Transitions Digest

Part 6

There may be nothing worse for a business than to have its owner suddenly die. . . especially if it’s your business.

Let’s look at what can happen when an owner dies.

Joe Carpenter was the 55-year-old sole owner of a successful construction company. Joe hoped to sell his company to a third party in the next 18 months.

What Joe needed was a way to ensure that his company would survive if he died or became disabled during that period. Before he could put any plan into place, Joe was killed in a traffic accident. Soon after his death, key employees left his company for jobs with more certain futures. They feared that the company might not continue without Joe’s leadership and personal financial backing.

Their departures caused a decrease in revenues, as well as the default on a number of contracts, which exposed the company to significant liabilities. Long-time customers grew uneasy with what they perceived to be a rudderless ship and took their business to Joe’s competitors. Joe’s bank grew uneasy as well and decided to call in his company’s debt — debt Joe personally guaranteed.

Within weeks of Joe’s death, his key managers were gone, his company defaulted on a number of contracts, revenues plummeted, customers jumped ship and any prospects of securing replacement financing quickly disappeared.

As you can see, business continuity planning is vitally important to your company. Without a well thought out “survival plan,” the consequences to employees, customers and most importantly, your family and estate are dire. (Don’t think that your estate will escape the notice of your business creditors.)

Fortunately, there are a number of methods sole owners can implement today to help avoid the type of business collapse that Joe Carpenter’s business experienced.

First, to keep key employees on board after your demise, offer ownership — perhaps via a buy and sell agreement, or offer additional compensation if key employees continue to run the company. The amount of compensation can be directly tied to company profitability and continued success. As an additional incentive, offer these employees a substantial bonus (called a “Stay Bonus”) for staying with the company — one that can be funded with insurance and that can be accessed in case of your death.

Second, alert your bank to your succession plans. Meet with your banker to discuss the arrangements you have made and show him or her that insurance to affect these plans is in place. Make sure your creditors are comfortable with your succession plan. Ask them what arrangements they would like to see in place.

Third, create a written plan that states: 1) who should take on the responsibility of running the business; 2) whether the business should be sold (if so, to whom) continued or liquidated; and 3) who your heirs should consult regarding the sale, continuation or liquidation of the company.

Finally, work closely with a capable insurance professional to make certain the necessary insurance (such as funding the Stay Bonus) is purchased by the proper entity, (you, your trust or the business) for the right reason and for the right amount.

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

Posted on June 15th, 2009 under Exit Planning Digest. Tags: business for sale, business planning, Exit Planning, process of selling a business, selling business. Comments: 5

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

By Donna Billings, PCC and Jane Patterson, CPPC

You’ve decided it’s time to sell the business. You have an offer. Your advisors are telling you it’s a fair price.  But something is holding you back. 

It’s not unusual for a business owner to come to the brink of sale and then pull back, believing that a better offer is just around the corner.  You ask yourself, “What’s the hurry?” But we know this can be dangerous thinking because for each company there is a time and season to sell when the maximum market value of the company has been reached.  Prospective buyers lose interest because they’re not convinced that a deal is possible.  And, morale and productivity are affected when employees are placed in and out of uncertainty.

At Enterprise Transitions, we recognize that the sale of your business is a significant decision with consequences for yourself and your family, employees and customers. Our team of financial and legal experts works with you to assess when the time is right to sell and evaluates and negotiates offers to ensure the best price.  We also recognize that there are other, non financial, aspects that you are considering, such as:

• What are your goals for the future, personally and professionally? Is it time to retire, and if so, what might retirement look like for you?
• How will you transition from your role as business owner to what’s next? 
• What about your employees?  How can you help them transition to new ownership?

These are legitimate and important questions for all business owners. So we offer a team of professionally trained and experienced executive coaches to help our clients explore these and many other related issues.

