicator of value—is cash flow. Our discussion includes how to preserve cash flow and value from income taxation (legally, of course). Income taxes collected on the sale of a business interest can range from 0 to over 50%. Of course, each tax-efficient design and the tools used to implement those designs usually have disadvantages along with their advantages. However, to date, we have not identified any upside to paying more than necessary to your silent partner, Uncle Sam.

As you read articles about The Seven Step Exit Planning Process, we hope you begin to appreciate that while planning and preparing yourself and your business for your ultimate exit may seem to be a daunting task, it does not need to be. Indeed, if you approach the task systematically, you will use only small chunks of time and effort for a potentially enormous payoff.

If you would like more-detailed information about Value Drivers, please contact us today, and we will provide you with guidance and literature on how to install and maximize the effects of Value Drivers in your business.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

2/8/17 2/8/17

What Is Your Business Really Worth?

For many owners, the answer to one question determines whether they can leave their companies: “How much money will I get when I sell?”

This question is critical, and answering it is Step Two of The Seven Step Exit Planning Process™. Realistically, you can’t exit your business unless you achieve financial independence, and the primary source of that independence is likely to be the funds you receive for your business when you leave.

For many owners, the answer to one question determines whether they can leave their companies: “How much money will I get when I sell?”

Let’s look at fictional owner Ron Nee, the owner of Landscaping Supply Company, to see why getting a valuation well before your exit date is so important.

For years, Ron figured he could sell his business for more than enough money to retire comfortably. He based that belief on his understanding of his industry’s valuation rule of thumb: a percentage of gross revenue. Using that rule, Ron calculated that his company was worth about $2 million—more than enough to finance his post-exit life.

When Ron decided that it was time to sell and met with a transaction intermediary, he learned that the rule-of-thumb approach didn’t apply. Ron discovered that buyers for the company would base their offers on cash flow rather than on revenues (the basis for Ron’s estimate).

Because Ron relied on an incorrect assumption about the value of his business, he had wasted valuable time coasting along to his exit date. Had he retained a professional to estimate value or provide a range of likely sale prices before he was ready to exit, he could have spent his time focused on increasing the value of his business.

How Can Owners Avoid Ron’s Predicament?

Ron Nee failed in a critical aspect of ownership: knowing the value of his business. By not getting a professional valuation or estimate of value, he never knew how far away he was from exiting. He had no accurate information on which to base a plan to grow value.

Benefits of Valuation

An accurate valuation of the business does the following.

· It objectively tells owners how much value they need to add to the business.

· It gives owners the ability to monitor their progress toward their ultimate financial objective. For example, if Ron had discovered that his business was worth $1.5 million (pre-tax) instead of $2 million, he could have created and implemented a plan to increase the business’ value to $2 million by the time he wanted to exit. His plan could have included interim goals and laid out strategies to achieve each interim goal.

· It determines whether and when owners can reach their Exit Objectives.

· It provides a basis for estimating and minimizing tax consequences of Exit Path alternatives.

Whether owners are ready to exit their businesses today, tomorrow, or in 10 years, they need more than a thumbnail sketch (i.e., a rule of thumb) of value. An experienced appraiser should be able to answer the question, “Can my company be sold today for enough money, after tax, to allow me to reach all of my Exit Objectives?” If the answer is no, owners can use that knowledge as the basis for a plan to build business value.

Cost

The scope and cost of hiring an appraiser or business intermediary varies substantially. For example, if an owner is several years away from a transfer of ownership, a full-blown valuation may be unnecessary. Instead, that owner needs a value approximation (or range of likely sale prices). If an owner is ready to exit and plans to sell to a third party, a transaction intermediary can prepare a range of likely sale prices. If that owner plans to transfer the company to employees or family members, a certified business appraiser can prepare a “calculation of value.”

Estimates of value, thorough valuations, and marketability appraisals all have their places. Don’t skimp on obtaining the valuation you need, but don’t secure a more precise valuation before you need it.

What If?

