Transitions Digest

By Chuck Chrissis, The Growth Coach®

Equally important to thinking and acting like a CEO is the opportunity to become a sculptor of your business. Make time to craft and mold your business so it will run more effectively and deliver more consistent results. Actively shape and re-shape it to make operations smoother and more efficient. Turn chaos and confusion into order and discipline. Rising customer satisfaction and more predictable profits will follow. It’s time to standardize and document your business.

Challenge old beliefs about how your business should work. It’s never too early or too late to shape or re-shape your business. It doesn’t matter if your business is 20 years old, 2 years old, or still on the drawing board. Begin to mold the company to run without you being woven into its very fabric. Design it to run without you supplying all the energy and effort. You can’t control everything and everyone, nor should you. In short, behave like a strategic business owner. Let go!

Do this by creating more than simply a job for yourself. The ultimate goal of starting a business is to sell it one day at the highest possible premium to your employees, family members, or an outside buyer. You deserve an acceptable return on your time, talent, and capital.

No matter the size, age, or industry, every business should be prepared to be sold. Yours is no different. This “start with the end in mind” strategy should help focus you on building an effective business model that doesn’t have you at the center of its universe and doesn’t rely on your presence, personality, and perspiration for its success. In other words, you should not be the business and the business should not be you. This work-in-reverse approach not only maximizes your selling price, but minimizes the challenges and headaches while you own and run the business.

As mentioned earlier, your goal is to design and re-design your business to work without you. Your business model should be sculpted in such a way that it can be replicated easily and often in cities across the country and around the world. All that’s necessary is your vision, not your physical presence and exertion. Whether you intend to expand or not, such a goal will help focus you on building a systems-dependent, not owner dependent business that will generate repeatable performance and consistent results.  And you must get others to help. Without them you don’t run a business – you work a job.

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What is an effective business system? It is simply an integrated web of separate processes, procedures, and policies. A business system is your documented instruction manual for “this is what we do, and how we do it” at our company. A business system allows you to get consistent results through other people. What tremendous leverage and freedom that can give you!

Some typical operating processes are:

• Selling
• Marketing
• Manufacturing
• Inventory Management
• Order Processing and Fulfillment
• Customer Service
• Billing and Accounts Receivable
• Procurement and Accounts Payable
• Facilities Management
• Accounting and Finance
• Human Resources
• Information Systems

With such processes fully identified and explained, your employees will deliver amazing consistency by minimizing employee discretion. Such a system will also free you from having to touch every transaction, make every decision, answer every question, and solve every problem. You can manage by exception! Such a carefully crafted approach affords you breathing room to think and behave like a strategic business owner. You will also have time for the personal activities that matter most to you.

Without a business system in place, it’s unlikely you will be able to obtain a premium price for your business. A potential buyer may be unwilling to invest in an enterprise that is dependent solely on you for its day-to-day operations and survival. If it’s obvious that you are held hostage to your business, you may not realistically expect to achieve a sale price you find acceptable. If it’s obvious the business is systems-deficient, then it’s unlikely an objective third party will offer you a price that reflects the time and effort you have put into your business. Rather, emotion, not reason will come to rule the transaction and may very well derail it.

To maximize your company’s eventual selling price, realize that buyers want to acquire a smoothly-running, money-generating machine. They want to purchase a business system that runs on near autopilot. They want to buy a fully documented and organized business system that gets predictable results. They desire an asset with a proven track record, predictable revenue stream, and growth potential. Give them this by first taking the opportunity to step back, let go, and become a sculptor of your business.

 Let us know your insights by commenting on our blog post below.  

By Chuck Chrissis
The Growth Coach®

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly A. Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on October 29th, 2009 under Building Value, Business Growth, Entrepreneurship, Exit Planning Digest. Tags: business processes, coaching, Exit Planning, exit strategies, process of selling a business. Comments: None

By Holly A. Magister, CPA, CFP®

Without a single doubt, there is only one obstacle or “deal breaker” that I have come across over the years that is insurmountable.  And it always surprises the Seller.  “What could that be?” you are wondering.
 
Well, before we get to that, let’s talk a bit about what makes a business valuable after the Seller departs for his/her golden years in retirement. 
 
