Articles Tagged ‘financial strategy’

The Importance of Financial Statements in the Exit Planning Process

Thursday, June 21st, 2012

Presented by T. Ray Phillips

Whether you plan to transfer your business to an insider or sell to a third party, demonstrating your company’s financial stability through sound financial statements is a crucial step in successfully exiting your business. When you first meet with an Exit Planning Advisor, he or she will want to determine your company’s current financial status, an assessment that involves reviewing:

Business tax returns for the previous two to three years;
Current financial statements of the business; and
Your personal financial statements.

Does your Exit Planning Advisor need your company’s financial statements at your initial meeting?

Yes. He or she needs a clear and comprehensive understanding of your financial picture for several reasons.

First, the company’s financial statements not only allow your advisor to understand your current financial position, but enable him or her to effectively gauge what you have already accomplished and what remains to be accomplished to create a successful exit plan. As your advisor identifies areas in your business that need strengthening, he or she can suggest and help you implement strategies to create a positive cash flow trend or increase profits. The goal: to achieve your overall exit objectives.

Second, your financial statements provide much-needed insight into what makes your business tick and what criteria you use to base all of your financial decisions.

Third, and most importantly, financial statements provide cash flow information which we can use to determine both the value of your company and its possible sale price. Financial statements show you and your advisor the historic earnings, cash flow results and past years’ trends.

Historic results and trends can be indicators of your company’s future performance. In short, we need this information to estimate what you can reasonably expect to receive for your company.

Finally, reviewing your financial statements with your advisors will help to dispel any misconceptions you may have about your company’s value and the likelihood of growing value quickly. For instance, you may believe that recent improvements will double cash flow and company profits over the next couple of years. Your advisors, however, will also look at your company’s historical trends to determine whether past cash flow activity supports your belief.

In short, the starting point for sound Exit Planning begins with reviewing well-prepared financial statements.

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.

To contact T. Ray Phillips Re: subject matter in this article, call
(317) 208-6312 OR e-mail trphillips@finsvcs.com

Please do not leave trade instructions over e-mail, as they cannot be processed.
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS under circular 230, we inform you that any U.S. Federal tax advice contained in this communication, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.

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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:
read full article »

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Bonus Incentive Plans For Employees: What’s The Point?

Thursday, April 5th, 2012

When I ask business owners about the possibility of installing an employee incentive plan, I often hear one of two responses:

“I would like to do something to reward my key employees for their performance. ” OR
“You know, one of my best employees left last week for a company for more money. I think I’d better do something to stay competitive in the marketplace. ”

May I suggest that these two motives are not nearly self-serving enough? The purpose of installing a bonus plan for your employees is to motivate them to help you reach your exit goals.

While owners differ about when they want to leave their companies or how they wish to leave, the underlying ownership goal is consistent: to leave the company in style. No matter what type of employee incentive plan you create, it should be designed to support your fundamental exit goals by motivating your key employees to stay with your company and build its value.

Consider the following realities:

1. Few owners will take an extended vacation much less cut back on their involvement without leaving capable management in place to run the business.
2. Most sophisticated buyers will not seriously consider a company that lacks a good management team;
3. Many, if not most companies, are sold to key employees; and
4. Transferring a business to children can be especially risky in the absence of key employees who will remain with the new owners.

Whether your goal is to sell to a third party, transfer the business to children or to employees, the success of your strategy depends on the presence of motivated key employees.

We measure the effectiveness of an employee incentive plan in part by how well it motivates key employees to increase the value of a business. Effective plans necessarily reward employees as they increase the value of the business.

Usually, this means that owners (and their advisors) must develop an incentive formula that links increases in the income or cash flow of the business to the employees’ rewards. In its simplest form the incentive plan gives the key employee a cash bonus. Part of the bonus is paid currently and part is subject to vesting thus handcuffing the employee to the business.

Let’s look at how one fictional owner set up his company’s incentive plan.
read full article »

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Preparing For Your Exit: Planning For Your Inevitable Business Exit

Friday, November 25th, 2011

With over half of today’s 9.5 million owners of established businesses reaching the retirement age of 50 years old or older it is likely that many of you will be ready to leave your business within the next decade or so1. What have you done to plan for that day?

What are you waiting for? How could planning for the biggest financial event of your life not be worth your time and effort?

Given that most retirees live on 95 percent or more of their pre-retirement income there’s good reason to get busy creating an Exit Plan that enables you to help achieve your financial and lifestyle objectives after you leave your business2.

If you aren’t sure how to begin preparing for your voluntary – and inevitable exit – because you don’t understand the process or even know whom to turn to for help, you are not alone. There is a methodical, adaptable and customized Exit Planning Process that business owners and their advisors have used for years that is designed to help owners leave their businesses on their own terms and on their schedules.

Exit Planning is not mysterious, time-consuming, nor just a clever way to sell you another product. It is, however, a means to help you achieve your financial and lifestyle objectives:

1. Leaving on the date you choose.
2. Receiving the amount of cash you want.
3. Choosing your successor.
4. What exactly is the Exit Plan that will allow you to leave your business in style? How do you create yours? Just as there is an almost infinite variety of businesses and business owners, so too are there many different Exit Plans.

Yet all plans contain several common elements. Let’s begin with the basic seven issues that most owners understand best when we phrase them as questions.

1. Do you know your primary planning objectives for leaving the business, such as:
Departure date?

2. Income needed to achieve financial goals?

3. To whom you want to leave the business?

4. Do you know how much your business is worth?

5. Do you know how to increase the value of your ownership interest through enhancing the most valuable asset of the company – the employees?
read full article »

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