Here are the ways it pays to plan for succession

An expert suggests working on the company, as opposed to working in the company.

Many business owners do not realize that spending time on different succession planning topics will usually improve the company and the sales price. The following are some of the ideas that increase the value of the company and put more money in your pocket.

We suggest that business owners start thinking about selling the company 3 to 5 years ahead of time. You need this amount of time to get your company ready for the wedding.

 

"If you’re going to sell your house, you spend time fixing it up.”

I know that your emphasis the last 30 to 40 years has been increasing sales and profits, working with employees, helping customers, and putting out all of the daily fires. For the next 36 months try to remember that you’re going to work “on” the company for a couple of hours each month rather than “in” the company.

If you’re going to sell your house, you spend time fixing it up. If you’re going to sell your car, you’re going to spend time washing the outside and cleaning the inside. Now that you’re thinking about selling one of your largest assets you need to spend a little bit of time washing the outside and cleaning up the inside.

In the last 36 months try to increase your gross margins 1% per year. Also, try to decrease your expenses 2% per year. This will make the company look much better, and you will get a higher sales price.

Next, clean up all of your financial statements. Any potential buyer is going to ask for your last 2 or 3 years tax returns and financial statements. Make sure that if there are any entries on your financial statement that are not needed, have them removed. Every year we see financial statements from business owners and it will show a loan “from stockholder” or a loan “to stockholder”. When we talk to the owner we find out that those entries are old and those types of loans were paid off years ago, but just never removed from the financial statement. Clean up the balance sheet and the profit and loss statement. Don’t leave anything on your financial statement that is not appropriate that will cause the buyer to ask more questions.

Early on, pick your team of advisors that will help you design a blueprint that best fits your corporate sale. On that team you should have a corporate attorney who has worked with many family businesses over the years. Add to your team of advisors an accountant that can help you with minimizing both your corporate tax and personal tax when selling the company. There are many ways to minimize the taxes when selling a company and all of those ideas need to be discussed. The third member of your team should be a financial advisor that can help you with: negotiating the sale of the business, analyzing your net worth, preparing retirement income projections, and helping to protect your net worth in the future.

When you sell your company you no longer receive a salary and stop adding to your net worth. Now your team of advisors needs to help you protect your net worth for the future, estimate annual income and assist you with making financial decisions to protect what you have accumulated. The attorney that you choose charges fees. The accountant that you choose charges fees. And, the financial advisor you choose should also charge fees and not receive commissions. You want to make sure that your team of advisors are independent fiduciaries that only work for you.

During the last 3 years, you should meet with your team at least 2 hours a year. Once you have found a qualified buyer, you will start meeting with your team more often. These 3 individuals will cost money, but the value that they add to you and your business will be far greater.

After 3 years of working with your team, the results that you should experience will be higher profits in the company during the last 1 or 2 years. Your financial statements will be clean and the buyer will be impressed. Both you and the company will be ready for the typical due diligence process that any buyer would require. You will get a higher selling price and the taxes on the sale will be minimized. You will also have a clear understanding of your retirement income and what your net worth will look like in future years.

These ideas will help you prepare for the sale of your business and give you a lot of comfort in knowing that you are ready to start the next chapter.

Gary Pittsford is president and CEO of Indianapolis-based Castle Wealth Advisors. His e-mail is gary@castle3.com.
 

Login or Register to post a comment.