A Buyer wants a business that will sustain itself in good times and in bad times.  Recently, we all have learned what those “bad times” feel like in more ways that most of us can count.  Those bad times have brought havoc to virtually every industry across every nation.  Long term sustainability requires a business cash flow to have a “quality” about it.  Positive cash flow is not sufficient; instead it must be cash flow that will endure.  (Cash flow quality will be covered in a subsequent article.) 
 
A Buyer wants a business that is not riddled with conflicts, lawsuits, and the like.  Essentially a poor reputation in the marketplace and local business community is very unattractive.  Nonetheless, it is typically not a deal breaker.  Many Buyers will take on such a challenge hoping their own ethically sound business practices will repair and rejuvenate the business and its future prospect for success.
 
A Buyer wants the Seller to be truthful about its past operations and future opportunities.  This is why we recommend you hire the best accounting firm you can afford to assist you in preparation of your financial statements if you intend to sell your business in the next three-to-five years.

A Buyer wants to know that the day the founding Entrepreneur receives his/her equivalent to the corporate “golden parachute”, that the business will continue to operate without a misstep.  Indeed, this is where deals break down.

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In all my years working closely with founding Entrepreneurs, I still find it highly unusual to find one truly preparing their business for that day.  Most Entrepreneurs are very good at doing many tasks.  You know them too…Jack of all trades!   It is their innate ability to do many things well that gave them the courage and energy to start their business in the first place.   No one is better suited to succeed in a business endeavor than someone who can handle many tasks coupled with endless stamina.  And for most founding Entrepreneurs, delegating anything to others is difficult at best!

Regardless of the stress that delegation to others may cause the Entrepreneur, it is wise and necessary to begin the process of delegation sooner than later.  When a buyer looks seriously at a business for its long term financial opportunity, they want a business that operates without the founder.  And they want to know that it has been operating without the direct contribution of effort from the Entrepreneur for a reasonable period of time. 

When the situation is not one where the business operates through the efforts of key management and other employees, many Buyers lose interest and walk away.  If they are willing to take on the challenge to replace the efforts and talents of the Entrepreneur post sale, the price paid is either reduced or contingent on future success of the business.  Neither consequence is a good one! 

Unfortunately, when the Entrepreneur receives negative feedback from a potential Buyer regarding the need to “replace” the CEO, they often say “I wish I knew the importance of this issue years ago”.   Don’t underestimate this matter and be one of those disappointed Entrepreneurs.

 Let us know your insights by commenting on our blog post below.  

Holly A. Magister, CPA, CFP
Enterprise Transitions, LLP

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly A. Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on October 29th, 2009 under Building Value, Entrepreneurship, Exit Planning, Exit Planning Digest. Tags: business planning, Exit Planning, exit strategy, planning for retirement, process of selling a business, sell a business, sell businesses, sell my business, selling a family business. Comments: None

Part 4

Recently I took my nine year old daughter and a carload of her friends to our town’s Volunteer Fireman’s Carnival for an evening of ferris wheels, funnel cakes, and laughter–of course!  It was a Friday night after a long week.  Truly, I would have benefited from a simple dinner at home to unwind from the week.  Sound familiar?  However, I intuitively knew that the laughter of those children was most important and desperately needed…so off we went.
 
As the girls were getting out of the car, they caught sight of the ferris wheel in the distance and the excitement erupted into chaotic squeals, giggles and laughter.  I found myself feeling a bit nervous for their safety as the other cars were moving in and out of the parking spaces nearby.  I regained their attention and reminded them that they promised me to apply the buddy system to keep safe.  All was well…
 
In typical fashion, the Fireman’s Carnival delivered all that was anticipated.  It rained all week, so the grounds were like a mud filled sponge and no amount of hay can fix that.  It always rains during the week the carnival comes to our town.  The children never take notice of the condition of their shoes.  It is all about the laughter. 
 
When I was nine, I loved carnival rides too.  Another mother and I were lamenting the fact that somewhere between the age of 21 and childbirth the ferris wheel went from thrilling to terrifying.  How does that happen?  I think it is just about the same time that we adults forget how to laugh. 
 
Among my successful Entrepreneur clients, I observe that they know how to keep all of their troubles in perspective.  Simply put, they have not forgotten how to laugh!  And given the times we live in, they have been laughing a lot!  Don’t get me wrong, they do not disregard reality or not take their business or life seriously. They keep perspective and know the value of childlike laughter! 
 