Finally, let’s return to Ron’s situation: What might have happened had Ron obtained a business appraisal and learned—well before his target exit date—that his company would likely sell for a price that would meet his financial objective? Should he have taken immediate action to sell? What would you do if you learned that you could exit your business today for an amount of after-tax cash that would meet all of your financial objectives? How would knowing that your business’ value is 60, 75, or 110% of what it needs to be affect your actions? Life offers no guarantees regarding your health or longevity, and volatile economies can provide an excellent reminder that there are plenty of circumstances beyond your control. For all of these reasons, knowing the value of your company is a fundamental, indispensable element of sound decision-making.

For more details about how we can help you value your business, contact us today.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

1/18/17 1/18/17

Top Excuses Owners Use to Avoid Exit Planning

Like every owner, you will one day exit your business, voluntarily or involuntarily. On that day, you will want to attain certain business and personal objectives: The first (and usually prerequisite to all others) is financial security.

Believe it or not, most owners do absolutely nothing to consciously plan and systematically move toward the all-important goal of financial security. Anecdotally, the four most common excuses owners use to justify delaying and eventually ignoring Exit Planning are as follows:

1. The business isn’t worth enough to meet my financial needs. When it is, I’ll think about leaving.

2. I will be required to work for a new owner for years.

3. I don’t need to plan. When the business is ready, a buyer will find me.

4. This business is my life! I can’t imagine my life without it!

1. The business isn’t worth enough to meet my financial needs. When it is, I’ll think about leaving.

2. I will be required to work for a new owner for years.

3. I don’t need to plan. When the business is ready, a buyer will find me.

4. This business is my life! I can’t imagine my life without it!

Today, let’s look at the first hurdle that prevents most owners from making the necessary plans to cash out of their businesses and move on to the next stage of their lives.

Excuse 1: The Business Isn’t Worth Enough to Meet My Financial Needs. When It Is, I’ll Think About Leaving.

This is a common and relatively reasonable assumption: Why spend time, effort, and money to plan to leave your business when you cannot do so today? Why not wait until it is at least theoretically possible to leave to begin the Exit Planning Process? Consider the following example:

At age 45, Jerry Rowling dreamed of the day he could leave his company. The past five years that Jerry had spent trimming fat, watching every dime, and developing new marketing strategies on a shoestring budget had taken their toll. Nevertheless, Jerry kept his nose to the grindstone, fully confident that if he worked hard enough, the exit he dreamed of would take care of itself.

Fast forward five more years: Jerry has remained stagnant, dreaming more frequently but doing nothing to bring about the day he could walk out the door. What had changed was that Jerry had reached his 50th birthday, a benchmark he had set years earlier as the day he’d leave the business behind.

During the five years Jerry spent working in rather than on his business, he missed the opportunity to do the following:

· Clearly establish his personal Exit Objectives and goals.

· Create an Exit Plan (based on his goals) that would identify the most productive actions he could take to create and protect value, and to do so in the most tax-efficient way possible.

· Drive up business value to the point where he could sell, pay taxes, and exit with the amount of cash necessary to achieve financial security.

What owners know to be true but often fail to act on is that growing value usually does not occur unless owners focus their efforts on deliberate actions that move their companies measurably toward their goals. In failing to act on what they know, owners don’t create or implement Exit Plans and thus are never able to exit on their terms.

Do You Have a Plan?

Avoiding planning not only puts your future financial security at risk but also overlooks your company’s need to grow in value efficiently and quickly in carefully targeted areas. Growing and protecting value is at the core of Exit Planning. To identify where and how to spend precious company resources (i.e., your time and money) to make the greatest impact is a key Exit Planning task. It is just as important as identifying and implementing strategies to minimize both current taxes and the tax bill when you transfer your company.

It makes sense to start planning for your eventual exit now, because you have to plan (and consistently take purposeful actions to implement your plan) regardless of the state of the economy. The simple reality is that most owners don’t plan; therefore, most owners are never able to leave their businesses in style.

Excuse 2: I Will Be Required to Work for a New Owner for Years.

If one of an owner’s Exit Objectives is to leave the business as soon as possible, he or she needs to direct the Exit Planning Advisor to make that a prerequisite of any sale. Some buyers require sellers to stay on after closing, but if the management team is strong, most require the former owner to remain only for short transition period, usually no more than a few months.

If the company’s management team consists only of an owner who wants to leave as soon as possible, the former owner should plan on working for the new owner for a couple of years. If the owner’s exit is still several years away, then there’s work to do.

