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exit objectives – Partners31: Specializing in Health and Human Services http://partners31.com We're Really Good At What We Do! Wed, 13 Apr 2016 23:07:11 +0000 en-US hourly 1 https://wordpress.org/?v=4.9.3 http://partners31.com/wp-content/uploads/2011/09/cropped-Janet-FINAL-LOGO-no-bar-32x32.jpg exit objectives – Partners31: Specializing in Health and Human Services http://partners31.com 32 32 Growing the Value of Your Business- Getting Ready to Sell? http://partners31.com/business-planning/growing-the-value-of-your-business/ http://partners31.com/business-planning/growing-the-value-of-your-business/#respond Mon, 04 Mar 2013 19:27:46 +0000 http://partners31.com/?p=1480 In our experience most owners do not know how to grow value in their businesses: “…71% of small and mid-sized enterprise owners plan to exit their businesses within the next ten years, strongly highlighting the growing importance of enhancing business value. However, the challenge is that few organizations genuinely understand what actions they must take […]

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identifying business goalsIn our experience most owners do not know how to grow value in their businesses:

“…71% of small and mid-sized enterprise owners plan to exit their businesses within the next ten years, strongly highlighting the growing importance of enhancing business value. However, the challenge is that few organizations genuinely understand what actions they must take to achieve this goal…” – Deloitte

In our practice, we work with owners to methodically and successfully close the gap between what you have and what you will need. We begin with Step One: creating a written value building plan.

To create a written value building plan we ask several questions contained in our Value Driver Analysis. These questions are designed to:

  1. Identify your long-term business and personal goals (strategic objectives).
  2. Assess your current personal and business financial landscapes (quantify resources).
  3. Target specific areas in your business that you feel can drive up value and close the gap between where you are today and where you want to be after you leave your business.
  4. Your responses to our questions result in a graphic Assessment that gives you (and your advisors) a bird’s eye view of your company’s potential value building areas.

Based on our preliminary Assessment, we then ask a series of additional questions to pinpoint areas within your company that can best yield significant increases in value. In general, the areas that offer the best opportunity for value growth (and the areas we’ll examine in future issues of this newsletter) are:

Minimizing risks from inside and outside of the company.

Motivating the management team to perform without the owner’s involvement.

Pre-emptive tax planning.

Deployment of various operating systems.

Using timely and accurate financial reports to improve cash flow.

The Value Driver Report that we create includes specific recommendations about how to increase business value using these tools (and others). This written Report is not only a road map that reminds you (your advisors and if appropriate, key managers or co-owners) where you are going, but it:

  • outlines what must be done to reach your goals;
  • makes specific recommendations about how to achieve each task;
  • designates the person(s) responsible for accomplishing each task; and
  • holds everyone accountable to a timetable for achieving each task.

This process of creating a written Value Driver Report is the first vital step toward growing the value of your business.

When the task of creating more value appears overly-involved, burdensome, and time consuming, owners procrastinate or avoid the project altogether.  After all, you have businesses to run. We help owners to overcome this hurdle by prioritizing what needs to be done and creating a series of tasks with short time lines, measurable results, and concrete deadlines. Think of each task as a “low cost probe.” No one task will take a lot of your time, energy, or money. Yet each moves you closer to creating greater value, more sustainable cash flow, or less business risk.

We are excited to offer the Value Driver Report to business owners who are serious about exiting their companies in style. If you are one of those owners, give us a call and we will help you to create your successful financial future.

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Exiting Your Home Care Business Without Leaving It http://partners31.com/business-valuation/exiting-your-home-care-business/ http://partners31.com/business-valuation/exiting-your-home-care-business/#respond Tue, 22 Jan 2013 16:17:40 +0000 http://partners31.com/?p=1460 Business owners may be telling their advisors things like, “I’d like to back away from my business”, “I’d like the freedom to do whatever I want, whenever I want”, “I don’t want to worry about money. But if I sell, I’m unlikely to get enough cash in today’s merger and acquisition marketplace.”, “If I could […]

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Choices of a businessmanBusiness owners may be telling their advisors things like, “I’d like to back away from my business”, “I’d like the freedom to do whatever I want, whenever I want”, “I don’t want to worry about money. But if I sell, I’m unlikely to get enough cash in today’s merger and acquisition marketplace.”, “If I could cash out, where could I invest and generate a reasonable rate of return?”, “Don’t even think about suggesting that I put my money in the stock market!!”, “Even if I were foolish enough to let you do so, I doubt you could match the return I get on investments in my own business.”

Faced with limited prospects, owners often wonder if, rather than exiting, they can “back away” from their companies. They may contemplate treating their companies as more of an investment while continuing to own it.

Many owners realize that today’s merger and acquisition market contains fewer cash buyers. Consequently, owners may be reluctant to offer their companies for sale. They may be convinced that there could be less risk in keeping their businesses — at least in the short term.

In addition to a scarcity of cash buyers, the merger and acquisition market is no longer supporting the valuation multiples of six or seven times Earnings Before Interest, Taxes, Deprecation and Amortization widely achievable just a few years ago. Instead, most industry sectors have seen a decrease in valuation multiples of 20 to 50 percent.