After an evening of laughter, it was time to return home with our funnel cakes “to go”.  Dad and big brother were waiting for them.  As we returned to our car, we found ourselves “in trouble”.  No, I am not kidding.  As we approached my car, a Policeman asked me if I was Holly Magister and if that was my car?  Never a good question when posed by a Police Officer!  His cruiser cornered me and my car in and his spotlight was squarely on me!  “Yes, officer.  What is wrong?”  I replied.  My panic-struck heart was pounding and my nine year old began to cry.
 
Truly, my first thought was that someone died and they were trying to find me to deliver the news.  What else could it be?  My daughter thought I was going away in handcuffs forever because that is what she sees on TV.  She never saw a Police Officer that close before–one that knew my name.  They were looking for my mom!
 
The Officer told me that “the white SUV next to me suffered a “door ding” and he was there to investigate the accident.”  “Is this truly necessary?”  I asked the young man who was standing next to his prized mode of transportation.  (Okay, if you have read my earlier blogs, you know that I ask this question a lot!) With no reply to my question, I asked it another way… “Did you have to call the Police?”
 
It turns out that the nine year old’s chorus of squeals, giggles and laughter muffled the sound of the “door ding” that the neighboring SUV suffered several hours earlier.  And the young man felt that he needed the protection of the Police to make certain that justice would be done.  This young man discovered his “door ding” and decided to wait for me to return to my car.  He waited more than two and one half hours! 
 
The Police Officer informed me that it was his “job to determine if the door ding was inflicted with malicious intent or by accident.”  I replied, “I do not know any nine year old that would have malicious intent of any kind and I am grateful for that!”  He was not pleased with my reply and further informed me that he “did not want this to get ugly”.  Regardless of the absurd situation, I decided to save my sharp tongue and sarcastic sense of humor so the Officer did not feel compelled to take me away!  Besides, the funnel cakes were getting cold.
 
Today, I learned that the body shop did not consider the SUV’s injury to be a “door ding”, instead it was a “paint transfer”.  And it would take only $554.73 to make it go away!
 
The white paint from the SUV that was “transferred” onto my blue car was undetectable after a $6.00 wishy wash at the gas station.  What a bargain!  But here is the best part…after my car was washed, the shine revealed no less than 11 “door dings”.  Real ones! 
 
As I share this story with you, and more recently my family, I am reminded of the numerous “door dings” we endure as Entrepreneurs, parents, and humans for that matter!   And I believe that it is the endurance and perspective gained along the way, not the removal of the door dings, that make the difference!  To know that the door ding the white SUV suffered was because of a child’s excitement and laughter put a smile on my face.  Are you smiling?
 
As for my door dings, all eleven of them, they are not going away!  They serve to remind me daily what really matters… endure, keep perspective and remember to laugh every chance you have!
 
Let us know your insights by commenting on our blog post below.  

Holly A. Magister, CPA, CFP
Enterprise Transitions, LLP

Read Previous Articles in the Series:

Part1:Troubled Waters Part 1
Part2: Troubled Waters Part 2
Part3: Truly Necessary in Troubled Waters

Posted on September 15th, 2009 under Building Value, Business Growth, Economy, Entrepreneurship, Exit Planning. Tags: Entrepreneur, Entrepreneurship, successfull entrepreneur. Comments: 3

Step 7

 The last step in your Exit Plan is Wealth Preservation Planning. But that doesn’t mean you should wait until you are out of the business to begin actively preserving your wealth. In fact, if you wait until the value of your business is converted to cash, it may be too late to realize all of the benefits of wealth preservation. The most significant and powerful claimant to your wealth is the IRS — especially in the estate tax arena.

George opened our meeting almost apologetically. “I knew I’d waited too long to begin gifting part of the company to my kids when I met with my CPA. She told me that, based on the company’s pre-tax cash flow of $2 million per year, the company could be worth as much as $12 million to a third party. I had no idea! Since I don’t need that much, I want to transfer at least half the value — at a lower valuation of course — before any possible sale. I’m looking at millions in gift taxes.”

George hired a Certified Valuation Analyst (CVA) who valued the business at $9 million, a conservative but supportable valuation. The company’s stock was recapitalized into voting and non-voting stock. Based on current tax case law, the CVA knew that she could justify discounting the value of non-voting stock (or a gift of a minority interest of the voting stock). In her opinion, the minority discount was 35 percent of the full fair market value of the stock. Even with the 35 percent discount, however, a gift of half of the company (now reduced to a gift of approximately $3 million) would cause the payment of a gift tax of approximately $500,000.

