by Intuitive Digital | May 14, 2013 | Advice
The most popular exit strategy for small businesses
If family succession planning isn’t viable, and there is no company insider who is willing and able, then an arm’s length sale on the open market may be an option. This is the most popular exit strategy for small businesses. The business owner lists the business for sale and – we hope – ends up with a healthy sales price.
Groom your business for the sale
If you are targeting investors looking for an attractive opportunity, spend some time grooming your business for sale to make it as attractive as possible. A great potential buyer is another business in your industry that is looking for a strategic acquisition to simultaneously expand into a new market while eliminating a competitor.
The key is to target your potential acquirer(s) in advance and position your company accordingly. And of course, convincing your acquirer that your business is worth what you want for it.
Get a professional business valuation before naming your price
There are numerous business valuation formulas ranging from asset-based to future earnings approaches. But no single method can be used in isolation because market trends, economic conditions, and comparable sales also influence what buyers are willing to pay. If you have the resources, hire a professional business appraiser to do a valuation before you set the price. A professional business valuation will increase credibility and may save you legal hassles later on.
Listing your business for sale
After determining the price, an owner can list the business for sale on various business sale websites. Some sites permit sellers to list their businesses directly (think “FSBO” for a house), while others limit access to business brokers. Typically the sites charge a listing fee, but some, such as GlobalBX, are free. Business broker and consultant Eric Williams of Codiligent, LLC recommends that sellers not limit themselves to a single website when listing. Williams notes that many buyers are cognizant of some business sale sites but not others, so to get maximum exposure he recommends that owners list their business on as many as possible.
by Intuitive Digital | May 9, 2013 | Advice
1. Think out loud
Creating a succession plan as a fait accompli is rarely a good idea. There are simply too many misunderstandings, assumptions, and interpersonal dynamics that can thwart the best laid plans if you don’t communicate your ideas early and often.
2. Equality is a myth
While “share and share alike” is a good idea in theory, not every child is equipped with the same drive and talent to run your business. It may be fairer for the successor(s) you have chosen to have a larger share of ownership than family members who will be passive owners. Or it may be best to transfer management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
3. Invest in training time
Your family business succession plan will have a much better chance of success if you work with your successor(s) for a year or two before you hand over the reins. For solo entrepreneurs, sharing decision making and teaching business skills to someone else can be difficult, but the effort can pay big dividends.
4. Get outside help
It can take a village to sell a business. Most owners will benefit from engaging their CPA, estate planning attorney, business attorney, and financial advisor in the planning stage. There are also companies such as PragmaVentures, Inc. and Codiligent, LLC, which specialize in business succession planning and who can help owners work through difficult issues.
5. Start early
If you want to keep your business in the family, procrastination is a bad idea. Many business succession experts suggest a minimum of three to five years advance planning. A good succession plan can ensure that you will have the funds needed to retire and that the company you have built will thrive in the hands of the next generation.
by Intuitive Digital | May 7, 2013 | Advice
So you’ve decided to sell your business and you want your children to earn a living after you retire. Why not combine both objectives and sell the business to your kids? For many business owners, a sale to family members is a chance to maintain a legacy through the next generation. And there are benefits to keeping the business in the family.
• As an exit strategy, transferring the business to a family member allows you to handpick and groom a successor and may also create an opportunity for estate tax avoidance planning.
• A private sale to a family member also may be a solution to a lack of marketability for your business.
• If the family member is already involved with the business, there is less ramp-up time to familiarize the new leader with the inner workings of the company.
• Finally, a sale to a family member may let you stay involved without the same level of daily responsibility.
On the downside, developing a family succession plan can be enormously difficult. According to the Family Business Institute, 88% of current family business owners believe the same family or families will control their business in five years, but statistics undermine this belief. Only about 30% of businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.
Setting aside the very real impact of taxes, a major issue that business owners often overlook is whether there is a viable successor. You may want your first-born child to take the reins, but he or she may not have the interest or skills to handle that responsibility. Perhaps another family member is better suited. Resentment may develop among the remaining children who were not selected. Or it may be that no one is able to pick up where you want to leave off. Examine the strengths of all possible successors as objectively as possible and think about what’s best for the business.
Stay tuned for tips on succession planning strategies to make sure your business stays in the right hands when you retire.
by Intuitive Digital | May 2, 2013 | Advice
Sales of a business come in all different flavors. We’ll spend some time over the next several posts going through some common options for selling a business. Today we’ll look at the “insider” sale, which is not to be confused with the less desirable transaction of “insider trading.”
An insider sale involves transferring ownership to an existing employee or co-owner. Although some insider sales may involve a lump sum cash transaction, often the buyout occurs over time, typically funded in part from ongoing earnings of the business.
Depending on how the insider sale is structured, the seller may gradually transfer his or her ownership during the payout period, or the seller may transfer ownership in one fell swoop but retain a security interest, such as the right to reclaim the ownership stake if the buyer doesn’t perform its obligations (lawyer-speak for “doesn’t pay on time”).
One benefit of an insider sale is a greater likelihood of ongoing success than with an “outsider” sale, because an insider usually has greater familiarity with company operations and personnel. In addition, an insider sale may allay concerns from other employees, as well as the company’s suppliers, customers and lenders, about ongoing leadership and management. This in turn may increase the likelihood of getting a deal done, obtaining a fair price, and the ongoing success of the business, which is critical if the selling owner is getting paid over a period of time.
Downsides may include resentment from other employees who find themselves working for a former co-worker, or the realization that the new owner lacks skills or experience to fill the previous owner’s shoes. Also, new owners may want to invest more profits into developing new product lines or customer bases, which may reduce short-term profits, thus limiting the availability of funds to pay the selling owner. In addition, a sale to an insider may result in a lower price than a sale to an outsider.