The best way for owners to assure that they don’t become employees for a new owner is to make themselves an unnecessary expense by creating a management team that has proven its ability and motivation to make the company profitable.

Excuse 3: I Don’t Need to Plan. When the Business Is Ready, a Buyer Will Find Me.

One of the hard lessons of the Great Recession of 2008–2011 is that the timing of an exit depends on a vibrant economy with active buyers, a company with strong cash flow, and an owner ready to sell. These factors seldom exist in equal measure at the same time.

We suspect that some owners believe that waiting for a future economic tide to bring back well-financed buyers involves little to no risk. However, this type of passivity is fraught with danger:

· What if a qualified buyer doesn’t show up?

· What happens if, when the owner is ready to sell,

o the mergers and acquisitions market is dormant?

o the owner’s industry niche has fallen out of favor?

o a national competitor moves into the owner’s territory?

o the business and/or the economy is in decline or worse?

o the owner’s health and/or personal circumstances unexpectedly deteriorate?

· What happens if the economic tide doesn’t return at all or at least not for many years?

Excuse 4: This Business Is My Life! I Can’t Imagine My Life Without It!

We all know business owners whose belly fires have gone cold and whose animating goals have grown stale. Nonetheless, they hang on to their businesses because they can’t imagine their post-exit lives without them. We also know owners who remain energized and involved with their companies until they die. Both types will leave their businesses eventually.

If owners still are passionately engaged with their businesses and happily making a difference in their lives and the lives of others, they should not exit just to exit. However, if the passion that once burned brightly has turned to cold ash, it’s time to act while there’s still time.

To start Exit Planning only when the end is near fails to exploit the majority of Exit Planning’s benefits. Exit Planning involves building business value, cash flow, and resiliency so that the business prospers regardless of who owns it or what that owner’s Exit Objectives are. Exit Planning involves protecting value and minimizing taxes, both of which are valuable endeavors regardless of an owner’s specific Exit Objectives. When departure day dawns, owners who have planned their exits are better positioned to achieve all of their business and financial objectives.

Final Thoughts

Certainly, the decision to sell the business you created and nurtured is an intensely personal one. No one can tell you when to exit your business or what to do with the rest of your life. Having worked with other owners, we can help guide you through the process of preparing for the biggest financial event of your life. We can help you consider all of the factors associated with exiting your business and help you complete your Exit Objectives.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

1/4/17 1/4/17

Selecting Your Exit Goals

When a man does not know which harbor he is heading for, no wind is the right wind. –Seneca

The starting point for any type of plan is defining its goals. In the case of planning a business exit, this means knowing what it means to “exit your business in style.”

Philosophers, business owners, and successful people from all walks of life understand the critical importance of establishing goals, creating plans to attain those goals, and persevering to see their plans through to completion. Having worked with owners to create successful Exit Plans, we know that it is critical for owners to ask several questions to establish three principal Exit Objectives before moving forward with their Exit Plan.

When a man does not know which harbor he is heading for, no wind is the right wind. –Seneca

The starting point for any type of plan is defining its goals. In the case of planning a business exit, this means knowing what it means to “exit your business in style.”

· How much cash do they need when they exit to support the lifestyle they desire? (Do they want to be cashed out when they leave the business or are they willing to receive the purchase price over time?)

· When do they want to leave the company? (How much longer are they willing to remain active in the company?)

· To whom do they want to sell/transfer the company? (To a child? Key employee? Co-owner? An outside party that can pay top dollar?)

Let’s look at an example of an owner who arrived at his exit date without a plan to reach his goals, as told by an Exit Planning Advisor.

Ben, the owner of a 45-employee plastic-extrusion company, had long thought of transferring his business to a son and a key employee but had done little to prepare for that transfer. However, as tougher economic conditions challenged his company and he reached his 58th birthday, he decided it was time to retire and called me.

I said, “Ben, it’s helpful that you’ve established two of the three Exit Objectives critical to all successful business exits. You’ve determined that you don’t want to work much longer in the business, and you’ve decided that you want to transfer the business to your son and a key employee. But what about the third Exit Objective: How much money do you want or need when you leave the business? Have you determined whether you need cash or can accept a promissory note?”

