Building a successful business likely took you years of deliberate planning. From your initial business plan to now, you’ve built something worth protecting and worthy of pride. When many owners reach the peak of their business success, they wonder where they go from there. Whether you’re approaching, at, or getting farther away from the peak of your success, the answer is likely the same: The next step is planning for the future of your business and your ownership.
The tricky part is making time to do the planning. It may seem like you have years and years to begin planning for future success, but that isn’t always true. Though it may seem impossible to think through all the important considerations that are involved in your ultimate and inevitable separation from your business, doing so is also an opportunity to take as much control over the future as possible.
We believe that the most effective way to position yourself for future success is to begin a three-step process. Each of these steps can help you answer questions about your current ownership, how you picture the rest of your life, and how your decisions can affect people and things you care about.
Determine How Much Money You Need to Become Financially Secure
Do you know how much money you spend each year? How many different perks do you take as the owner of a successful business? How much money would you need—for yourself and anyone who relies on you—to never have to work another day in your life? These are just a few questions you should ask yourself.
If you cannot answer these questions with confidence, it’s difficult to know how much money you need to be financially secure. Financial security is important because it can give you the freedom to do exactly what you want with your future. Whether that means selling your business and retiring; transferring ownership to someone inside the business, like a child or employee; or working through your last breath, working toward financial security gives you and the people who depend on you a cushion if something unexpected were to happen, and confidence if you want or need to separate from the business.
Of course, if everything goes as planned, you can achieve financial security and all the freedoms that go along with it. So, knowing how much you need to be financially secure can be a big win-win situation.
Decide What You Must Do to Reach Your Financial Security Goal
Once you’ve figured out what you need for financial security, you should consider how you’ll get it. Ask yourself whether there’s anything you can do within the business to improve cash flow and profit. Find out whether you’re investing non-business assets in ways that will help you reach your financial security goal. Figure out how you can use the strength of your business—which is likely your largest asset—to pursue financial security.
Determine What’s Important to You
Financial security might be the most important aspect of planning for future success, but it isn’t the only thing. Many business owners focus so much on their financial goals that they forget to think about more intangible goals. For example, if you could guarantee yourself financial security by selling your company to someone who has told you that he will lay off everyone in your company, would you do it? If you wanted to transfer your ownership to a key employee who is exceptionally talented but treats his co-workers poorly, would you do it?
These intangible, or values-based, goals play an important role in your planning for future success. Business owners can easily disregard these goals and come to regret it in the later stages of their planning. Values-based goals matter, and they can affect how you pursue your overall financial goals. That’s why it’s important to consider them early in your planning process.
Making these determinations and decisions isn’t something you must do alone. If you’d like to talk about using a process to plan for your future success, please contact us today.
Olympus Tax, Business and Insurance Solutions, Inc.
4600 Roseville Road, Ste 150 / 260
Sacramento, CA 95660
There are many things for you to consider as you think about the future of your business ownership: When is the right time to move on? How much money will I need? How do I even sell this business? These questions dovetail into an important decision you’ll try to make early in the process of planning your future: Whom you’ll sell or transfer your ownership to.
At the end of the day, business owners can sell to two different types of buyers: insiders or outsiders (also referred to as “third parties”). There are different flavors of insiders (e.g., children, key employees, co-owners, and even ESOPs) and third parties (e.g., competitors, venture capitalists, private equity groups, strategic buyers), and owners sometimes get bogged down in what seems like an endless supply of options and strategies to plan for the future of their businesses. However, whether your goal is to sell to an insider or a third party, it’s important to understand that, no matter what, third parties set the standards by which we judge just about all ownership transfers.
It may sound odd that a third party can set the standards of an ownership transfer even if you wanted to transfer your ownership to, say, a family member. But professional buyers, such as private equity groups, set the terms of ownership transfers based on their experience with buying businesses, their competition with other buyers, and their abilities to find strengths and weaknesses in potential acquisitions. In short, they know what makes successful businesses successful, and they demand that the businesses they buy have the elements of a successful business. Like professional buyers, just about anyone else you’ll look to sell to will want those same things.
So, even if your dream is to transfer your ownership to your children or employees, it’s important for you to prepare your business for a third-party sale. Let’s look at three reasons why.
1. Professional buyers determine value.
Professional buyers have the experience, resources, and understanding of the market to find what makes a business successful. They know what a strong management team looks like, they know what good operating systems look like, and they often know how to leverage a business’ strengths beyond what the current owner can do. Thus, they are the arbiters of value.
Because professional buyers can determine a company’s value, it’s wise to build your plans around what professional buyers look for in a potential acquisition. If a professional buyer would value your company highly, it’s likely that other third parties and insiders will do the same. Additionally, if a professional buyer values your company highly, it can mean that your business has elements that make it run smoothly whether you’re present or not.
2. Many buyers want similar elements in their businesses.
Many buyers want strong management teams, a competitive advantage, and a proven growth strategy in place before they buy a business. This is true of professional buyers as well as insiders. Insiders—especially children and co-owners—can develop a blind spot for the company’s weaknesses and take its strengths for granted. This can put you at risk if you’re relying on the company’s performance to provide your income after you exit. On the other hand, if you propose that your top managers take over ownership, they may start to scrutinize flaws in the business, creating skepticism and uncertainty.
You can position yourself to mitigate these risks by planning as though you needed to impress a professional buyer. Again, if a professional buyer sees the value in your business, it’s likely because it has certain elements that allow it to run smoothly, whether you’re in control or not.
3. Third-party sale planning gives you an out.
Sometimes, transfers to insiders can fall apart even with the best planning. For instance, a family member or key employee may decide that the pressures of ownership aren’t worth the benefits and pull out at the last moment. Or, a co-owner you hoped to sell your share of ownership to may realize they aren’t cut out to fill your role. By preparing for a third-party sale even when you don’t intend to sell to a third party, you can give yourself an out if the insider you choose can’t or won’t take the reins.
Many of the big picture elements that go into third-party sale planning apply to planning for an insider transfer. If you’d like to evaluate or begin your plans for the future of your ownership, please contact us today.
Edward W. Cotney
Olympus Tax, Business and Insurance Solutions, Inc.
4600 Roseville Road, Ste 150 / 260
Sacramento, CA 95660
The reasons for selling a business can be divided into two main categories. The first is a sale that is planned almost from the beginning or by an owner who knows that selling is or should be a planned event. The second is exactly the opposite – unplanned; the sale is motivated by a specific event such as health, divorce, business crises, etc. However, in between the two major reasons, are a host of unpredictable ones. Every business owner will eventually exit their business… should you create a plan to sell your business?
A seller may not even be thinking of selling when he or she is approached by an individual, group or another company, and an attractive offer is made. The owner of a business may die, and the heirs have no interest in operating it. A company may bring in new management who decides to sell off a division or two, or maybe even decides that selling the entire business is in the best interests of everyone.
A major competitor may enter the market, forcing an owner to elect to sell. And the competition may not just be another company. The owner of a business may realize that an external threat is such that the company will lose a competitive advantage. New technology by a competitor may outdate the way a company produces its products. Two competitors may merge, placing new pressures on a company. The growth of franchising and big box stores can promote themselves on a much larger scale than a single business, no matter how good it is. National advertising can create the perception that a large business’s pricing, inventory or service is better than the smaller competitor, even if it isn’t.
Although these issues may not push a business owner or company management to consider selling, they are certainly causes for consideration. Unfortunately, most sellers fail to create an exit strategy until they are forced to. Professional athletes want to go out on top of their game, and business owners should do the same. It’s much easier to find a buyer for a business that is thriving, vs. a business that is past it’s prime.Read More