What is coaching? Coaching is a partnership designed to help you achieve professional and personal goals which, in turn, enhances your effectiveness and quality of life. Coaches are trained to listen, to observe and to provide support.  A coach may share experience, expertise and information. Primarily a coach asks powerful questions and guides their clients to confront situations, solve problems and make decisions.  Although our coaches have a great empathy for and understanding of human behavior, coaching is not therapy.

How can you benefit from coaching? The Wall Street Journal reported that more than 60 percent of executives at Fortune 500 companies now work or have worked with an executive coach. Studies show that more than 93% of executives who have received coaching would recommend it to others, realizing an average ROI of 5.7 times. The coaches affiliated with Enterprise Transitions are highly trained professionals with extensive leadership and business experience in strategic planning, career transition, organization development and more. Importantly, each of our coaches is an entrepreneur themselves, running a successful coaching business.

Your company has been your life for many years.  You and your family have sacrificed. You’ve built a good business and stuck with it through thick and thin. You’ve built a reputation by making tough decisions.  You’re proud. And you should be. If something is holding you back from the decision to sell your business, price might not be the only issue. Contact us to arrange for a confidential session with an executive coach to explore more fully the next step.

(This is the first of a three part series which will explore the benefits of executive coaching for business owners during the emerging, acquisition, exit planning and/or business sale stages.)

Posted on August 25th, 2008 under Uncategorized. Tags: acquisition, business sale stages, coaching, emerging, Exit Planning, facing retirement, family business, how to retire, planning for retirement, process of selling a business, process of selling a family business, retire, retirement, retiring, selling a business, selling a family business, selling business, thinking of selling business, when to sell a business. Comments: 1

By Donna Billings, PCC and Jane Patterson, CPPC 

You did it! After endless hours negotiating, you finally got “The Number” - the amount of money you consider a fair price for your business.  When the sale closes you’ll have enough for the kind of retirement life you’ve been waiting for:  Freedom. Security. Quality of life.

But something is holding you back.  Money isn’t the issue.  And you know the company will be in capable hands. Even your family is behind you 100%. You hate to admit it, but what’s most on your mind is, “What will I do if I retire?”

You’re not alone.  We’ve heard that question from many clients, especially an entrepreneur who has invested his/her entire life running his/her own company.  On one hand, the good news is that people are retiring earlier than ever (age 58 today, which is down from age 65 in 1990) and living longer (women age 84 and men 81). The bad news is that a recent study revealed that 81% of retirees feel they should have planned better for what they would do in retirement.

One client characterized her first year of retirement as “a roller coaster ride of ups and downs, great times and wasted time.” For many, this is the first opportunity in a long time to make meaningful choices about the future. But choosing can be difficult because there are tough questions to face: “What really matters to me? Who is important to me? What do I really want to do with the time that’s left in my life?”

To plan or not to plan, that seems to be the question.  Yet, it’s somewhat of a Catch 22, isn’t it? You shouldn’t retire until you know what you want to do but you don’t know what you want to do until you retire! For one entrepreneur, retirement without knowing exactly where, what and how he/she will spend his/her time is out of the question. For another, he/she can’t wait to simply live in the moment.

What do we think about retirement planning?  At Enterprise Transitions, we know that each client has a unique personality and circumstances. We simply don’t believe there is just one right way to retire. Our executive coaches work with a client (and often family members) to design a retirement lifestyle that meets the client’s particular needs and goals.

We know that the only mistake you can make in retirement is to try to do it like someone else. You’ve earned the chance to live life your way and by working with an experienced executive coach, you’ll explore how you make the most of this next stage of life. You’ve earned it!

(This is the second of a three part series exploring the personal impact on business owners during the emerging, acquisition, exit planning and/or business sale stages.  Executive coaches Donna Billings and Jane Patterson, are available for a private consultation to discuss your retirement transition.)

Posted on August 25th, 2008 under Uncategorized. Tags: acquisition, business sale stages, coaching, emerging, Exit Planning, facing retirement, family business, how to retire, planning for retirement, process of selling a business, process of selling a family business, retire, retirement, retiring, selling a business, selling a family business, selling business, thinking of selling business, when to sell a business. Comments: None