Like you, George was not particularly keen on paying a tax of $500,000. So he didn’t. And he still gave away 50 percent of the company to his children. He did so by using the biggest lever in the Wealth Preservation Transfer Game: a “GRAT” — a Grantor Retained Annuity Trust.

A GRAT is an irrevocable trust into which the business owner (and the Trustee of the GRAT) transfers some of his stock.

The GRAT must make a fixed payment (annuity) to the owner each year for a pre-determined number of years (in George’s case, four years). At the end of this period, any stock remaining is transferred to the owner’s children.

Stock transferred into a GRAT is treated as a gift — the amount of which is the value of the asset transferred minus the present value of the annuity which the owner will continue to receive. (George’s advisors made sure that the present value of the annuity paid out over four years equaled the value of the stock transferred into the GRAT — therefore no gift was made by George.)

Another key to a GRAT’s success is the transfer of an asset that appreciates in value and/or produces income in excess of 120 percent of the federal mid-term interest rate. This rate fluctuates monthly; for examplpe, the rate varied from 7.5% to 2% in the period 2003-2009.

Let’s summarize what George did:

1. He transferred one-half of a business with a fair market value of $9-$12 million to his children in four years using none of his lifetime exemption.
2. He continued to receive all of the income from the company during that four-year period, because the annuity payment to George was designed to equal the amount of income expected from the stock transferred into the GRAT.
3. At the termination of the trust (four years) the trust asset, consisting of one-half of the company, was transferred to trusts for George’s children, free of any gift tax.

These trusts were in turn established by George when the GRAT was created and contained his wishes regarding when, and if, the children were to receive money from those trusts.

This is huge leverage. And best of all, planning techniques such as GRAT’s and the careful use of minority discounts, as well as a variety of other estate tax avoidance techniques, are likely available to you and your family.

Your financial, legal and tax advisors can provide you with more information about this aspect of the planning.

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly A. Magister, CPA, CFP®) offers you unbiased information about what you may need to know.  Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Complete Series

Step One: Setting Exit Objectives
Step Two: What is My Business Worth
Step Three: Working On - Not In - Your Business
Step Four: Getting Top Dollar for Your Business
Step Five: Transferring the Business to Children or Employees
Step Six: Planning for a Rainy Day
Step Seven: Preserve Wealth: Give it Away!

Posted on July 15th, 2009 under Building Value, Exit Planning Digest. Tags: Exit Planning, Grantor Retained Annuity Trust, GRAT, retirement, sell a business, sell businesses, selling a family business, wealth preservation transfer. Comments: None

By Holly A. Magister, CPA, CFP®

Do you know what is truly necessary?
 
With the multiple changes in the marketplace over the past six months or so, many Entrepreneurs find themselves overwhelmed.  They are reacting to client demands, changing vendor and employee relationships, increasing costs, and dwindling resources–financial, human and even their own energy.  They go home at the end of the day not truly knowing if they made any progress.  And that day was likely a 12-to-15 hour day! 
 
Does this sound familiar?  If so, know that you are in good company!
 
As you endure the chaos, it is impossible to have the insight to recognize what is truly necessary and what is distracting you from your best work and opportunities.  Unless, you stop and make a point of asking yourself “is this truly necessary?”
 
In many cases, Entrepreneurs spend inordinate amounts of time dealing with the matters that really mean the least to their future success.  And by doing this, they are expediting their failure.  Do you fear failure?
 
To ensure success, you must take time to reflect on matters that are critical and clearly understand and focus on the matters that are truly necessary every day.  As far as those matters that are not truly necessary, stop addressing them now! 
 
When you recognize how distracting those unnecessary matters are, you will quickly recognize the numerous expenses you will be able to eliminate when you let go of the unnecessary.  That is the good part!   When you eliminate the unnecessary, your life is simplified, some (maybe many) of your expenses are eliminated and your profit increases!  In my experience, “eliminating the unnecessary” has the potential to transform your business, your outlook as an Entrepreneur, and you.
 
Over the past few weeks, I have been sharing my insights through this blog series about how successful entrepreneurs are navigating the troubled waters we all share.  Successful Entrepreneurs are courageous as they consider their numerous options, they utilize their resources and eliminate the unnecessary.  And without exception, they understand the importance of the last principle…they find the humor in the situation.  In very simple terms, they laugh.  They apply this principle often!
 
