Theory of Constraints POOGI Part 62 Exit Planning Questions

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Brad: Next, we have a choice. Most business owners have a desire to transfer the business to one or more "insiders", but the business may be worth more and the business owner would make more money sooner if the business was sold to a third party. So, it's helpful to choose one or the other for exit planning. Choosing one initially doesn't mean that you can't change your mind later:

4. Do you know how to sell your business to a third party and potentially pay the least possible taxes?

5. Do you have any plans on how you will transfer your business to family members, co-owners or employees while paying the least possible taxes and enjoying maximum financial security?

Dr. Lisa: And why do you say that transferring to insiders yields less money or takes longer for the business owner when compared to a third party sale?

Brad: Most businesses are not saleable. They are too small, not profitable enough, or have some other issue(s). No business broker or investment banker will waste their time representing a business that buyers won't buy. If a business is valuable enough to be sold to a third party, the process takes time to execute and there are plenty of pitfalls, but business owners that can sell to a third parties usually do. The threshold is somewhere between $5 and $10 million in business value, depending on market conditions and the quality of the company. These business owners cash out, and with proper planning, can still take care of the insiders they want to.

But it is valid to transfer to insiders. The problem is that most family members, co-owners, and employees don't have any money! What is required in this case is an elegant exit plan, because it will be the current and future cash flow of the business that is needed to fund the business owner's exit from the business, in conjunction with the ownership transfer. I find it interesting that rather that selling for maximum value as in a third party sale, transferring for the lowest defensible value is the best way for the business owner to maximize after-tax cash in a transferring to insiders.

Dr. Lisa: Transferring to insiders sounds complicated.

Brad: It doesn't need to be. In either case, a sale to a third party or a transfer to insiders, the business owner needs professional help. But we aren't done with the questions that need answering. The next two are related:
6. Do you have a continuity plan for you business if the unexpected happens to you?

7. Does your family have financial contingency plans if the unexpected happens to you?

Dr. Lisa: In TOC, we say the first rule of management is to "be paranoid". So this has to do with business continuity and personal wealth and estate planning. Are most business owners prepared?

Brad: Some are but most aren't. And even if a business owner did a buy-sell agreement, or estate planning, chances are that was years ago and the documents are out-of-date. Exit Planning requires a team of advisors, coordinated by an exit planning professional. Creating an exit planning roadmap, implementing it over time, and keeping it up-to-date is crucial for the business owner that wants to meet his or her retirement objectives.
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Want to have an Exit Plan? Go to http://www.scienceofbusiness.com/exitplan.aspx and take the first step.
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Here's to maximizing YOUR profits (and selling price of YOUR business)!

Dr Lisa
(c)Copyright 2010, Dr Lisa, Inc. All rights reserved.

Theory of Constraints POOGI Part 60: Exit Planning cont.

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Dr. Lisa: What’s the impact of the economy on exit planning?


Brad: Unless the business managed to maintain its sales and profit levels and growth rates, the business is probably less valuable. So, even business owners with exit plans have probably extended the date of their exit and/or reduced the amount they are willing to accept for the business.

Dr. Lisa: How about demographics of business owners?

Brad: With so many businesses owned by baby boomers, there are a lot of business owners our there that would like to exit in the next few years. I heard a statistic the other day that half of all business owners are emotionally—not financially—ready to sell, but are waiting for a white knight to appear, meaning they aren’t doing anything to properly prepare the business for sale.

Dr. Lisa: What are the choices a business owner has for selling or transferring his business?

Brad: The business owner would usually make the most money by selling to a third party. But many business owners have different objectives, and would prefer to transfer the business to a family member(s), or another owner(s), or to an employee(s). Exit planning helps in both cases.

In a sale to a third party, exit planning can minimize taxes and yield the greatest amount of after-tax proceeds from the sale. In a transfer, exit planning can help the owner keep control as long as necessary, minimize risk, and maximize the amount of after-tax money received.

Dr. Lisa: We work with owners of small businesses all the time. I see how exit planning fits. Business owners need to put in place robust processes—using TOC, Lean, and Six Sigma—that help their company grow and become more and more profitable. And they need to put in place a management team to run the business without being dependent on the owner. Both make the business more valuable.
Brad: Correct. Without an exit plan, a business owner does not have an end in mind. However, even with an exit plan, growing more and more sales and profits is not a given. The TOC approach to marketing and sales fits perfectly. Most of these business owners do not now have an offer that is “unrefusable” to their customers and prospects (a “Mafia Offer”) and a robust sales process to deliver it. Improved marketing and sales is a requirement for every company, with or without an exit plan. But coupled with an exit plan, the business owner is more likely to meet his exit planning objectives.
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Want to have an Exit Plan? Go to http://www.scienceofbusiness.com/exitplan.aspx and take the first step.
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Here's to maximizing YOUR profits (and selling price of YOUR business)!

Dr Lisa Lang
(c)Copyright 2009, Dr Lisa, Inc. All rights reserved.