Articles Tagged ‘financial tips’

Can You Sell Your Company to an Outside Third Party?

Wednesday, April 25th, 2012

We talk to business owners every day who “plan” to exit their companies via a sale to a third party because they believe that they’ll get more cash up front (and more overall) than if they sell their companies to insiders (family members or employees). Consequently, they believe there is far less risk selling to a third party than to insiders.

Are they correct? As diplomatically as possible, we suggest that they just might be dead wrong.

Third Party Sales Involve Risk

1. Sales to third parties are less risky than sales to insiders only if a business can be sold for all cash or if there’s simply no time to implement a carefully designed sale to an insider.

Investment banker Kevin Short reminds owners that unless a company meets the following criteria:

has more than $1 million (or even $2 million) in EBITDA;
is in a attractive market sector;
has strong fundamentals; and
enjoys a unique competitive advantage;
it is unlikely to sell to a third party—for substantially all cash.

2. Selling to a third party requires a third party wanting to buy. In a difficult M&A market, being in an attractive market sector is more important than ever. Again, according to Kevin Short, “hot” or “niche” industries include: power, alternative energy, health care, medical services and healthy-living products.

Companies engaged in construction, retail, real estate, automotive and consumer products will find it difficult, if not impossible, to attract a buyer in today’s (early 2012) marketplace.

For most companies, today’s M&A market is decidedly cool if not stone cold; few companies meet the criteria above. The most realistic owners quickly realize that there simply are no third parties interested in their companies.

3. Waiting involves risk. We suspect that some owners hold to the belief that there’s little risk in waiting for a third party buyer because it provides an excuse to “avoid the hassle” of planning. “No risk?” we ask.

What if a qualified buyer doesn’t show up?
What happens if, when you are ready to sell:
the M&A market is dormant; or
your industry niche has fallen out of favor; or
your business and/or the economy is in decline or worse?
Why subject your future financial security to these uncertainties? Why not assume control of your exit—your life, really—by creating an exit strategy that allows you to:
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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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Elements of a Plan to Sell to Insiders

Thursday, August 25th, 2011

Presented by T. Ray Phillips

Today we discuss the essential elements of a plan owners use to transfer a business to insiders (with the help of skilled advisors) that keeps 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 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.

For that reason, 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 for this exit strategy, they also must define and or quantify their objectives. These may include:

Financial security and independence;
Departure/retirement by a chosen date;
Keeping family legacy or company culture intact;
Rewarding key employees; and/or
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. In a transfer to insiders, however, cash flow assumes gargantuan importance because initially it is the major, if not sole, source of your 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, only if cash flow continues to grow does the ownership transfer generally occur. For this reason, 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 me for one of our Value Driver White Papers. )

Element 5: Capable management desiring ownership.

Having a motivated management team in place and capable of replacing you is hugely valuable to any buyer. In a transfer to insiders, such management is essential. That management group 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, and they do…but sometimes only until they realize that they have to pay for ownership.

Element 6: Minimize Taxes.

While no owner we know wants to pay more taxes than absolutely necessary, those contemplating insider transfers must focus on minimizing taxes. In an insider transfer it is imperative that you and your advisors structure the sale to minimize taxes on the company’s cash flow (pre-tax income) because without planning the cash flow is taxed twice:

once when the insider receives it (as the new owner) and then pays taxes before paying you to purchase the company; and
again when you pay taxes on the proceeds you receive.

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 trouble to save a third or more of the cash flow from this type of double taxation. One-time taxation means owners receive more money more quickly and thereby reduces risk of non-payment.
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Top Excuses Owners Use To Avoid Exit Planning: Part One

Thursday, July 7th, 2011


Presented by T. Ray Phillips

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 that all-important goal. Anecdotally, the four most common excuses owners use to justify delaying and eventually ignoring Exit Planning are:

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

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

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: It makes no sense to start planning when my business isn’t worth enough to meet my financial needs. When it is, that’s when I’ll think about leaving.

This is a common, and not unreasonable, assumption: Why spend time, effort and money to plan to leave your business when, today, you can’t? Why not wait until it is at least theoretically possible to leave to begin the exiting process?

At age 45, Jerome Rowling was dreaming 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 had taken their toll. Like the trooper he was, Jerry kept his nose to the grindstone

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