by Stephen Ferraro,
CPA/ABV/CFF, MAFF, CVA, CEBC
Business owners need an ongoing planning process to grow, maximize business value and create the most successful business transfers. It’s just as important to work on your business as it is to work in your business.
The process should coordinate business valuation, growth planning and business transfer analysis with personal retirement planning. The ultimate goal…successfully operate, grow and transfer your business on your terms and time frame, while maximizing and protecting your personal wealth.
Maximize Business Value
To determine how fast you can get to where you want to go, you need to know where you are now. That’s why business valuation is so important. As part of the process, you should review the profits and cash flow generated by your business so you can understand the range of values the market will place on your business as it is today and in the future.
You should assess your value drivers—those factors that enhance the inherent value of your business—and discuss strategies that allow you to maximize business value. The process should focus on key areas such as growth, recurring revenue, product differentiation, customer diversification, financial, sales and marketing, customer satisfaction, human resources and more.
Mental Readiness & Owner Dependence
When will you be ready to leave your business? Mental readiness for a transition is a critical factor for nearly every business owner who wants to continue with their business, but still protect their illiquid wealth. You need to know what the business really means to you—personally—and what you are going to do with your time after the transition.
Personal Value Gap
In order to answer the question “can I afford to transfer my business?” You must know your personal financial situation. In other words, is there enough money saved outside the business to provide financial freedom.
In the case of most owners the majority of your wealth is locked in your business. You need to understand the following:
What you currently have saved outside the business.
What other sources of income are available to you today and in the future.
What your lifestyle expenses are today and are expected to be in the future.
What the difference is between what you have for assets and income versus what you need for personal living expenses. This is called your Personal Value Gap.
The Personal Value Gap analysis provides an overview of your current financial situation as it relates to being financially free from your business. As part of this process you should discuss and review the following:
Your existing lifestyle and how much the business pays for personal expenses.
Your current savings, investments, and savings habits, as well as, your current and projected sources of income (such as real estate, social security, pension income, etc.).
Your comfort level with projecting certain estimates of return on investments and growth of your liquid assets to complete the Personal Value Gap calculation.
Transfer Options Analysis
As you move through the process you will continually explore when, as well as how you would like to transfer your business. This also leads towards identifying the transfer option(s) that are most likely suitable for you to begin to build your transfer strategy around.
Each business owner can identify transfer alternatives available that fit your respective situation. You should examine all the options available to determine which one is the best fit for helping you to achieve your overall goals. This may include one, or a combination of, the following transfer options:
Sale of the business to an outside party/strategic buyer; private equity group recapitalization; employee stock ownership plan (ESOP); management buyout (MBO), and gifting program
The various transfer options may have different business values associated with them. In order to evaluate the outcome from each of the options, you should understand the “range of values” that exists for your business. The estimated range of values for the transfer of a business could include the following different values:
“Fair market value” through the establishment of an ESOP, MBO or gifting program; “investment value” an investor (such as private equity) may pay for your business; and “synergistic or strategic value” a competitor may pay for your business.