This provocative article reminds owners that buyers pay for business value—not for the selling owner’s expertise—and that Exit Planning is the process owners use to make themselves “inconsequential.” In addition to building value, Step Three involves protecting value and minimizing taxes.
In all likelihood, you are absolutely critical to the success of your business. Without you, there is no business.
We want to fix that.
With a little luck and a lot of hard work, we can help you become an Inconsequential Owner.
At some level, all owners understand that they will someday leave the businesses they have created. Let’s assume for a moment that you leave your business permanently tomorrow. If you are an Inconsequential Owner, your exit will have no impact on the business, and that’s good for business value. Buyers pay for business value, not for the departing owner.
If you constitute a significant part of your company’s value (i.e., you are a Consequential Owner) and you have left the scene, there likely will be few buyers interested in your company, and those who are interested likely will pay significantly less than they would had you been an Inconsequential Owner.
Exit Planning is a process you can use to transform yourself into an Inconsequential Owner for your sake, your family’s sake, and your company’s sake. While perhaps not the most flattering label, becoming an Inconsequential Owner not only increases your business’ value but also probably aligns with what your friends and children have been calling you for years!
All Exit Plans should answer this question: “What has to happen in my business by the time I leave it to (1) enable me (and my family) to achieve financial security and (2) allow me to move forward with the rest of my life, confident that I have been a good steward of the business?”
The details that constitute “what has to happen” are discussed in myriad newsletters, books, and white papers that we can share with you. For most owners, one of the first and most important things that “has to happen” after figuring out where they are (i.e., current business value) and where they want to go (i.e., Exit Objectives) is to create and sustain business value.
When we talk about value in the context of Exit Planning (Step Three of The Seven Step Exit Planning Process™), we divide the discussion into three areas: building value, protecting value, and minimizing income taxes. The following is a summary of each area.
When considering building value, we first will ask, “What do you, as the owner, need to do to create a successful company that can operate without you?” Topics include developing a market focus, creating a top management team, and adopting a proper financial focus and corresponding policies.
Second, we ask, “Which characteristics will buyers pay handsomely for?” We call these characteristics Value Drivers, and they include (but aren’t limited to) the following:
- A stable and motivated management team
- Operating systems that improve cash flow sustainability.
- Understanding and nurturing the company’s competitive advantage.
- A solid and diversified customer base.
- A realistic growth strategy.
- Effective financial controls.
- Good and improving cash flow.
Protecting value relates to both internal and external threats. Instead of handling these threats as they occur, owners must identify threats and know how to avoid them before they happen. Some examples include protecting propriety information and trade secrets; preventing employees from doing harm to the business when they leave by taking customers, employees, and business relationships; and anticipating and evaluating outside threats to owners’ companies.
Minimizing Income Taxes
The lifeblood of every business—and therefore the best indicator of value—is cash flow. Our discussion includes how to preserve cash flow and value from income taxation (legally, of course). Income taxes collected on the sale of a business interest can range from 0 to over 50%. Of course, each tax-efficient design and the tools used to implement those designs usually have disadvantages along with their advantages. However, to date, we have not identified any upside to paying more than necessary to your silent partner, Uncle Sam.
As you read articles about The Seven Step Exit Planning Process, we hope you begin to appreciate that while planning and preparing yourself and your business for your ultimate exit may seem to be a daunting task, it does not need to be. Indeed, if you approach the task systematically, you will use only small chunks of time and effort for a potentially enormous payoff.
If you would like more-detailed information about Value Drivers, please contact us today, and we will provide you with guidance and literature on how to install and maximize the effects of Value Drivers in your business.
The information contained in this article is general in nature and is not legal, tax, or financial advice. For information regarding your particular situation, contact an attorney, or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax, or financial advice. In specific cases, clients should consult their legal, accounting, tax, or financial advisor. This article is not intended to give advice or to represent our firm as qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we always will work closely with you to help you gain access to the resources and professional advice that you need.
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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.