Planning to Sell
Have you planned for your sale?
Here’s an small overview of 7 Steps to Planning.
Step 1: Setting Exit Objectives
Do you know exactly what your retirement goals are – and how much cash it will take to reach them?
Step 2: Determining Value / Price
Do you know how much your business is worth today?
Your business is typically your most valuable asset. But only exit planning for a sale will help achieve maximizing value.
Yes, increasing income while minimising expenses is one way, however different businesses have different value drivers.
Step 3: Preserving, Protecting, Promoting Value
Do you know the best way to maximise the income stream generated by your ownership interest?
Preserving involves exit planning activities such as annual review of financial statements; business plan review and update; individual planning update; use of trusts; employee share ownership plan; annual update of value.
Protecting value from creditors includes annual fiscal and legal audit; risk management review for liability and casualty insurance coverages; remove personal guarantees and assets from use as business collateral.
Promoting value is key in exit planning and involves focusing on the value drivers.
Value drivers are factors that affect the value of the business. As such, investors and lenders look for the business’ performance in these areas.
Universal value drivers include: increasing cash flow; developing operating systems that improve sustainability of cash flows; improve facility appearance; pay down debt; document sustainability of earnings; implement a strategy to grow the company; build a strong management team and groom a successor;
Industry specific value drivers would include things such as stability of growth; inherent growth rate; return on working capital and receivables and inventory turnover; technical expertise; diverse and attractive customer base; corporate structure; employee performance.
Motivating and keeping key employees is critical, by providing a capable management team for the potential buyer, will increase the value of the business.
Step 4: Converting Business Value to Cash – Sale to an Outside Party
Do you know how to sell your business to a third party and pay the least possible taxes?
Planning and preparation are critical here. As is getting the right help from an investment banker or business broker. Following an exit planning process pays big returns!
Step 5: Transferring the Business
Do you know how to transfer your business to insiders [family, employees, co-owners] while paying the least possible taxes and enjoying the maximum financial security?
The key concept here is to maximize income and therefore cash flow while minimizing ownership value.
Step 6: Contingency Planning
Do you have exit planning for your business if the unexpected happens to you?
Four major problems arise on the death or disability of a business owner. Exit planning is used to solve these problems.
1. Continuity of business ownership
Sole proprietors need to plan to secure continued services of employees; funded with sufficient life insurance to pay bonuses during the transition. Communicate your wishes in writing to spouse and advisors about key employees to assume responsibility; advisors and others who can be consulted during the transition period; to whom the business can be sold if that is your wish.
Multi owner business should use an up-to-date and adequately funded buy-sell agreement to enable remaining owners to acquire deceased’s interest. The agreement must cover such events as death; disability; right of first refusal on transfer to third party; termination of employment; retirement; involuntary transfer due to bankruptcy or divorce; business dispute amongst owners.
2. Loss of financial resources can be relieved somewhat by creating successor management; funding with life insurance to replace immediate losses and provide ongoing capitalisation.
3. Loss of key talent can only be mitigated by having employees who can assume responsibility. If they have to be found, provide enough funding with life insurance to find and train replacements.
4.Loss of employees and customers might be mitigated if successors can maintain cash flow and confidence of employees and customers. You will need a plan that must be funded to pay the bonuses to compensate those who stay; and a succession management plan naming the person[s] to take over. Decide now about whether sale, continuation or liquidation is best. Employees and customers want and need to know this.
Step 7: Wealth Preservation
Have you taken steps to protect your family’s wealth?
Exit planning is needed now – transfer of ownership might occur without notice!
Funding for anticipated needs – liquid assets; life insurance; sale of a business.
Decide and communicate who is in charge of the estate and the business.