Newsletter - November 2010
In this edition
Our firm offers traditional accounting, tax advisory and audit services, but we also have a strong emphasis on Business Lifecycle Planning. Visit us at www.cpadonovan.com or contact Jeff Donovan at 317-745-6411.
Why an exit strategy? I am only 55 years old.
Most business owners do not understand the complexity involved in exiting a business. Whether they are selling, merging, or succeeding their business the transaction has emotional, financial and timing elements to address. At any point in time an owner can pull the trigger, run a fire sale, accept a lower fee or pay a bigger tax burden. That’s easy and often too frequent of an occurrence if disaster strikes or if the economy is weak at the time they take their business to market. The goal should be to maximize the profitability of the sale and minimize the post-tax impact of the transaction.
The dot.com era is a great example of how not to conduct a transition. In the dot.com era times of “any high tech/internet business will flourish thinking” people were selling unproven concepts because buyers were tossing cash around and investing in anything that moved. Businesses brought to market then were more likely to sell at a premium. In today’s weaker economy, even a solid, proven and profitable business might see a decline in the selling price because a business is only worth what the buyer will pay for it. When the pool of sellers outweighs the pool of buyers, prices drop. That’s true economics.
Planning an exit strategy years in advance provides the seller several benefits:
- Profit enhancement. It gives ownership several years to improve the profit margins on the books, which will spike the sales price.
- Owner distancing. A drawback to a great business is one in which the owner pushes all the buttons. To make a business more attractive, buyers need to feel the operations will easily transition without the owner’s continued involvement.
- Ready to strike at any time. By addressing these first two items, the owner is given the flexibility to go to market with more speed if they see conditions changing.
- Be prepared in the event of a disaster. We do not like to sell on fear, but people get sick and personal needs change. Businesses that encounter these kinds of problems and are not in an adequate position for a more immediate sale will most likely suffer and will not receive market value or higher.
The ability to transfer ownership over time. This might have a bigger impact in an ESOP or family succession transition. Gifting strategies may be used to transition entity gains, which can reduce the debt for an incoming family member and minimize the taxable gain on the transaction.
Real growth comes from changing your leader’s operating mindset.
Type “A” executives do not delegate well. Most try to do too much themselves. As a result many things get accomplished, but the organization often struggles to get items independently moving forward without intervention from those high-level, type “A” executives. Their personal list of tasks continues to grow because no one can do it like they can. In reality, no other person can easily do a task as well or the same way as the rainmaker, owner, or “company genius”. They have their own unique DNA mapped into their methods, but the secret is to make it easier for others to support these movers and shakers.
Every business has select people that make the place work. Most of these executives have a hard time understanding why others cannot do what is intuitively easy to them. We all have certain skills that for some reason we seem to be able to do better than others. All pro athletes train hard, but why can one quarterback throw a ball so smoothly and so much further than others? Most of them do not have over-developed arms and they possess a natural talent that produced success from the very first throw.
Successful companies have a list of “naturals”. Every business has the owner or partner who walks into a room full of strangers and talks with ease to anyone. Some have the executive who can speak in front of large groups with minimal preparation. Others have the technician who knows every rule, law, code number and issue dating back to 1943 because they constantly read or are naturally able to store that information in their head. These people are the foundation of a company and sometimes lead to a company’s downfall.
They can become bottlenecks that slow progress. Real growth comes by changing the way the leaders operate. The perception is that only a few people can do the important or advanced activities. This might be true for overall strategic direction in a business, but that does not mean others cannot reduce those key executive’s involvement on each task. The path to real growth comes from increased delegation.
The problem is putting the stake in the ground. It’s difficult to take the painful step to show someone else how to do what you can do in minutes. Initially the same task will take exponentially longer the first few times, which in effect can create a bigger bottleneck. However, the bottleneck is temporary and the net gains are huge. Imagine giving a few top executives 10 to 20% of their time back. They will be free to make the call, send the email, have the meeting, and take the next step toward getting and retaining clients and sales and making operational changes that will create a major impact to the bottom line.
Test the process. Although it might seem like a step backward at first, in the end it will create a small army of independent thinkers capable of doing more than you ever imagined to support your cause. Even if it’s just one key executive that gains back four hours a week, those four hours can give a company hundreds of hours to redirect toward making a major dent in the organization.