B2B CFO^®    (877) 4-B2B CFO

"John's work was excellent.  He was able to identify the critical issues and did an excellent work in developing solutions.  His follow up saved us well over five hundred thousand dollars."
Gary Stanis, VP & Chief Financial Officer, Detroit Technologies, Inc.

"John has been terrific to work with.  John's knowledge and experience has been very valuable.  Moreover, John has been very fair with us from a billable hour point of view.  I would love to be used as a reference."
Lou Meeks, Pessident & CEO, The Service Source, Inc.

"John fills a critical need for many mid-market companies who have never had a true CFO. His years of real-world experience combined with his executive presence and leadership skills have made him a valued resource to many companies. I am happy to strongly recommend John to our clients who need true strategic CFO help."
Jim Alampi, Managing Director and Owner, Alampi & Associates, LLC

Business exit strategies can take many forms. However, there are really only two primary objectives in any deal. One, the buyer wants to MINIMIZE the consideration paid relative to the after-tax cash flow of the purchased assets or operations, and two; the seller wants to MAXIMIZE the after-tax cash proceeds from the sale. Since both objectives are essentially opposite, having the right exit strategy plan puts the business owner in the driver’s seat. It will not matter if the deal is an asset sale or a stock transaction, as long as the entrepreneur has contemplated and implemented the best business exit strategy.

There are various exit strategies, so determining which is best depends on the entrepreneur’s goals and the successful implementation of a business plan designed to achieve those goals. In a stock deal, liabilities are assumed by the buyer and the existing asset’s basis remains the same. Depreciation continues for the remaining life of the assets and accounting methods don’t change. Licenses and contracts are easier to transfer and are often the key to the future value of the business. In an asset transaction, liabilities are limited and often left for the seller to eliminate. Buyers generally only accept “free and clear” title to the assets they purchase, which gives them a fresh start when establishing an asset basis, usually at fair market value. Asset depreciation starts over with a new asset life, and different accounting methods may now be implemented. However, licenses and contracts may be more difficult to transition.

Under either method, valuation is critical. Purchase price determinations are often based on “multiples” such as a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). Sometimes a purchase price is a multiple of revenue, net income, or even tangible net worth.  There are many ways to calculate a purchase price. One critical measurement is the discounted cash flow of the company. A buyer will most certainly want to calculate the future cash flow to help determine the cash value of an acquisition, and the seller will want to know what that value is in today’s dollars. However, at the end of the day, the only thing that matters is the fair market value of the business as determined by what a willing buyer will pay a willing seller. Entrepreneurs can put themselves in the best position to negotiate valuation if they have done their homework on their business exit strategy.

Are you ready to sign the papers? Not so fast! If you have not analyzed the future impact of the deal, the terms, and the on-going obligations, you are not ready. Buyers will conduct some form of due diligence and sellers, yes, the sellers, should also do their own due diligence on the buyers. There will be representations, guarantees, and covenants made by both the seller and the buyer. It is important for each party to thoroughly review and understand the post-closing commitments. Perhaps most critical to the buyer’s success in a deal is the post-purchase integration plan. A plan that clearly integrates the business, the people, and the assets is crucial, especially if the seller has any interest, monetary or not, in the future of the business. Clearly understanding the terms of the deal, the post-closing commitments, and the plan of integration will also prepare the parties in the event disputes arise.

Once a price is determined, a business exit is not complete without the payment. While it may seem like cash is the most common form of purchase, and the one that the seller wants the most, a buyer will often structure a deal using cash, stock, or a combination thereof. Often buyers want sellers to take structured deals, sometimes in the form of earn-outs, earn-ins, notes and performance contingencies.  This is where tax strategies are critical. IRS rules change frequently and the creation of goodwill, non-competes and other intangibles have many business and personal tax consequences. Only a solid business plan that contemplates a pre-determined business exit strategy will include these issues.

According to a recent survey[1], family-owned businesses in the United States account for over 64% of the nation’s gross domestic product. Yet, over 50% of those businesses fail to last beyond the first generation. Successful business owners who want to pass along their business to family members know there are certain “big-company” fundamentals that apply to their business.

For example, big companies spend a significant amount of time, money, and resources on strategic planning, but when surveyed, less than 54% of family-owned businesses had a written strategic plan. Big companies have a management succession plan. Only 30% of the family-owned businesses surveyed said they have spent any time on a succession plan. Big companies have outside (non-employee) directors helping advise them, yet only 33% of family business owners surveyed said they have outside directors on their boards. On another front, most companies spend a great deal of time searching for qualified people to staff their businesses. However, 64% of family business owners do not require family members entering the business to have the qualifications or related experience necessary to be successful.

So here are a few “secrets” of successful family-owned businesses preparing a path for an exit or transition in the future:

• Develop a shared strategic vision of the business and communicate that vision.
  • Business is easier when everyone knows the score. Commit to a consistent and effective communication process among family members and employees.
  • De-mystify the sacred cows.
  • Use outside data (market data) to find out and verify what is going on.

Most businesses will change their strategies four or five times before it gets passed on to the next generation. Doing what is best for the business, employees, customers, and community may preserve it for the next generation.

• Establish a board of directors and recruit outsiders to participate
  • Mentors need mentoring and leaders need mentoring. Insiders cannot be objective and are certainly not always independent in their thinking.
  • Outside board members who are successful business people or financial experts, can provide balance for the company’s direction.
  • Outside board members have a fiduciary responsibility to provide their advice for what is best for the company.

Of the businesses surveyed that already had a board of directors which included outsiders, 77% said they strongly agreed that the board made a positive contribution to the direction of their business.

• Cultivate a climate that develops good leadership
  • Founders must find ways to give feedback to employees, foster growth via success and failures, and build a culture of opportunity.
  • Foster a philosophy of fair family and employee compensation. Family businesses should not confuse the flow of funds or mislead family members into believing they are worth more.
  • Adopt a transition planning process early.

Family business owners must know what “hat” they are wearing when they come in contact with other family members both at work and at home. Social engineering is an important part of a functioning business unit.

“Finding the Exit,” and ensuring a smooth transition between generations requires many sound business fundamentals. It is important to make sure the assets are protected to ensure the well-being of both generations.  Often, a well-thought-out buy/sell agreement can help “in-the-business” and “out-of-the-business” family members make the transition. Buy/Sell agreements lay important ground work ranging from establishing the price to detailing how other family members might acquire ownership.

“Finding the Exit” can be difficult, but finding the best way to move toward the exit starts by contacting your trusted business advisor at B2B CFO^®. We have the financial and business expertise to guide a business owner through the process and can work with the other professionals needed to make an exit a smooth transition.