At this point, Ben had two choices:

· He could retire immediately and try to sell the company for cash, but not to his son and key employee: They had no cash, and no bank would lend an amount even close to the amount of money necessary to close the deal. If Ben wanted to sell today and receive an amount that would support his post-exit lifestyle, he would have to sell to an outside third party with sufficient cash.

· Ben could sell the company to his son and key employee but would have to wait 6–10 years to receive the entire purchase price, which was not guaranteed.

Ben’s situation illustrates why setting objectives or goals (and understanding how each affects other objectives and goals), creating a plan, and acting to reach those goals is critical to a successful exit.

If you prefer to leave your business in style (which to us means leaving your business to the successor you choose, at the time you choose, and with the amount of cash you desire), you must take time to formulate specific, consistent, attainable goals and objectives. You must determine a course of action—a plan—based on those goals, and you must persevere with that action until you achieve your goal. Without setting goals at the outset of your exit journey, you may drift aimlessly until, like Ben, it’s too late.

Don’t be an owner who is too busy working in your company to work on the most important financial event of your business life. We are happy to help you begin by providing you with more information about setting objectives and other Exit Planning topics.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.

12/22/16 12/22/16

Failure to Plan Has a Price

I never worry about action, but only about inaction. –Winston Churchill

“I haven’t decided what I ultimately want to do with my business, when I want to exit, how much money I’ll need, or whom to sell to. So how can I plan my exit? Besides, I don’t want to exit right now.”

If you’ve said or thought this, you are not alone. Many business owners are either overwhelmed by the thought of exiting or are so busy fighting daily fires in their businesses that they assume they cannot plan their exits.

I never worry about action, but only about inaction. –Winston Churchill

If you aren’t sure about what you want from an exit or when you want to leave, why is it so important to decide to act today?

First, recognize that when owners have a passive attitude toward the irrefutable fact that they will—one way or another—leave their businesses someday, they are settling for less than the most profitable exit for themselves and their families.

Second, understand that preparing and transferring a company for top dollar takes time: on average, 5–10 years. Most of those years will be spent preparing the business for the transfer or, if the owner decides to sell to employees or children (two groups who rarely have any money), giving them time to earn the money to pay for the owner’s interest. The more time owners have to design and implement income tax–saving strategies, build value, strengthen management teams, and begin a gradual transfer of ownership (not control) to key employees or children, the more likely they are to reach their goals.

Third, if owners decide to sell to a third party, remember that the market does not operate on their schedule and may not be paying peak prices when they are ready to sell.

If the prospect of leaving your company with little to show for it is unacceptable to you, let’s look at your three options.

Wait for a Buyer

Owners who wait for a third-party offer for their businesses believe that one day, a buyer will contact them, negotiate a fair price, and that will be that. This is certainly a course of action, but one that flies in the face of reality. There is a pent-up supply of businesses owned by baby boomers who, given strong interest from buyers, are clamoring to sell their companies. The simple law of supply and demand implies which kind of market sellers will face. In a buyer’s market, only the best-prepared businesses sell for top dollar. The owners of those well-prepared businesses will have made the decision to prepare their companies years ahead of the actual sale.

Liquidate

Liquidation is a common Exit Path for owners of companies whose cash flow is declining and has little probability of improving, absent the design and execution of an alternative Exit Plan. If this description fits your company, we recommend that you meet with your tax and other advisors to do the planning necessary to create the most tax-efficient liquidation possible.

Decide to Exit and Plan Accordingly

Start today and take the following steps:

1. Fix a departure date.

2. Determine your financial needs.

3. Decide whom you want to succeed you.

4. Have your business valued to see whether you should sell today and/or it has the value necessary to meet your financial and other Exit Objectives.

5. Based on your objectives and the realities of your business, use a skilled Exit Planning Advisor to forge a plan with accountability/decision deadlines.

Your failure to act can be fatal to your successful exit. You and your family depend on the success of your business exit. Can you afford to fail to act? Acting today to create your best possible Exit Path is not difficult. Simply pick up the phone and call us.

As a member of the Business Enterprise Institute (BEI), Cornerstone Business Advisors is an authorized distributor of BEI’s content and Exit Planning Tools.