May 26, 2005 at 08:00 PM
How many of your clients are small business owners: people who have worked decades growing their company or professional practice into a successful enterprise that is now worth a substantial amount and provides livelihoods for many people?
Over the years your clients have plowed profits back into their businesses and dream of the day when they will cash out and move on. They imagine the process of selling their business as similar to selling their house: put it on the market, take the best offer, and ride off into a happy, affluent retirement.
Unfortunately, this “plan” is based more on myth than reality. A business owner must create a market for the company and that doesn’t happen overnight. It takes forethought and planning to ensure the business will yield the income the sellers need in retirement. Ironically, most business owners are reluctant to prepare for their exit by planning for it. Why? Here are some reasons:
o They don’t have time;
o They don’t see the point;
o There’s no rush;
o Thinking about the future makes them uncomfortable; or
o They will work until they “die in the saddle.”
It’s your job to help clients realize that someday they will be more than ready to sell the business because they’re bored with it, tired of it, physically unable to run it, wealthy enough to leave it or ready for the next stage of life. When that day comes, they’ll want out sooner rather than later. And a lack of planning could tie them to the business longer than they’d like.
A small business represents from 50% to 90% of the net worth of the owner, who likely cannot afford to leave money on the table in an unplanned departure. Once clients see the logic behind this train of thought, the stage is set for you to swing into action.
The exit planning process is simple in concept but can be difficult to execute, only because you cannot do it without your clients’ cooperation. Busy people are not inclined to focus on an event that will take place years from now, but you can help them imagine their future.
o Step #1: Identify client goals. Ask your clients tough questions. When do they want to sell their business? What do they plan to do afterwards? How much will it cost to live the life they envision? Do they have a buyer in mind? Does that person have access to the funds needed to buy the business?
The answers to these questions will form the basis of a succession plan that minimizes tax liabilities at the time of sale and maximizes retirement income for clients.
o Step #2: Determine the current value of the business. An appraisal or certified valuation provides an appropriate benchmark for establishing the company’s current market value. Often the appraisal can result in an unpleasant surprise for clients. But with your assistance, they have time to build more value into the business.
In the case of a sale to an inside buyer, talk to your clients about establishing what their valuation advisor may refer to as the lowest defensible value to minimize taxes. Clients will need to know how much future cash flow the company likely will generate after their departure.
This critically important number–generated by their accountant–comes into play when the owner sells to a favored buyer who cannot amass the cash needed to pay top dollar for the business.
o Step #3: Develop a plan for enhancing the company’s value. While some businesses own valuable hard assets, such as equipment or real estate, it’s the company’s reputation that makes any enterprise a viable operation. And reputations are made by people.
What would it mean for the business if a key employee left? You as the advisor can create value by developing incentive plans that motivate and retain the people who are essential to the company’s success. These plans, in turn, increase the value of the business, if designed properly.
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