By Michael Coyle, CenterPoint Business Advisors
MMS, Inc., a computer service business, had survived recent industry turbulence through the persistent efforts of its owners, Ralph McMillan and Janet Shaw. In fact, MMS had enjoyed good cash flow for the past three years and its future looked rosy. Successfully meeting these challenges made Ralph (age 59) more anxious than ever to leave the business and Janet (age 48) more than ready for Ralph to leave. But neither owner had a clear idea of how to proceed, who to ask for guidance or even how to take the first step.
Janet and Ralph had to find the starting line before they could run the course to the successful dissolution of their partnership.
Ralph’s Tasks
First, Ralph must assess his income needs and timing of his exit. He must determine how much of the purchase price he needs (or wants) on the day he leaves and how much he is willing to receive after he leaves (a Retirement Needs analysis). This is a very different question from how much his interest is worth yet the questions are related because the cash Ralph needs must be attainable from the sale of his interest.
Second, Ralph must obtain an independent valuation of his ownership interest.
Note: Ralph is unwilling to leave unless he exits with full value for his ownership interest (hence the need for the valuation) and unless that value is enough to meet his retirement needs (hence the need for a retirement income needs analysis).
Janet’s Tasks
Janet wants to balance the risk/liability she and the business will assume in Ralph’s buy-out with the opportunity for continued growth in the value of business interest. Since Janet is likely to be unwilling to buy Ralph’s interest—if doing so puts her (or the business) at too great a financial risk—she must secure a professional’s projection of the company’s future cash flow.
This cash flow projection with enable Janet to determine if the business will likely have enough cash flow (after Ralph leaves) to finance the purchase of Ralph’s interest without stifling the growth and prosperity of the business.
Ralph’s Exit Plan Design
Ralph’s Exit Plan should be designed to:
• Use the available cash flow in the most tax-efficient manner possible.
• Plan the long-term ownership structure of the company.
For example, after Ralph is gone, what does Janet (the remaining owner) intend to do with the business? Does it not make sense to consider her future exit when Ralph’s exit is being designed and implemented?
Ralph’s Alternatives
As Ralph contemplates his exit, perhaps Janet should consider:
1. Selling all of the ownership to an outside party. To do so, the business must be marketable and Janet (and perhaps even Ralph) may need to remain for a year or more after the sale. In this scenario, Ralph has a better chance of receiving at least the bulk of the purchase price.
2. Selling Ralph’s interest to key (or all) employees. This strategy depends on the existence of motivated management willing to assume ownership. Often, a partial sale to a younger management group (keeping control firmly in the hands of the remaining principal owner) makes great sense. This strategy starts to pave the way for the eventual sale of the remaining owner’s interest to this group, can be a great motivation tool and handcuffs this management team to business.
3. Selling all (or just Ralph’s interest) to an Employee Stock Ownership Plan (ESOP). This design can potentially offer tax and cash flow savings for both Ralph and the buyers.
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These are just a few of the many ways to design the exit of a co-owner.
Before any group of co-owners can create a successful exit plan they must employ professionals to:
1. Assess the departing owner’s needs (a retirement income needs analysis);
2. Secure an independent valuation of ownership interests; and
3. Assess the remaining owner’s risk tolerance (dependent on a cash flow projection).
This process can help you to create a buy-out plan that helps you to achieve your buy-out goals.
This article was originally posted in the Exit Planning Review (TM) by the Business Enterprise Institute, Inc. Used with persmission.
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About the Author:
Michael Coyle is the founder of CenterPoint Business Advisors, Inc. in NH providing exit planning, business consulting, valuation and intermediary services throughout New England Read more>>
The Successful Transition Planning Institute of Cambridge, MA teaches Baby Boomers and their advisors how to avoid boring, meaningless retirements. STPI's books, tools, training and seminars empower Baby Boomers to "Think", "Live" and "Decide" what to do with their companies and careers. By doing so, Baby Boomers create plans for dynamic new lives, full of meaning and purpose. (see video).
In a recent article of the Australian on-line magazine AdelaideNow, 68% of family busineses have owners ages 50+. Two thirds said NO family members had an interest in taking over the business. Amazingly, only 25% said they considered succession a "problem". How can this be considered leadership?
What were they THINKING? Can owners in the US and elsewhere be much different? I rather doubt it.
At the Successful Transition Planning Institute (STPI), we call this attitude the "R&D method" of transition planning: "Repress and Deny".
Simply put, EVERY business owner will exit their business someday. They have two choices:
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plan for it on their terms
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let others plan it for them
Having been a business owner, I know that owners like control. Yet the fear of dealing with the inevitable, as well as the unknown, causes too many to simply default to "I'll plan for that later" (really never). There is even a subset that won't plan for it to "prove" that "only they" could run the business properly. If the business fails after they're dead, it somehow affirms their "leadership". This attitude is simply pathological and may leave a trail of financial ruin in the owner's wake.
