Articles Tagged ‘Small business exit planning’

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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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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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?
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Which Comes First? Estate Planning or Exit Planning?

Tuesday, October 18th, 2011

Presented by T. Ray Phillips

Well…

A successful business Exit Plan achieves three important owner goals:

1. Financial Security. (The business sale or transfer provides the amount of income the owner, and owner’s family, needs after the owner’s exit.)
2. The Right Person. The owner chooses his or her successor (children, key employees, co-owners or a third party).
3. Income Tax Minimization maximizes the amount of cash in the departing owner’s pocket.

A successful Estate Plan achieves three important personal goals:

1. Financial Security (for the decedent’s heirs).
2. The Right Person. The decedent (rather than the State) chooses who receives his or her estate.
3. Estate Tax Minimization reduces the Government’s bite leaving more funds for one’s heirs.

Once owners see that the two processes share the same goals, they can appreciate how to leverage the time and money they spend developing their Exit Plans into the design of their estate plans.

For example, when you engage in Exit Planning you most likely determine your objectives and secure an estimate of value on your business before you start working to create more business value. In securing an estimate of value, you possess a piece of information that’s critical to both your business continuity and estate plans.

Thinking of exit and estate planning in tandem brings the owner’s entire picture into focus:

1. If you don’t make it to your business exit date, how will you provide your family with the same income stream they would have enjoyed if you had?

2. How will you make sure that your business retains its previously determined value?

3. If your exit strategy involves transferring part of the business to the children, or if it does not, does your estate plan reflect and implement your wishes if you don’t survive?

4. If you die before you exit the business, are you certain your family will still receive the full value of the business? (This question is especially important to answer if you are the sole owner. Sole owners are unlikely to have a buy-sell agreement because there are no remaining co-owners to purchase and/or continue the business.)

Your estate plan can manage these issues, but does it?
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