THE GAP BETWEEN YOU AND A SUCCESSFUL OWNERSHIP TRANSITION

DO YOU KNOW YOUR GAP?

By Maurie Cashman

After taking a bit of a sanity break last week, let’s get back to business by talking about the gap that you may need to fill between your objectives and the reality of your ability to transition ownership in your business.

Let’s use Joe Davolla, a business owner who would like to leave his food processing business in five years. Let’s review what we know so far:

Joe:

• Age 58 married to Sue, also age 58.
• Sole owner of Davolla Food Processing, Inc.
• Salary of $250,000
• Exit Objectives:
  • Exit at age 63 (five years from today)
  • Post-exit income of $200,000 for 30 years

Davolla Food Processing, Inc.

• Annual cash flow of $250,000
• Value today: $1,000,000 to $1,500,000

Working Assumptions:

• Rate of investment return on personal investments (both pre- and post-exit): 7%.
• Life expectancy: age 91 (according to current Annuity actuarial tables).
• Joe’s non-business assets will be worth approximately $500,000 at Joe’s desired exit date.

Bottom Line:

• To finance the Davolla’ post-exit income needs, given the number of years they want income and their assumed rate of investment return (7%), Joe needs to sell his company for $2M after tax (we’ll keep things simple, to net $2.5Min investable funds.
• Joe must increase the value of his company by over $500,000 to $1,000,000 if he is to exit on his terms.

In Joe’s case, the Million Dollar Question is: How can he increase the value of his company by $1,000,000 over the next five years?

The first question is: “Have you quantified the amount you will need to leave your company on your terms?” And if so, is there a gap between your company’s value today and the value you’ll need when you exit?

Your very next question should be, “If I haven’t taken the time to identify and quantify my value gap, how can I take concrete and immediate steps to close it?” The size of your gap determines what needs to be done, how it is to be done; when each value building action needs to begin and who is to undertake each such activity.

Most owners know they have to increase business value and want to grow their companies. But most owners don’t know how to do so. That knowledge begins with first determining the scope of the value-building project.

If Joe is to reach his goal within his five-year timeframe, he must start work today. He will have to re-orient himself from working in the business to working on the business. This means that as tempting as it is to put out every fire, he must set aside time each day to take action to increase value.

Second, Joe needs to lay the groundwork for increasing value by determining how much the company needs to grow each year. This begins with creating monthly, quarterly and annual cash flow projections, and then directing his and his company’s energy toward achieving these immediate goals. An annual business plan based on these goals will become his roadmap to driving value upward.

Your gap analysis is the foundation for all of your value building choices: the tools and processes you will use, the support you will need, and the intensity of your efforts.

Creating a value building plan based on what you want is a first step in taking charge of your personal and your company’s financial future. We’ll discuss how you can take charge of that future next week.