Are you an â€œInconsequential Ownerâ€? To determine this answer these two questions: Are you are absolutely critical to the success of your business? Without you, is there a business?
Most owners of closely held businesses, if they are honest, would answer â€œyesâ€ and â€œnoâ€ to those questions. Letâ€™s discuss how to fix that.
With some hard work, we can help you become an Inconsequential Owner. Let me explain what I mean..
All owners should understand that they will someday leave the businesses they have created or built upon. Letâ€™s assume for a moment that tomorrow you leave your business permanently. If you are an Inconsequential Owner, your exit will have no impact on the business, and thatâ€™s good for business value. Buyers pay for business valueâ€”not for the departing owner. The owner may receive some compensation for transitioning the business or a consulting agreement, but these are generally fairly inconsequential to the overall transaction value.
If you constitute a significant part of your companyâ€™s value you are a Consequential Owner. If you left the scene, there would likely be few buyers interested in your company, and those who are will likely pay significantly less than they would had you been an Inconsequential Owner.
Planning is the process you can use to transform yourself into an Inconsequential Owner for your sake, for your familyâ€™s sake and the sake of your company. Ownership Transition Planning is a term that probably aligns with what your children have been telling you for years!
Put another way, your Ownership Transition Plan should answer this question: â€œWhat has to happen in my business by the time I leave it, to: (1) enable me and my family to achieve financial security (2) allow me to move forward with the rest of my life, secure in knowledge that I have been a good steward of the business; and (3) allows me to transition ownership on my terms?â€
The details that constitute â€œwhat has to happenâ€ are discussed in a large number of newsletter articles, books, and White Papers that we can share with you. But for most owners, one of the first and most important things that must happen after figuring out your current business value and your Ownership Transition objectives is to create and sustain business value.
When we talk about value in the context of Ownership Transition Planning we divide the discussion into three areas: Building Value, Protecting Value, and Minimizing Income Taxes.
What do you, as the owner, need to do to create a successful company that can operate without you? Building Value includes: 1) Developing a market focus; 2) Creating a top management team; and 3) Adopting proper financial focus and corresponding policies. For more information on these topics, you might read one of my favorite books, Innovation and Entrepreneurship by Peter Drucker.
What characteristics will buyers pay handsomely for? These Value Drivers include (but arenâ€™t limited to):
- A stable and motivated management team;
- Operating systems that improve sustainability of cash flows;
- Understanding and nurturing you companyâ€™s Competitive Advantage;
- A solid, diversified customer base;
- A realistic growth strategy;
- Effective financial controls; and
- Good and improving cash flow.
Weâ€™ll talk about protecting value from both internal and external threats. Instead of handling these threats as they occur, weâ€™ll talk about the threats and how to avoid them before they happen. Topics will include: protecting proprietary information and trade secrets; preventing employees from doing harm to the business when they leave (by taking customers, employees, business relationships, etc.); and anticipating and evaluating outside threats to your company.
Minimizing Income Taxes.
The lifeblood of every business, and therefore its best indicator of value, is cash flow. Our discussion includes how to preserve cash flow and value from income taxation. Income taxes on the sale of your business interest can range from zero to over fifty percent. Future issues of this newsletter will discuss how to avoid excessive and unexpected taxes. Each tax-efficient design and the tools used to implement those designs usually have both disadvantages and advantages. To date, however, weâ€™ve been unsuccessful in identifying any upside to paying more than necessary to the government
As you read this article we hope you begin to appreciate that while planning and preparing yourself and your business for an ultimate Ownership Transition may seem to be a daunting task, it need not be so. If you approach the task systematically, you will use only small chunks of time and effort for a potentially enormous payoff.