Along With MPS, Are You Creating Overall Value Down the Road?7 Dec, 2010 By: Bob O’Hara, O’Hara & Company, PC
Along With MPS, Are You Creating Overall Value Down the Road?
I know you are thinking about Managed Print Services as the silver bullet to grow your business, which is all well and good as we know that a well implemented MPS program is vital to the success of you business.
But what about other long term goals? Like when you finally retire from business (from increased revenues from MPS) or your eventual succession, such as handing the baton to family members or though profitable acquisition. Many will say they have enough on their plate dealing with financial and employee issues occurring today, without devoting time and attention to exit planning. But the reality is that from the moment a business opens, the clock is ticking toward that ultimate transition day…and the actions taken today to preserve and create overall business value, will chart the course for a lucrative tomorrow.
The sale of a company or dealership requires a comprehensive action plan and can take up to a decade to transpire, but with the proper measures taken and advisers in place, this critical transaction can be conducted with minimal stress. Ultimately, there are but five ways for owners to leave their companies: Sell to a Third Party, Sell to a Co-Owner/Family Member, Sell to Key Employees, Die Owning the Business or Liquidate the Company.
For those in the beginning stages of an exit plan, consider that leaving your company is a process that, if it is to be successful, requires a written plan. This plan should set your exit objectives – financial and otherwise – and document how you will achieve those goals.
No matter how skilled or experienced a business person you are, executing an exit plan is not something that should be done solo. If you opt to go it alone, chances are you will leave a lot on the table – in terms of money, time and perhaps even your emotional well-being. A successful exit plan involves a number of elements – legal, financial, tax, to name just a few. It is in your best interest to hire an experienced team of professionals, including an attorney, CPA and financial planner to assist you through the exit plan process.
The Healthy Exit Path
In order to select an exit path you must first identify your most important objectives, both financial and non-financial. Internal and external considerations impact an owner’s choice of exit. An example of an interior consideration is the owner who wants to transfer the business for cash, but is unwilling to place his established company and the fates of his employees to an unknown third party; in this case he may decide that an Employee Stock Ownership Plan or carefully-designed sale to a key employee or group of employees is most suitable. Exterior considerations that may impact the choice of exit path include business, market or financial conditions. If an immediate sale is not necessary, a business owner may opt to wait it out a couple years to avoid dealing with an anemic market.
The importance of financial statements cannot be overstated when going through the exit plan process. Whether you intend to transfer your business to someone within the company or sell to a third party, demonstrating financial stability is a crucial step in establishing a successful exit.
Financial statements provide a clearer picture of current financial position; in effect gauging what has already been accomplished and what still needs to be completed to create a successful exit plan. These vital statements provide cash flow information, which is used to determine the value of your business and the price it may be sold for – they show historic earnings, cash flow results, and trends that have been established over the years; in effect creating an indicator of the company’s financial future. For example, if you plan to sell your business during the first half of 2011, you will need cash flow projections for the remainder of that year, in addition to the years 2012 through 2015. Understand that these projections must be grounded in the reality of past actual performance, rather than your rosy hopes for the future.
Regardless of whether your exit plan revolves around an internal transfer of ownership or sale to a third party, an independent valuation provides a solid basis for planning. The last thing you want is to spend time and money planning your exit, only to discover that the value of your company can not support the exit, either financially or time-wise. Evaluating various tax consequences is also paramount to your choice of exit plans. This assessment will include several factors, such as the form of business entity as well as if you will sell the business assets or your stock in the company.
Advantage vs. Disadvantage
For company owners seeking to outright sell, there are both advantages and disadvantages to dealing with a third party. On the plus side, if the business is properly prepared for sale, you can get cashed out – in other words, you can get the majority of your money at closing. Immediate cash translates into less risk down the road. But if this important detail is not part of your sales contract with the new owner, you will be at a disadvantage. Bottom line is, you want to receive the bulk of the purchase price in cash at closing. Another advantage – if the market is “hot” for your business, you may be pleasantly surprised with receiving more cash than anticipated. As with most things, timing is everything when selling a business.
One significant disadvantage to selling to a third party is more emotional than monetary. Regardless of what the buyer says, the personality and culture of your business will undergo a radical change. Maintaining the culture and core essence of a business is normally best achieved by selling to someone other than an outside third party.
Apart from who the company is sold to in the future, the need to build its value should be a constant top priority, beginning in the embryonic stage. It’s important from the “get go” for business owners to ask the hard questions about their future and the potential of the business they are creating. A road map to an eventual exit plan will provide focus and direction; it will also allow an owner to develop plans to motivate and retain key employees in consideration for top seats in the event that the business is transferred to the management team or sold outright to a third party.
Owners should decide early on who will run the business if and when he/she leaves. It makes no difference if the plan is to someday transfer ownership to the management team or sell it to a third party – as an owner you must take measures to include those key individuals on decisions that will affect the company’s future, and provide incentive to those essential employees to work with you toward the goal of building business value.
For instance, the person in charge of operations should be given the authority to set production policies and provided motivation to control costs and develop efficiencies. By sharing authority and decision-making responsibilities, the owner begins to make the business capable of operating in his/her absence. Look at it as a simple equation. One person in charge can create a weak link to the future as all responsibility rests with that individual. But a business overseen by several top-notch employees has a process in place that can better build productivity and cash flow…in addition to adding value to the table when the time comes to sell your business.
The time spent now to preserve and increase your company’s value, perhaps partly through MPS, and other notable strategies, will pay off later…for both the short and the long run.
Bob O’Hara, CPA/PFS, MST, CExP, is Pres. / CEO of O’Hara & Company in MA that addresses the comprehensive exit strategy of business owners. For info visit www.oharaco.com or www.exitplanning-edu.com or call 978-244-9860.