I will share more about humor in my next blog posting.  In the meantime, stop and ask yourself “what am I doing today that is not truly necessary?”  Let us know your insights by commenting here.

Read the Previous Articles in this Series

Troubled Waters Part 1
Troubled Waters Part 2

Posted on May 20th, 2009 under Building Value, Business Growth, Economy, Exit Planning. Tags: Entrepreneur, Increasing Costs, Profit, Profitability, Simplify, Successful Entrepreneur. Comments: 1

By Holly A. Magister, CPA, CFP®

As you navigate these troubled waters, what resources do you draw upon?

Many good-intentioned entrepreneurs confuse being courageous (the subject of my last blog) with the notion that during difficult times they must become Lone Rangers in order to survive.  What I have observed is the truly successful entrepreneurs do the exact opposite.  They instinctively recognize the value of their resources and know exactly when to draw upon them for help.  Instead of retreating to their early days of entrepreneurship, where they were “rugged individualists” by necessity, they call upon the people, companies, and other resources from the past that have consistently provided them with “best of their breed” performances.  And if for some reason, they do not have access to such a resource in their time of need, they find them.  Someway, somehow they find them.
 
As your business is occupying its position in the marketplace today, the world is changing.  Really, really changing.  Stop for a minute and ask yourself the following question: “What is different today in my marketplace than one year ago?”  If you cannot list at least three differences, your head is buried in the sand.  And if that is the case, you have permission to stop reading this now.
 
With your list of three (or more) differences, you have the place from which you should start to work.  You must deal with these differences NOW to survive today AND thrive in the future.  This is where those valuable resources (old and new) become critical.
 
So how do you know if the resources you have drawn upon in the past, or are considering for your current and future needs, are truly “resourceful”?  Or do they simply go through the motions?  I recommend asking yourself if those resources have delivered, kept promises, or maybe even exceeded your expectations. Are they creative and capable of providing a point of view that may not be popular?  Is their advice, service and attitude one that makes you feel as if they truly are concerned about YOU?  The truly valuable resources in your world should not be afraid to make changes to the way they deliver their products and services to you.  They should be flexible, open-minded and capable of adapting to the troubled waters we are all sharing.  Technology and the knowledge base is changing and growing rapidly.   Your resources should be adopting these advances and excited to share with you the benefits from doing so.
 
One of my favorite quotes of Warren Buffett is “You never are hit by the bus that you are looking at.”  How so true, on so many levels!
 
The successful entrepreneurs that I work with have been run over by more than a few busses.  The difference between the successful ones and the rest is the attitude they carry as they react to the situation and the resources they have to draw from to help them.
 
Before you pull out your PDA to call upon your resources, we need to make certain you are applying them to the things that really matter.  And that leads me to the subject of my next blog–principal number three–Eliminate the Unnecessary.  In the meantime, think about your resources…Are they resourceful?
 
Read Trouble Waters Part 1

Posted on May 8th, 2009 under Building Value, Business Growth, Economy. Tags: Building Valuable Businesses, Business Growth, Business Resources, Economy, Entrepreneur, Growth Resources, Successful Entrepreneur, Warren Buffett. Comments: 1

Step 4

What is a good way for you to get top dollar for your business?

First, consider selling to an outside third party, not to an insider such as a child, key employee or co-owner. Outside third parties typically have the cash and the ability to pay a higher earnings multiple for your business.

Secondly, proceed through planning steps prior to putting your company on the market. These steps, (discussed in the previous three issues of The Exit Planning Review™) are:

• Setting your Exit Objectives;
• Determining the value of your business;
• And, most importantly, taking action to implement and enhance the Value Drivers in your business.

Third, once you have maximized the value of your business, undertake the proper sale process which, if properly conducted, can potentially put more money in your pocket.

Let’s look at how the sale process itself can make you money.

Basically, there are two ways to sell your company to a third party:

• A negotiated sale; or
• A controlled auction.

Maximizing the amount of cash you receive upon the sale of your company is the business owner’s equivalent of hitting the game-winning home run. To hit this one out of the park, you must know what to do before you approach the batter’s box. So, too, with a sale to a third party.

