Articles Tagged ‘financial strategies’

Loss of Key Talent: You The Owner

Thursday, May 17th, 2012

Presented by T. Ray Phillips

Three issues confront a company whose owner dies or becomes disabled prior to a planned exit:

1. Continuation of ownership;
2. Company’s loss of financial resources; and
3. Company’s loss of key talent—you, the owner—and the cascading affect on employees and customers.

Today let’s look at how the loss of an owner affects both sole-owned and co-owned businesses.

Problem for Sole Owners. Your death will likely have the same impact on your company that the death of any one of your key people would have. Your talents, experience, relationships with customers, employees and vendors may be quite difficult to replace (especially in the short term).

Once you are gone, expect employees to jump ship unless you’ve made careful contingency plans. Without employees, your company is likely to default on its contractual obligations. Without planning few businesses have the financial resources or successor management to weather this storm.

Problem for Co-Owners: Multi-owner companies experience the same losses as solely-owned companies, if the remaining owners do not have the experience or talent to replace you. If you are the person who generates new clients, heads operations or maintains most of the company’s key relationships, your death or disability will, at best, jeopardize your company’s survival.

Solution for Sole Owners: Sole owners should create written stay bonus plans to motivate their key employees to remain with the company after the owner’s death. Additionally, you should create a succession of management plan that names the person who will assume your duties. Finally, you should decide now how you want your company to be preserved. Do you want the company to be sold, continued, or liquidated?

Solution for Co-Owners: If your co-owners do not have the skills and experience to replace yours, you must put in place a plan to give them the skills and experience they lack. If your employees are confident that the surviving owners have the skills necessary to bring in new business, run the operations or maintain key relationships, they are less likely to jump ship.
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The Avoidable Failure to Act

Thursday, March 1st, 2012

Presented by T. Ray Phillips

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

“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or 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 this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they assume they cannot plan their exits.

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

First, recognize that when you take a passive attitude toward the irrefutable fact that you will—one way or another—leave your business, you are settling for less than the most profitable exit for yourself and for your family.

Second, understand that preparing and transferring a company for top dollar takes time—on average five-ten years. Most of those years will be spent preparing your business for the transfer and, if you decide to sell to employees or children (two groups who rarely have any money), giving them time to earn the money to pay you for your interest.

The more time you have to design and implement income tax-saving strategies, build value, strengthen your management team, and begin a gradual transfer of ownership (not control) to key employees or children, the more likely you are to reach your goals.

Third, if you decide to sell to a third party, remember that the market does not operate on your schedule and may not be paying peak prices when you 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.
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Buying Out Your Partner

Thursday, January 26th, 2012

Presented by T. Ray Phillips

MMS, Inc., a computer service business, had survived recent industry turbulence through the persistent efforts of its owners, Ralph McMillan and Janet Shaw. In fact, MMS had enjoyed good cash flow for the past three years and its future looked rosy. Successfully meeting these challenges made Ralph (age 59) more anxious than ever to leave the business and Janet (age 48) more than ready for Ralph to leave. But neither owner had a clear idea of how to proceed, who to ask for guidance or even how to take the first step.

Janet and Ralph had to find the starting line before they could run the course to the successful dissolution of their partnership.

Ralph’s Tasks

First, Ralph must assess his income needs and timing of his exit. He must determine how much of the purchase price he needs (or wants) on the day he leaves and how much he is willing to receive after he leaves (a Retirement Needs analysis). This is a very different question from how much his interest is worth yet the questions are related because the cash Ralph needs must be attainable from the sale of his interest.

Second, Ralph must obtain an independent valuation of his ownership interest.

Note: Ralph is unwilling to leave unless he exits with full value for his ownership interest (hence the need for the valuation) and unless that value is enough to meet his retirement needs (hence the need for a retirement income needs analysis).

Janet’s Tasks

Janet wants to balance the risk/liability she and the business will assume in Ralph’s buy-out with the opportunity for continued growth in the value of business interest. Since Janet is likely to be unwilling to buy Ralph’s interest—if doing so puts her (or the business) at too great a financial risk—she must secure a professional’s projection of the company’s future cash flow.

This cash flow projection with enable Janet to determine if the business will likely have enough cash flow (after Ralph leaves) to finance the purchase of Ralph’s interest without stifling the growth and prosperity of the business.

Ralph’s Exit Plan Design

Ralph’s Exit Plan should be designed to:
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The Importance Of Time In An Employee Buy Out

Monday, January 9th, 2012

Presented by T. Ray Phillips

Many, probably most, business owners would like to sell their businesses to their employees, but for one nagging problem: Their employees have no money.
The desire to sell to employees collides with the owner’s overarching need for financial security. Owners simply cannot risk selling a business to employees who have no cash.

Take James Johnson, the fictional owner of fictional company Johnson Consultants, Inc. James’s management team was capable and interested in buying the company. The business had little debt and good cash flow.
When James met with his advisors to discuss the topic, one of their first questions was, “When do you want to leave the business?”
If James answers, “Now!” a sale to employees who lack cash is fraught with risk. If James’s answer is, “I’d like to be out—and cashed out—of the business in five to eight years,” a well-designed exit plan can make that happen—if James starts today.

Plan Goals Any buy-out plan must accomplish three goals:

1. Minimize the owner’s, the company’s and the employees’ risk, by keeping
the owner in control of the business and the sale process until the owner receives the entire purchase price.
2. Ensure that the owner receives full value for his or her ownership
interest.
3. Minimize the income taxes of both the owner and the employees.
Unless a buy-out plan meets these goals, owners would be wise to reconsider selling their companies to their employees. If, on the other hand, owners plan and begin to execute a transfer plan well in advance of their departures, they can achieve these three goals. Of course, special planning is required to meet the income tax minimization goal.
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