Articles Tagged ‘exit strategies’

Why Owners Choose Not To Sell

Tuesday, June 5th, 2012

Presented by T. Ray Phillips

Some owners make a choice not to sell their companies for very legitimate reasons. Among them are:

1. They still have enough fire in the belly to fuel their investment of time and energy in the business.
2. They are grooming interested family members or employees to one day assume the reins.

Some owners, however, have businesses that are prepared for sale, but hesitate. Why? These owners typically don’t sell when they should because: 1) they procrastinate; 2) they fear the unknown; or 3) they fear losing the known.

Procrastination

Procrastination on the part of an owner is not uncommon and has many causes.

* First, some owners just don’t know where or how to start planning an exit. If you are one of those owners, then reading the remainder of this article is a good start. The next step is to contact our offices to begin the process of creating an Exit Plan that allows you to cash out of your business and leave in style when you are ready to do so.
* Second, some owners think that they can always sell later. These owners overlook the demographic evidence indicating that when most Boomers reach retirement age, the glut of companies in the marketplace may drive prices down. Other owners in this group understand that the level of activity in the Mergers & Acquisition market can have a huge affect on the sale price of a company and their strategy is to wait until the market recovers.
* In the third group of procrastinating owners are those who believe that because they have “good” businesses, their exits require no significant planning. When they think about selling, they assume that there isn’t much for them to do because when the time is right, the right buyers will appear and pay them great prices for their companies.

It does happen, albeit quite rarely, that the right buyer appears and pays a great price for a great company. However, it makes more sense to prepare for the biggest financial transaction of your life than to entrust the success of your business exit to Lady Luck.

Fear of the Unknown

Owners who suffer from the fear of the unknown usually hold one (or more) of the following opinions:
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Six Estate Planning Questions for Business Owners

Tuesday, February 14th, 2012

Presented by T. Ray Phillips

James Keefe sat nervously in his Exit Planning Advisor’s office. Until the day before, he had been president of Keefe Automotive Sales, one of the region’s largest new car dealerships. Now he was out of a job and felt he was a victim. Naturally, his first thought was to sue those responsible for his misfortune. The targets of his wrath were his younger sister and his mother. They had forced him out of the business.

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

James’s father had brought him into the business early and taught him well. After the founder’s death, James assumed all responsibilities for sales and became the key man in the business. His sister, Susan, handled the bookkeeping and other administrative matters. Her husband managed the service department.

Despite the economic slump that hit the region, the business persevered under James’s stewardship. It had a long-standing tradition of service and good name identity because the elder Keefe had pioneered the new car business in the suburbs.

Because of his dedication to the business, James had not spent much time nurturing family relationships. He was less a devoted son to his mother than was his sister a devoted daughter. As their mother aged, she became increasingly susceptible to the influences of her daughter. Family friction continued. A confrontation was inevitable.

James had always assumed that his superior abilities and position as president and board chairman would enable him to win any family showdown. He was wrong. At a special meeting of the board of directors, James was removed from his posts, fired as an employee, and given three months of severance pay—after 25 years in the business.

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

The unfavorable business transition experiences described above in the hypothetical case study may have been avoided had James’s father asked—and answered with the help of an experienced Exit Planning Professional—six critical questions.
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Quantify Your Resources: The Ultimate Exit Test

Tuesday, December 13th, 2011

Presented by T. Ray Phillips

In the first Step of The Seven Step Exit Planning Process™, you, as an owner, establish three primary exit objectives:

The date you wish to exit;

The amount of cash you want upon exit;

and Your choice of successor.

Today, let’s look carefully at that second objective: How much cash will you need from the sale of the company to enjoy a financially secure post-business life? For most owners this is a great starting point for determining when, or if, they can leave their businesses.

Peter Daniels was the 58-year old (fictional) owner of Daniels Food Processing, Inc. He had engaged his financial advisor to:

Set a realistic assumption for a rate of return on Peter’s investments;

Research actuarial information to determine average life expectancies for both he and his wife;

and Help him and his wife agree on and establish an acceptable post-exit annual income amount.
As part of this process, Peter and his advisor reached the critical question whose answer would determine Peter’s ability to retire on his terms: What must the value of Peter’s business be if Peter is to leave, as he desires, at age 63?

Like Peter, your resources are likely both in the business and outside of it. You need to know the value of both so you can determine if there is a gap between the amount of money you will need in the future and the amount you have today. This gap must be quantified and—to exit successfully—you must create and implement a plan to close that gap. Most owners retain an experienced financial planner to help with this project.

Peter and his advisor used the following process:

First: Peter and his wife (Pam) agreed on their future annual income needs. They believed that they could live on $200,000 per year (95% of their current income) and would require that level of income for approximately 30 years (based on their life expectancies).

Second: Peter and his advisor, using their agreed-upon estimate of a projected rate of return, calculated that Peter’s non-business investments assets would be worth approximately $500,000 in five years (Peter’s desired exit date).

Third: Peter’s advisor calculated that the amount of investment capital needed to pay Peter and his wife $200,000 per year for the duration of their lives (based upon current actuarial tables and assuming a seven percent investment return*) beginning five years hence is approximately $3,000,000. Thus the net (after tax) sale proceeds from the sale of the business must be $2,500,000, or between $3,000,000 and $3,500,000 pre-tax.
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Eight Ways To Exit Your Company

Tuesday, November 8th, 2011

Presented by T. Ray Phillips

According to Paul Simon, there are 50 ways to leave a lover. Not being as creative as Mr. Simon, we’ve only come up with eight ways for owners to leave their companies:

1. Transfer the company to a family member;
2. Sell the business to one or more key employees;
3. Sell to key employees using an Employee Stock Ownership Plan (ESOP);
4. Sell the business to one or more co-owners;
5. Sell to an outside third party;
6. Engage in an Initial Public Offering;
7. Retain ownership but become a passive owner; and
8. Liquidate.

Given the right circumstances, one of these paths may be appropriate for you. The process of determining exactly which path is best presents an obstacle to many owners. If, however, you wish to “leave your business in style,” we suggest that you work through this three-step path selection process.

Establishing thoughtful objectives lays the foundation for an Exit Plan. Doing so well in advance of your departure gives you and your advisors the time necessary to make your goals a reality. As you work through this path selection process, you will synthesize or harmonize your exit objectives with the characteristics and capabilities of your company as well as with the external realities of the marketplace.

Choosing a Path

1. Step One

First, you, as an owner and with the help of your advisors, identify your most important objectives. (Please contact us for issues of this newsletter that further explain how to identify and quantify your objectives.) These objectives are both financial (“How much money will I need from the transfer of the business to assure my, and my family’s, financial security?”) and non-financial (“I want the company to stay in the family,” or “I want to remain involved”).

Internal and external considerations also impact an owner’s choice of exit path. For example, the owner who wishes to transfer the business for cash, but is unwilling to trust his company’s and his employees’ fate to an unknown third party, may decide that an ESOP or carefully-designed sale to a key employee group is the best exit route.

Exterior considerations that may impact the choice of exit path include business, market or financial conditions. For example, the option of selling your business for cash to an outside buyer may be eliminated because of the anemic state of the M&A market.

2. Step Two

As you develop consistent objectives and motives, you then must value your company and determine its marketability. This analysis usually provides direction and can eliminate potential exit paths.

For example, if the value of a company is high and its marketability is low (perhaps because of the depressed state of the M&A market), an owner may decide that a sale of the business to an outside party is impractical. Instead, selling to an “insider” (co-owner, family member or employee) may be a better option.
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