Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
REMEMBER WHEN you were a child and adults asked, “What do you want to be when you grow up?”
Inevitably, the answers were lofty, even a bit silly: A police officer; a teacher; or a caped super hero with the ability to fly. Children have little trouble dreaming up vivid images of their future selves.
Ironically, as adults owning a business, the future can be a bit cloudy. Hardly anyone bothers to ask “What will your business look like when it grows? Why are you in this business? What will happen to it when you’re ready to move on?” If someone asked, would you have an answer?
For some self-employed, the business may simply be providing a good job and a great lifestyle, but a job to abandon at retirement. The company dissolves without any residual value. However, if your company’s story includes trying to build something larger – creating a family legacy or building the next hot trend to be acquired for millions of dollars – then learning how to make value-enhancing decisions is important.
From capital purchases to people, inventory management to tax planning, maximizing the value of a business requires being thoughtful about risk, managing investments and cash, and developing a longer-term decision model.
Take tax planning, for example. For many, tax planning is a way to extract every possible dollar from the business at year end. Capital investments for pure tax-advantaged reasons are another potential pitfall. In the long-run, the value of the business may suffer.
Let’s say your year-end tax planning includes buying a piece of equipment to take advantage of big accelerated depreciation write-offs. Before running to the dealership, stop and visualize a long-range point of view. Will owning a new truck solve a business need? If not, could that capital be applied to another area of the company and ultimately increase the future value?
Many tax-saving planning strategies don’t really save taxes — they just kick liabilities down the road. That does not necessarily imply they are bad ideas. Tax strategies should be balanced through the lens of long-term and short-term benefit. Maybe leasing instead of buying that vehicle will free up capital to fund other projects with greater potential for return on investment. Better yet, maybe keep the old truck and instead hire a production manager who will help extricate you from day-to-day operations — bringing you closer to your goal of a more self-sufficient business. A deeper management team can decrease risk, thereby increasing the overall value.
Why? It’s a matter of preparation. If you are planning to sell your business or do estate planning someday, you will need to hire a professional to develop a business valuation report. The report will determine the value of the company by telling the story of your business from three perspectives:
The market story that paints a picture of your industry and competition as well as the historical and projected health of your industry.
The financial story of your business, analyzing everything from multi-year financials to inventory and other assets.
The ownership story that will impart readers with an analysis of your business structure, including management, technology, systems and the brand value you have built.
Preparing solid financial reporting systems today will make life easier down the road. Many closely-held businesses don’t collect monthly, quarterly and annual financial data because they aren’t required to report to a bank, investor or shareholder. Unfortunately, this makes it nearly impossible to derive a proper value of the business, or at least one that an outsider would trust. If you plan to sell your company in the next five to seven years, consider investing in accounting systems and financial statements that follow generally accepted accounting principle (GAAP) standards.
Another common mistake closely-held and family-owned businesses make is to blend personal expenses and luxury item purchases into their business. When potential buyers discover that the 40-foot yacht shrink-wrapped in the warehouse is on the books as company transportation, a large red flag goes up. Outsiders will likely view it as a misuse of capital. Worse, they may suspect other misleading information with the company’s financial performance.
Inventory is another area requiring careful consideration, especially when managing cash flow. There may be pressure to write-down slow moving materials off the books. However, if those assets still might be utilized long-term to build or service customer needs, such assets may have sufficient value and therefore should remain and be valued accordingly.
Managing risk requires being mindful of your current position in the marketplace. You may not be ready to retire, but you recognize that your business is in a declining industry. If true, you may choose to sell quickly before value slips. Contrarily, maybe your company is a star player in a hot niche industry and you have found yourself riding the crest of a wave. In either scenario, being cognizant of value and being prepared to sell at any time will help you maximize the value of your business investment. For this reason, having the framework for your story — including the financial reporting, history of making good value decisions as well as solid management and brand investments—is essential to creating a business that is almost pre-packaged for sale whenever markets prove most advantageous.
Building your company story takes years of discipline, sacrifice and making difficult, but thoughtful, decisions. Value-based decision making will sometimes run at odds with immediate tax savings and after-tax current earnings. However, if you build a company that has maximized its value to potential buyers, you have won the value game, thereby earning the ability to take month-long vacations in warm, sunny places. After all, your company’s story should have a happy ending, shouldn’t it?
