By Maurie Cashman
It is time to determine what you need to receive from the ownership transition of your company. The recession and resulting recovery have brought a lot of challenges, but it has also brought the luxury of time to determine exactly what you need from the sale or transfer of your company to support a comfortable post-business lifestyle and time to create enough value in your company to achieve your desired transition terms.
â€œI’ve continued to recognize the power individuals have to change virtually anything and everything in their lives in an instant. I’ve learned that the resources we need to turn our dreams into reality are within us, merely waiting for the day when we decide to wake up and claim our birthright.” –Anthony Robbins
Most owners think they know how much money they will need to retire comfortably. Most owners are wrong. Many owners also think they know what the economy is going to do. In the opinion of a majority of economists, who are predicting a recession in 2018, those owners would also be wrong.
Owners start with the unrealistic assumption that they will receive all cash at closing for the sale of their companies. Yes, some owners do receive a great deal of cash at closing. Nearly all, however, are subject to various terms and earn-outs designed, by buyers, to make sure that all of the sellerâ€™s predictions about future growth in income/profits/margins are correct. Earn-outs also can be used to protect buyers from the downside, such as the loss of a major customer or the rise of a new competitor.
In addition to earn-outs, most owners must carry back debt â€” an installment note from the buyer to the seller for part of the purchase price. This note will always be second to the buyerâ€™s primary lender in terms of collateral position, payment priority and may be subject to be put on interest-only payments or outright suspension if cash flow does not allow for payment.
The second miscalculation owners make is the return they will receive on the funds they invest. Over time owners err on the side of optimism when considering rates of return. Perhaps owners, now sobered by volatility in the stock market and the uncertainty over future interest rates, will align their expectations better with reality. That remains to be seen.
The third common error owners make when calculating the amount theyâ€™ll need from their companies is to underestimate the amount they will need, on an annual basis, to live. They expect that theyâ€™ll require less cash than they need today. Do those owners plan to stay at home for the rest of their lives? What do they say to their spouses who have a pent-up desire to travel? Few owners are wired to putter around the yard or the house, or are content with television, golf and fantasy football. Few owners work as hard as they must to succeed to be satisfied with anything less than an active post-ownership life.
A skilled financial advisor can help owners to avoid these common mistakes. Financial advisors have estimators that take into account fluctuations in a variety of variables so that you can project best-, probable-, worse- and worst-case scenarios.
A skilled transition advisor can work with owners to develop a valuation of their business and a plan to make the value of the business grow. Once owners have accurate estimates of their post-ownership needs, they can then determine if the value of their companies support those needs. However, without this knowledge, if the stock market volatility continues and interest rates rise, business values will drop concurrently. More owners may learn, as they did in the last recession, that they simply canâ€™t afford to leave.
The past six years have given you time to protect the assets you have and to build business value. We have also gotten six years older. If you havenâ€™t taken these steps, when do you plan to do so?