Gary Reese, owner of Reese Diamond Importers, had been approached by a national competitor. Preliminary negotiations led to an offer of $7 million for the company. Before he accepted this offer, he called me with the good news. I urged him to contact an investment banker to orchestrate a controlled auction — a strategy Gary thought would scare off his suitor. The strategy scared the suitor alright — it offered another million dollars to avoid the auction. Gary subsequently hired the investment banker and sold his company (to another suitor) for $13 million cash. How?

First, Gary was clear about his objectives. He told his investment banker exactly what he needed financially, when he wanted to exit, how long he was willing to stay and in what capacity, and which companies he absolutely would not sell to. Using those criteria, Gary’s investment banker developed a buyer profile and began to market the company.

Next, the investment banker developed a Deal Book, which told the story of Reese Diamond Importers. Qualified suitors signed confidentiality agreements and were sent the Deal Books. After studying the Books, three suitors entered the controlled auction in which they bid against each other for Gary’s company. The auction concluded when Gary selected the suitor that met his financial objectives and other Exit Objectives and signed a non-binding Letter of Intent outlining the terms of the purchase.

The buyer’s attorneys completed the Due Diligence process (learning everything about Reese Diamond Importers as they drafted) and negotiated the definitive Purchase Agreement. The closing was held and Gary left the table with $13 million in cash.

If, as in Gary’s case, a sale is properly organized and orchestrated, the process can help to increase the amount of cash an owner receives. In other words, Step Three, “Working On — Not In — Your Business,” can help to increase your sale proceeds by making your company inherently more valuable. Step Four can help increase the cash you take from the closing table by properly managing the Sale Process.

Contrast the sale method used to sell Gary’s business (a controlled auction) with the negotiated sale. In a negotiated sale, a buyer has identified your company for acquisition and you have decided to sell to that buyer. The buyer controls the timing, the cash, and generally has more leverage in negotiations.

A controlled auction introduces your company to a pre-selected list of qualified buyers. The key to a controlled auction is to have multiple buyers, bidding for your company at the same time, each having identical information and each being financially qualified to acquire your company. As a seller, you can get top dollar when these buyers compete against each other for the opportunity to purchase your company.

Controlled auctions are not a one-size-fits all proposition. They work best when:

1.     The value of the company is at least several million dollars and large enough to attract the interest of multiple buyers.

2.     An owner’s transaction advisors are skilled and experienced in conducting controlled auctions. (This advisor is usually an investment banker or, for smaller deals, a business broker.)

Getting top dollar for your business requires more than having the best possible business to sell. It also requires selling your business using the method best suited to extract top dollar from the buyer’s checkbook.

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly A. Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on May 3rd, 2009 under Building Value, Exit Planning, Exit Planning Digest. Tags: business value, Exit Planning, selling business. Comments: 6

Step Three

What are Value Drivers? And why are they so important to you and your company? Value Drivers are the various characteristics of a business that professional buy-out experts believe drive business value upward and for which they are willing to pay top dollar. It is vital for you to know what these value drivers are if you want to successfully exit your business.

In Steps One and Two of The Seven Step Exit Planning Process™, you establish your Exit Objectives and determine the value of your business. Driving business value upward is a necessary step if, as is so often the case, you determine that the value of your company is not sufficient to satisfy your financial objective. During Step Three, you create the additional business value and cash flow necessary to help achieve your financial objectives.

To increase business value, you must target those same elements of a business that professional buy-out experts believe drive a business’ value upward and for which they are willing to pay top dollar. These elements — characteristics that both help to reduce risk and improve return — are commonly referred to as “Value Drivers.”

Value Drivers come in two varieties: generic (common to all industries) and industry specific. The generic Value Drivers are:

• A stable and motivated management team;
• Operating systems that improve sustainability of cash flows;
• Operating profit margins, at least as good as industry average;
• A solid, diversified customer base;
• Facility appearance consistent with asking price;
• A realistic growth strategy;
• Effective financial controls; and
• Good and improving cash flow.

Your industry also has specific or unique Value Drivers. For example, if you have a distribution company, a potential purchaser would look at the strength of the manufacturers you represent, the number of inventory turns per year, and the level of technical expertise your sales force possess.

