| Winter 2007 |
|
INFOLETTER
|
 |
 |
 |
Partner's Perspective |
|
Exit Strategies: How Will You Hand Over the Reins?
By James E. Merklin, CPA, CFE, M.Acc., Partner
Many business owners spend years building their companies without giving much
thought to an exit strategy.
That's understandable; after all, most owners are so busy running and growing
their firms that it's hard for them to imagine a day when they'll be doing
anything else. However, even the most enthusiastic owners who love owning and
managing their businesses will eventually be faced with handing over the reins
to someone else.
Therefore, it's wise to begin planning for this day as far in advance as
possible. This allows not only for a smoother transition of the business to new
ownership, but also for careful anticipation and planning for how you can reap
maximum financial rewards and security from the enterprise you have devoted much
of your life to building.
Questions to Ask
An exit strategy should be part of every business owner's long-range
strategic plan. As you begin planning your strategy, the first questions you
need to ask yourself are:
- When do you think you'll be ready to leave the business?
- How much money do you think you'll want to realize from the sale of your
business in order to meet your post-business or retirement income goals?
- Will you want to sell your business to a buyer outside your company or to
family members, employees and/or managers?
Types of Buyers
There are a number of different kinds of potential buyers for your business.
Complementary buyer—This is another company in a niche or industry that may
complement or enhance your business. Here, the combination of the two businesses
could strengthen each company and result in new opportunities.
Strategic buyer—This could be a competitor that might bring enhancements to
your company's products or services (as could your business to theirs). Take
care in choosing this strategy, though, to make sure that the merger of the
businesses makes sense from both an economic as well as a marketing standpoint.
With a strategic or complementary buyer, it's critical to consider how well
the cultures of the two companies will fit together. Incompatible values,
cultures and business philosophies can be disastrous to the company and are the
main reasons for failed business mergers and acquisitions.
Employees or management—The sale of your company to employees or management
can be accomplished in several different ways, but most commonly through an
Employee Stock Ownership Plan (ESOP) or Management Buyout (MBO). Each of these
options can take a number of different forms, and they may enable you to sell
the company to your employees or managers over time and thus phase yourself out
of the business.
Investor—Private equity investors may be interested in buying your company
in order to grow it and then sell it at a profit at some point in the future. A
partial private equity sale can also be used to raise capital to help grow and
expand your business. Private equity investors may be either silent financial
partners or individuals who take an active managerial role in the business.
Family members—If yours is a family business, you may want to pass the
business on to the next generation of owners in your family. Communication among
all family members is critical—you can't just assume that other family members
want (or don't want) to buy the business and keep it going. Also be sure to
communicate openly and honestly about the financial considerations involved in
the sale, including the value and price of the business and your personal
financial requirements in order to achieve your lifestyle goals for retirement.
Going public—For some owners, taking their company public is the "pot of
gold" that waits at the end of the rainbow. While going public may end up
reaping the owner huge financial rewards, there are potentially large risks and
costs involved in making an initial public offering (IPO).
Preparing for the Sale
It is really never too early to start planning your business exit strategy. The
further in advance you plan, the better able you will be to prepare the company
for sale.
There are many things you can do in the years leading up to your exit from
the business to position it most favorably for sale and, thus, maximize the
selling price. Consider these suggestions:
Do some "housecleaning." In the same way that you wouldn't put your house up
for sale without tidying things up, you shouldn't put a "messy" business up for
sale.
Start with the financials. If you have excessive debt, for example, begin
paying that down. If sales are lacking, hire a top-notch salesperson or two and
invest in some new marketing initiatives. If there are key positions that need
to be filled, do so now, and hire the best people you possibly can.
In fact, investing in your employees is time and money well-spent. Your
employees represent "intellectual capital," which is one of the most valuable
assets that a purchaser can buy. This includes providing ongoing training, clear
career development paths and competitive compensation.
Concentrate on building the business' value. A number of "value drivers" can
reduce a purchaser's risk in buying your business and enhance the business'
future growth prospects for the buyer. For example, are all legal documents and
contracts current and up to date? Are financial controls in place and
well-documented? Having a strong and well-motivated staff, as noted above, is
one of the greatest value drivers.