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New Book
by Jack Beauregard
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Owners need to put together a small team of collaborative advisors; it is not rocket science and need not break the bank either:
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a business consultant to assess the business's strengths and weaknesses, and to plan an exit strategy
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a Transition Planning Consultant to help the owner create a personal plan for leaving the business
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a financial advisor to make their wealth last a lifetime
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a business intermediary to make a deal happen
Adding a CPA, attorney and a banker to this team will create more options for the owner, and ultimately, more satisfaction.
So - how can advisors make this happen? (hint - that is why we published the book).
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About the author:
Paul Cronin is partner and Director of Business Development at STPI, the Successful Transition Planning Institute of Cambridge, MA. STPI trains advisors to the show owners how to "Think", "Live" and "Decide" what to do with their companies and plan for a dynamic, new life. Paul can be reached at 978-749-9546, Facebook, Linkedin, Twitter, Google+, or by clicking contact us:
For more information, visit STPI, or see this video.
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The Successful Transition Planning Institute of Cambridge, MA teaches Baby Boomers and their advisors how to avoid boring, meaningless retirements. STPI's books, tools, training and seminars empower Baby Boomers to "Think", "Live" and "Decide" what to do with their companies and careers. By doing so, Baby Boomers create plans for dynamic new lives, full of meaning and purpose. (see video).
by Wayne Vanwyck, founder The Achievement Centre
Winston Churchill famously called depression his “black dog.”
(editor: This case is a classic example of seller's remorse. The owner failed to plan his new life PRIOR to selling the business. STPI's mission is to prevent this from happening to others)
During my sabbatical in 2008, I interviewed an entrepreneur who had sold his business in 2004 for more money than he knew what to do with. However, soon after the sale he fell ill. He had trouble getting out of bed. It was like having the flu all the time, but the usual treatments had no impact.
Finally, he met with a psychiatrist who diagnosed his symptoms as depression and told him that, “when you sold your business, you died.” Although on one level, he was pleased with growing and selling a successful business, emotionally he was a wreck. The doctor pointed out that, “the person you were before you sold your business no longer exists. You have to reinvent yourself.”
It took this entrepreneur two years to recover from selling his business. By 2008 he was doing well. He was going to the gym every day, watching his diet and reconnecting with his family in an intentional way. He felt ten years younger. As we discussed his journey, he confided, “You’re only the third person I’ve told this to. In a way, I wish I could stand in front of a group of entrepreneurs and tell them what I experienced. But I can’t.” When I asked him why, he replied, “I don’t have the courage to do it.”
I was surprised by his answer. Here was an aggressive entrepreneur who started and grew a business that created thousands of jobs and equity that exceeded his wildest dreams. A man who took incredible risks, negotiated with tough bankers, union leaders and executives, yet he was reluctant to admit he experienced depression. What a stigma we’ve created around mental illness!
Depression is widespread in our world and has been identified by the World Health Organization as a looming threat to productivity and human health. It strikes individuals regardless of socioeconomic status, gender, IQ, or ethnicity. It happens in spite of positive attitude, educational status, or the ‘pull yourself up by your bootstraps’ approach to life common to entrepreneurs.
Depression requires treatment and intervention, often with a combination of medication and behavioural counselling, which can include simple strategies such as:
1. Write what Dr. Martin Seligman calls a “Blessings Journal.” At the end of every day, identify three things from the day for which you are thankful.
2. Connect with people who care. Even though you may feel like isolating yourself, reach out to your social network.
3. Exercise daily.
You may be surprised at the difference these three actions can make in how you feel. For more strategies and helpful research, read Flourish by Dr. Seligman and The Happiness Advantage by Shawn Achor.
About the Author:
Following a successful career as a salesman and sales manager, Wayne Vanwyck founded The Achievement Centre in 1984, a centre dedicated to sales and leadership development. The Achievement Centre International now has principals across Canada, the US, Puerto Rico and the Middle East. He also owns Callright Marketing Services, a professional call centre that does market surveys, customer surveys, lead generation, direct sales and database development work. Callright specializes in the newspaper industry and is one of the foremost suppliers for newspapers across Canada.
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The Successful Transition Planning Institute of Cambridge, MA teaches Baby Boomers and their advisors how to avoid boring, meaningless retirements. STPI's books, tools, training and seminars empower Baby Boomers to "Think", "Live" and "Decide" what to do with their companies and careers. By doing so, Baby Boomers create plans for dynamic new lives, full of meaning and purpose. (see video).