Action Step 1 - Identify Personal Needs
Rule #1 is “Owner Motives Matter Most”. Identify and understand the most important personal planning objectives of the owner. Thereafter, analyze and estimate the total dollar amounts likely to be required to meet all of these future personal objectives.
- Will you have enough to do everything you want to?
- When do you see yourself wanting to leave the business?
- How much money do you want or need for total personal financial independence?
- What is the annual after-tax income you want after leaving the business?
- What are your exact retirement goals and what it will take — in cash — to reach them?
- Do you have a continuity plan for your business if the unexpected happens?
- Does your family have financial security if the unexpected happens to you?
- When and how to plan to transfer the business?
- What do you plan to do next?
Action Step 2 - Evaluate Business
Special emphasis must be placed on the value of the business since for many owners this is the single most significant asset available to accomplish the identified future personal planning objectives. The complexity of many client situations often means that their personal and business finances are inextricably linked.
The best way to examine and analyze these fundamental interrelationships are through creation of comprehensive business and personal financial models. Without knowing the value of your company or the amount and timing of the likely “after-tax cash proceeds” it is impossible to determine if future personal financial objectives can be accomplished.
Action Step 3 - Measure the Value GAP
“The GAP” is the dollar difference between the future amounts likely to be required as determined in Step #1 compared to the projected amounts likely to be available resulting from Step #2.
Frequently, there is a big difference and an aggressive plan of action must be implemented to “Bridge the GAP” over several years. By comparing alternative future growth and transition scenarios, owners can estimate the specific financial impact of each, and thereby identify the specific plan to best accomplish all the personal goals and business objectives.
Action Step 4 - Improve Business Profitability
Expected future profitability is a very key fundamental driver of business value. If meeting your personal and business objectives requires more time, a “GAP-MAP” analysis gives you an excellent yard stick to know by how much the future value of your company must increase. With these types of quantitative and qualitative assessments, you can confidently plan many ways to “Bridge the Value GAP”. Do a comprehensive review of the many special factors that have the largest value impact for your type business. These “value drivers” are what experienced buyers look for in a closely-held business. For those owners seeking to sell or transfer a business to insiders, these same fundamental value drivers are equally important. Some of the many value drivers include:
- An Experienced Management Team
- Proven Operating Systems
- An Established Customer Base
- Modern Facilities
- A Documented and Realistic Growth Strategy
- Effective Financial Controls
- A History of Stable or Increasing Cash Flow
Action Step 5 - Increase Business Value
From the AICPA’s Strategic Planning Committee “…..today’s business professionals operate in a new economy where the old rules no longer meet markets needs as fully as they once did.
Increasingly, the business community is seeking professionals with the competencies to analyze today’s rapidly changing business environment and help them address broad strategic business issues. Research conducted by an international leader in market research showed that 76 percent of small, medium and large U.S. companies that employ professional services firms are devoting more resources to strategic planning compared to five years ago. More than half of these companies and professional services firms are finding it more difficult to identify people with suitable strategic skills.”
Action Step 6 - Financing for Business Growth
According to TEC speaker and capital finance expert, Gordon Tunstall, most entrepreneurs make three huge mistakes when planning for growth: They limit their growth based on access to a common commodity — cash. They limit their thinking to traditional “secured” financing. They attempt to acquire capital in increments rather than getting all they need at once. The solution? Determine the full extent of your capital needs and acquire the financing all at once rather than piecemeal. “When planning for growth, most entrepreneurs ask, ‘How much capital do we have in the company and how can we best allocate it?'” explains Tunstall. “In contrast, high-growth companies ask, ‘What could we do with the business if we had all the money necessary to grow it to its full potential?'”
Action Step 7 - Plan for Succession
Planning for business succession is not often easily accomplished. There are specialized elements of this process that require the skills of experienced advisors, including attorneys, accountants, and financial intermediaries.
The typical scenario of an offer for the purchase of a business suffers from the lack of advance planning, whereby the owners do not maximize their return on investment. Ideally, several years before the transfer of the business, alternative plans are considered and planning takes place for the most likely outcomes, to be executed at favorable times in the business cycle.
It is important to perform this business succession planning process for implementation with voluntary transfers (sale of business, retirement, management buyout, family member purchases) so that plans are in place for the unexpected, involuntary transfers (death, disability, industry consolidations).
Action Step 8 - Personal Planning
Personal financial management involves every facet of your lifestyle for all of your remaining years including, investment management, risk management, risk tolerance, etc. To get the best results, as with business planning, you need to identify the desired outcome, establish a detailed plan for action, and then consistently follow through. As a business owner, CEO or senior executive, the tools and resources needed to arrive at your financial independence are within your grasp. The sooner you start planning, the sooner you can get there. Be sure to include your spouse/significant other in the planning process.
Action Step 9 - Business Transfer
Very often your company represents the biggest and most important financial asset. First, understand that as the owner of a privately held business, you have two key roles — CEO and shareholder. As CEO, your job is to make the best decisions for the business.
As shareholder, your job is to make the best decisions about your investment. When it comes time to plan for the best transfer of the business, these two roles often do not coincide. Effective business transfer planning must therefore take into account the differing needs of each role.
Action Step 10 - Estate Tax Planning
This entire process requires great sensitivity to the need for wealth preservation planning. The sale of a business generates cash. Cash for the former owner, his family, and to some extent yet to be determined, the IRS. Few owners have great tolerance for the full share the IRS could take from the sale proceeds. For this reason, knowledgeable business owners preserve wealth for themselves and their families through the proactive design and implementation of wealth preservation strategies well in advance of any transfer ownership.