Determine your business' value. Most business owners don't have a clear idea
of the true value of their companies. While the value of a business will change
over time based on many factors (business fundamentals, capital availability and
liquidity, interest rates, the value of comparable business sales), it's a good
idea to obtain a professional business valuation whenever you are ready to get
serious about selling your business.
There are a variety of different business valuation methods, with most of
them using some kind of market multiple as a benchmark - multiples of operating
cash flow (also known as EBITDA), revenue or book value, for example. A business
valuation professional can work closely with you to choose the right method and
help determine a defensible value for your business.
Put together a strong advisory team. Your financial advisor can be a
tremendous help as you begin planning your exit strategy and how this will
impact your personal financial situation. As you get closer to the time to
actually begin the sale process, you'll want to include an attorney and
accountant who are experienced in business sales and acquisitions. You may also
want to involve a business broker, who can help identify potential buyers for
your business.
Reap Your Just Rewards
Given the amount of time, money and effort you will put into growing and
nurturing your business over its lifetime, you owe it to yourself to carefully
plan your business exit strategy. Doing so will help you reap the rewards you
deserve from a lifetime of hard work, sacrifice and leadership.
We have extensive experience in helping business owners plan and execute exit
strategies. For assistance with your strategy, please call or email me at
jimm@bobermarkey.com, or your partner
contact with the Firm. BMF&C
|
Issues to Consider
Your exit planning strategy will encompass a variety of different issues.
Among the most important are:
Your post-sale role in the business. Will you want to stay involved in the
business in some capacity after the sale? Often, owners agree to stay on for a
period of time (as a consultant, for example) to help with the transition to new
ownership. This should be part of the sale negotiations.
Estate planning. You need to determine how the sale of the business is going
to impact your estate planning strategies. Estate planning laws are currently in
flux - various pieces of legislation have been proposed recently to bring about
a compromise over the estate tax, but as of press time, none have passed yet. Be
sure to consult with your attorney and accountant about how this may impact your
sale.
Taxation. Selling your business may trigger myriad and complicated tax
consequences. As a general rule, you should begin establishing legal and tax
structures at least one year before the sale to help lower your potential income
tax liability. One tax strategy to consider: Extending the terms of the sale
over several years, which may enable you to defer some taxable income and
cushion the tax hit.
|
Plan for Supply-Chain
Disasters
By Michael J. Moldvay, CPA,
Senior Manager
 What
If One of Your Critical Vendors Burned to the Ground?
It happened in 2000 to Nokia, whose hot-selling cell phone
depended on a chipmaker's Albuquerque plant. Ericsson - Nokia's
main rival - relied on the same plant, and when it went up in
flames the stage was set for a comparison study.
Nokia formed a C-level team, convinced the vendor to produce the chip at
other plants, and redesigned the part so other suppliers could make it. Nokia
not only met its goal, but also increased its market share.
Ericsson, however, recognized the problem late. It couldn't meet demand and
had no other suppliers who could easily step in. It posted a huge loss - and
ultimately outsourced handset manufacturing altogether.
A Flexible Chain
Every manufacturer should prepare for the possibility of vendor disaster to
ensure continued access to raw materials, subassemblies, storage and
transportation.
Here are key ways to make your supply chain more flexible and prepare for
unexpected changes:
- Advise supply-chain partners upstream and down about supply and demand
changes. Give them access to relevant data and forecasts.
- Work with suppliers on product and process design. Establish different
chains for different lines, but standardize components and processes where
possible. And stockpile a limited inventory of inexpensive parts.
- If you buy in a foreign country, use consultants with local knowledge to
find reliable vendors there. Watch the local economy and political situation
for signs of disruption.
- Clarify vendors' responsibilities and share the risks and costs of
supply-chain excellence. Reward for performance that strengthens the chain
overall.
- Build relationships. After the September 11th attacks, businesses whose
purchasing departments had forged strong bonds with IT vendors were up and
running fastest.
Today's longer supply chains are subject to many kinds of disruption - which,
in this lean and just-in-time world, can have an immediate effect. Disaster
planning is an essential part of supply chain operations.
Our firm can help you identify your supply-chain vulnerabilities. Please call
or email me at mikem@bobermarkey.com
if you would like to talk further. BMF&C
Document Management in the
Information Age
By Danielle J. Kimmell, CPA,
Senior Manager
 Back
in the "old days," document management was fairly simple for most companies. It
was mostly a matter of dealing with the retention and storage of paper
documents, and the biggest decisions to be made were how long to keep documents,
where to store them and how to dispose of documents that were no longer needed.
