Go back to San Diego in 1954, a group of local businessmen approach an attorney, Sol Price, looking for investors in a new retail concept: a large warehouse-style store featuring department-store-quality products at lower prices. The idea they proposed was that selling a lot of goods in a no-frills setting could be a new and profitable niche in the retail world. They called the store Fed-Mart, and over the next two decades the company grew into a successful regional chain in the southwest.

A German retailer purchased Fed-Mart with plans to make it into a leading national retailer, but failed. Sol Price, a top manager with Fed-Mart, and his son Robert were now unemployed. Mulling around new ideas, they came up with a membership-based warehouse retail operation and called Price Club. They opened their first store in San Diego in 1976 in an old manufacturing building built by Howard Hughes. Several Fed-Mart managers came to work at Price Club including Jim Sinegal, who started at Fed-Mart unloading mattresses when he was 18 years old.

This bit of history is important to this story because at Fed-Mart, key relationships were formed and a set of operating principles for running the company
were clearly defined and spelled out by their president at Sol Price. They included pricing, displays, policies for handling customer complaints, rules for advertising and more. The very first item on the list: “Customers come first, integrity is the cornerstone upon which we much build consumer confidence that creates customer loyalty.”

A retailer in Seattle was interested in the Price Club model, flew their son Jeff Brotman down to check it out and he came back with glowing reports and there was nothing like it in the northwest. The Seattle group looked for a CEO and chose Jim Sinegal who agreed to manage the new start-up. In 1983, the group scraped together $7.5 million from investors to open their first store in an industrial area of south Seattle.

Fast forward to 28 years as Jim Sinegal announces his retirement as the CEO of the third-largest retailer in the U.S. – Costco. It has $89 billion in revenue, 64 million members with 600 locations including 81 in Canada, 32 in Mexico, 22 in England, 9 in Japan, 7 in South Korea, 8 in Taiwan, 4 in Puerto Rico and 3 in
Australia.

Jim Sinegal ingrained five simple and down-to-earth business principals into the Costo’s corporate culture that made the company what it is today. The following are excerpts of these principals:

1. Obey the law – The law is irrefutable! Absent a moral imperative to challenge a
low, we must conduct our business in total compliance with the laws of every
community where we do business.
2. Take care of our members – as well as individuals – Our members are our reason
for being – the key to our success. If we don’t keep our members happy, little else
that we do will make a difference. There are plenty of shopping alternatives for our
members, and if they fail to show up, we cannot survive. Our members have extended a
trust to Costco by virtue of paying a fee to shop with us. We will succeed only if
we do not violate the trust they have extended to us, and that trust extends to
every area of our business.
3. Take care of our employees – Our employees are our most important asset. We
believe we have the very best employees in the warehouse club industry, and we are
committed to providing them with rewarding challenges and ample opportunities for
personal and career growth.
4. Respect our suppliers – Our suppliers are our partners in business and for us to
prosper as a company, they must prosper with us.
5. Reward our shareholders – As a company with stock that is traded publicly on the
NASDAQ stock exchange, our shareholders are our business partners. We can only be
successful so long as we are providing them with a good return on the money they
invest in our company.

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
dan@dynastybuilder.com
phone: 765-644-8887

Knowing the value of your business is critical no matter who you plan to sell or transfer to. The primary three exit paths are:
1. Transfer your company to a family member
2. Sell the business to one or more key employees or co-owner(s)
3. Sell to an outside third party

Third Party Sale

Let’s look first at sales to third parties. If you plan to sell to an outside third party, you will need an accurate valuation to determine if, after the business is sold and taxes are paid, you will have enough money to achieve your financial goals. A valuation performed in advance will help you decide whether to begin the time-intensive and expensive sale process.

You will also need a business valuation based in reality; rather than on rules of thumb, or what your neighbor sold his business for or any of the other many sources of misinformation. Without a realistic, objective business valuation, how can you make a sound decision?
Retaining a certified valuation specialist to perform this valuation gives you an unbiased valuation. These specialists do not try to sell you a “bill of goods” only to encourage you to list the business for sale.
If you learn that the business is not valuable enough to achieve your definition of financial independence, the valuation specialist should be able to point out areas where the business performance could be improved. Following his or her advice, you can then work to increase the value of the company.

Insider Sale

If you plan to sell the business to an “insider” (a child, employee or co-owner), a valuation provides all parties with a sense of the true fair market value of the business. Based on the valuation, your advisors can create a plan to provide you with the full value while describing the most tax-advantaged method of how the insider and business can use the cash flow to pay for the business.

Often, to facilitate these sales, minority discounts or marketability discounts are used to place the largest possible amount of total after-tax cash in the departing owner’s hands. If discounts are used, they must be substantiated by a certified valuation specialist.

Transfer to Child

If you plan to give even part of the business to children, be aware that the IRS wants to know what valuation method was used. It is concerned that the gift may be undervalued. Therefore, a valuation specialist should substantiate these gifts in anticipation of an IRS inquiry.

In short, in all but the very simplest and low value scenarios, successful Exit Planning requires a valuation that can be relied upon by you, your advisors, and often, the buyers.

Article presented by T. Ray Phillips, CFBS, AEP, ChFC with The Family Business Legacy Co., LLC, is a member of Business Enterprise Institute’s Network Of Exit Planning Professionals™. © 2009 Business Enterprise Institute, Inc. To contact T. Ray Re: subject matter in this article, call (317) 208-6312 OR e-mail trphillips@finsvcs.com

DISCLAIMER: The information contained in this article is general in nature and is not legal advice. For information regarding your particular situation, contact an attorney or tax advisor. This newsletter is believed to provide accurate and authoritative information related to the subject matter. The accuracy of the information is not guaranteed and is provided with the understanding that none of the providers of this newsletter, including Business Enterprise Institute, Inc., is rendering legal, accounting or tax advice. In specific cases, clients should consult their legal, accounting or tax advisors.

The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity.

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