For MMI, a number of Value Driver tools and techniques could have been used to motivate and keep key people. These tools included:

• Stock option, purchase or bonus plans subject to forfeiture if the key employees left prematurely;
• Non-qualified deferred compensation plans — with vesting — to encourage key employees to stay;
• A richer benefit package; or
• A defined succession plan, which included the key employees

All of these tools can be designed not only to motivate and keep your top people — an essential Value Driver itself — but to reward them based on their efforts and success in driving business value upward. Look at your own business. Do you have an incentive system that:

• Is substantial in the eyes of the key employee?
• Has written performance standards, the attainment of which by the key employee not only results in a bonus to the key employee, but also increases the value of the company?
• Is part of a defined, written plan, communicated to the key employee?
• “Handcuffs” the key employee to the business by making it difficult for him to leave the business without forfeiting significant financial benefits?

As you can see from MMI’s example, creating and fostering Value Drivers is crucial whether you simply wish to put more money in your pocket every year, or whether you want top dollar by selling your company.

It bears repeating that we believe you should concentrate on Value Drivers because that’s what professional buyers may deem important and if they deem it important, it probably is. After all, they should have considerable experience in analyzing what increases a company’s value.

How do you implement Value Drivers in your business?

• First, learn more about Value Drivers by contacting us.
• Talk to your advisory team members, especially your financial/insurance professional, your CPA, and perhaps business consultant or attorney.
• Stand above the fray at least one-half day per month. Look at your business through the eyes of someone interested in buying it. What do you see that would cause you to pay top dollar for your business? What would cause you to pay less for your business? When answering these questions look both at what your business is doing, as well as at what it is not. Viewing your business in this way is what we mean by working on your business, not just in it.

By increasing your knowledge, by working with capable advisors, and, most importantly, by thinking about what the business needs to become more valuable, you can work to put into place the elements necessary to drive the value of your business upward.

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this newsletter (Holly Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on April 17th, 2009 under Building Value, Exit Planning, Exit Planning Digest. Tags: Exit Planning, Value Drivers. Comments: 3

By Holly A. Magister, CPA, CFP®

The first quarter of 2009 was brutal on virtually all fronts. During my twenty-five years of practice working with Entrepreneurs, I have never witnessed more chaos in the marketplace. Never.

Clients, vendors, employees and other resources that once were reliable relationships, a “known quantity” so to speak, have made moves that no one would have predicted–even 90 days ago. So, here you are…the Entrepreneur without a roadmap. What is one to do?

I believe that as an Entrepreneur you must apply four principles as you navigate these troubled waters…Find Courage, Draw from your Resources, Eliminate the Unnecessary, and Look for the Humor. Without doubt, looking for the humor may be the hardest principle to apply because nothing appears to be very funny at this point. We will get to that principle, however today’s blog is intended to highlight the first principle Courage.

In one of my recent blogs, I shared my belief that it is critical to Make No Assumptions. The first principal “Finding Courage” is necessary if you plan to “Make No Assumptions”. Not all Entrepreneurs are capable of making no assumptions and frankly the real winners are the ones who have enormous amounts of courage!

What does courage look like? In my travels, I have found numerous courageous Entrepreneurs. They know they must be brutally honest with people they love. Sometimes they must remove an employee that simply is not (and has not been) productive. Often they truly love that employee. I hear comments like “This is really tough, he is my son’s best friend since grade school…We all went to their daughter’s wedding.” But the truth is this employee is not cutting it and he is the bad apple in the barrel. You know who they are. You do not have to think about it for even a minute. Nonetheless, that bad apple is spoiling your barrel!

Courageous Entrepreneurs also know they are the driver of their business. It was their dream and their vision that drove them to start the business and it their passion that drives them to navigate these troubled waters today. They know they must follow their gut about clients, vendors, employees, and their other resources as they move forward. Yes, the input from others is important. However, the courageous entrepreneur knows deep down inside the people whom are valuable to them and their business.

One of my mentors is recovering from brain cancer surgery and continues to work with me as my coach. His incredible courage teaches me. As he was returning to his work with me only three months post-surgery, he wrote the following note and I want to share it with you: “Find the resources, make the time, come dressed to play, and be ready to win. If a fifty-six-year-old guy with a brain tumor thinks it’s important enough to dress up and come play, you should just come to see if I can still throw the ball.” He is the epitome of courage and one of my most precious Resources.

I will cover principal number two…Draw from your Resources…on my next blog. Until then, I know you will be courageous in those troubled waters.

Read Troubled Waters - Part 2

Posted on April 13th, 2009 under Building Value, Business Growth, Economy. Tags: Business Resources, Economy, Employees, Entrepreneur, Entrepreneurs. Comments: 1