In today's Information Age, you can add to this all of the challenges that
come with the management of electronic documents and data. Recent news headlines
have told one story after another of electronic documents and correspondence not
handled or disposed of properly and the resulting consequences for employees,
executives and their firms.
Creating a DRP
Given the complexity of document management today, companies should take the
time to create a formal document retention policy (DRP) that dictates all
aspects of how corporate documents, both print and electronic, should be
retained, managed and destroyed. There are many benefits to creating a formal
DRP:
- Organization and cleanup of what may be huge amounts of paper documents
that literally fill rooms full of boxes or file cabinets.
- Saving of valuable disk storage space on your computer networks and on
your employees' desktop PCs, helping optimize network performance.
- Less likelihood that documents may be used in a lawsuit against your
company and/or individual employees.
- Less likelihood that stolen or misplaced documents may be used for
identity theft against your employees and/or customers or clients.
Dealing With Electronic Documents
While you can shred paper documents, it's not always so simple to just
"delete" electronic data (including emails), which can often be recovered long
after files have been deleted (or even after hard drives have been reformatted).
And electronic data and documents can exist in many places outside of your
physical offices, such as on employees' laptops, in clients' email programs, on
phone messages and tape recorders, and even on old reformatted computers that
have been donated to charities.
Given this, the first step in creating your DRP is to determine exactly what
electronic data you have and specifically where it is located. Determine who has
access to the data, how secure and easily retrievable it is, and how and when it
can be destroyed.
Your DRP doesn't have to be long, cumbersome or complex -
it can be as short as a few pages (or even paragraphs). All DRPs should,
however, address a few fundamentals:
- Define how long and where all paper and electronic records should be
stored, and specify retention periods for specific categories of records.
- Deal with all forms of electronic data in all devices and media (including
digital printers/copiers and voicemail).
- Specify how records should be destroyed after their retention period
expires. Is the process automated or are individual users responsible for the
destruction?
- Identify which specific individuals are responsible for enforcing,
monitoring and updating document retention policies.
You'll likely want to involve employees from various areas of your company -
financial, legal, IT, etc. - in the drafting of your DRP, as well as outside
legal counsel and a CPA and perhaps an independent electronic discovery
consultant.
Considering drafting a DRP that will protect your company's interests? Please
call or email me at danielle@bobermarkey.com to learn more about how we can help. BMF&C
 |
In this feature of InfoLetter, each quarter we provide a profile of
one of our professionals who is available to work with our clients and
friends.
Dale A. Ruther,
CPA, CIT, CDS
Partner, Assurance and Advisory Services |
Dale focuses on providing audit, taxation and advisory services to his
clients in a variety of industries, including wholesale/ distribution,
construction, franchises, restaurant and tax-exempt organizations. In addition,
Dale represents a number of manufacturing and industrial product businesses
within the Firm.
A 1981 magna cum laude graduate of Walsh University with a Bachelor of Arts
Degree in Accounting and Management, Dale was with Main Hurdman (now KPMG Peat
Marwick) from 1981 - 1982. Dale joined BMF&C in late 1982 and was elected
Partner in 1992.
Dale is currently serving as a board member for ProfitCrew™ and the
Construction Financial Management Association's (CFMA) National Tax &
Legislation Committee. He is the Vice President of the local CFMA chapter, and
is an annual speaker for the CFMA conference as well as a guest speaker for the
Builders Exchange. Dale is Past President and current Treasurer of Evant, a
non-profit organization with group homes for the developmentally disabled. He is
also Treasurer for Nazareth Housing Development Corporation, Past President and
Honorary Board Member of Big Brothers and Sisters of Akron, a member of the
United Way Community Investment Committee and Past Instructor for Junior
Achievement.
"BMF&C has shown its continued commitment to serving the construction
industry by joining ProfitCrew, a national association of independent accounting
firms that serves clients in the construction field. This membership will keep
us on the cutting edge of the latest accounting and tax issues related to the
construction field. In addition, many value-added consulting services to help
increase a contractor's bottom line are being developed in conjunction with
Clemson University's Construction Science Department and iLumin, two of
ProfitCrew's strategic partners. We look forward to sharing their ideas with our
construction clients and prospects." BMF&C
|