It may be difficult to dispute that the lack of cash buyers willing to pay fair value for successful companies, and poor investment opportunities may certainly be sound reasons for owners to choose to stay in their companies. The issue for many owners then is: how do I back away and let others run the business without transferring ownership and control?

One answer is to engage in Exit Planning as if you were going to exit your business. After all, someday you will exit — even if you are carried out on a shield. Traditional Exit Planning can help to enable you to orchestrate a successful, permanent exit. Intermediate Exit Planning, however, can help to enable you to forge a path toward an exit without giving up ownership.

In order create an intermediate Exit Plan, you should:

1. Establish your (owner-based) on-going business objectives;
2. Determine future cash flow needs for yourself and for your business; and
3. Build a stronger business defined as one capable of running without you.

Let’s look briefly at each component.

First, working with your Exit Planning Advisors, establish your timetable for backing away from your business. Communicate your wishes clearly: What does backing away mean to you in terms of time commitment, emotional involvement, financial guarantees, etc.?

Second, you must determine the amount of income that you need the business to provide you. Ask members of your Advisory Team to help you make this determination.

Third, the characteristics of a “stand alone” business (one that can run without you) may be the same characteristics third party cash buyers look for. A company that can be managed from a distance and that is able to pay adequate cash flow with little risk of nose-diving without its owner at the helm, may be a highly-attractive business. It can be valuable both to third parties and to the owner who wants to step away. To create that type of business, you should have in place critical Value Drivers. They are:

  • Increased cash flow
  • Operating systems that improve sustainability of cash flows
  • Improved facility appearance
  • Debt reduction
  • Documented sustainable earnings
  • Growth strategy; and
  • Strong management team

When you work with your advisors to fashion your “stand alone” business, pay particular attention to creating repeatable, sustainable internal systems and developing and properly motivating your management team. In order to run successfully without you, your company needs systems and management in place capable of replicating your leadership.

The most valuable businesses are those in which the owners are no longer valuable. Planning to step away using intermediate exit planning can create a more vibrant business. When your day of departure does eventually arrive, both you and your business will be prepared.

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8 Ways to Exit Your Home Health Care Business http://partners31.com/home-care/8-ways-to-exit-your-home-health-care-business/ http://partners31.com/home-care/8-ways-to-exit-your-home-health-care-business/#comments Tue, 04 Sep 2012 20:04:53 +0000 http://partners31.com/?p=1242 According to Paul Simon, there are fifty ways to leave a lover. We may not be as resourceful as Mr. Simon when it comes to saying goodbye, but we were able to come up with eight ways for owners to leave their home health care business. 1. Transfer to a family member 2. Sale to […]

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8 Ways to Exit Your Business

8 Ways to Exit Your Business

According to Paul Simon, there are fifty ways to leave a lover. We may not be as resourceful as Mr. Simon when it comes to saying goodbye, but we were able to come up with eight ways for owners to leave their home health care business.

1. Transfer to a family member
2. Sale to key employee(s)
3. Sale to key employee(s) using Employee Stock Ownership Plan (ESOP)
4. Sale to co-owner(s)
5. Sale to outside third party (including home care business brokers)
6. Initial Public Offering (IPO)
7. Retain ownership but become passive
8. Liquidation

Depending on your unique circumstances, any one of these paths may be appropriate. During the three-step process outlined below, you will harmonize your exit objectives with the unique strengths of your company and the evolving realities of the marketplace. Establishing thoughtful objectives is the first step of you Exit Plan, and doing so well in advance of your departure gives you and your advisors the time necessary to make your goals a reality. Many owners choose to avoid this sometimes difficult process. But if you wish to “leave your business in style”, choosing the correct path is key.

Step One–

First, you and your advisors must identify your most important objectives–see Issue 2 for more about identifying and prioritizing objectives. These objectives are both financial–“how much money will I need to meet my and my family’s needs?”–and non-financial–“I want my company to stay in my family” or “I want to remain involved in the business.”

Internal and external considerations will impact your choice of exit path. For example, you may wish to transfer the business for cash but are unwilling to put your company and valued employees’ fates to an unknown third party. In that case, you may decide that an ESOP or carefully-designed sale to key employees is the best exit path. Exterior considerations may include business, market, or financial conditions.

Step Two–

You must accurately value your company and determine its marketability. This analysis will provide you with further direction and help eliminate unnecessary exit paths. For example, if your company’s value is high but its marketability low–perhaps due to an anemic home health care market–you may decide that an outside party sale is impractical and instead choose to sell to an insider (co-owner, family member, or key employee).

Step Three–

The final step involves evaluating the various tax consequences of your exit options. This evaluation will include factors such as business entity and any changes that must be made. To use a third party sale example, if it would involve a sale of assets and your company is a “C” corporation, the adverse tax consequences might indicate an ESOP sale as a more appropriate choice.

Using this three-step process will help you narrow your list of exit options. And if more than one route remains, you and your advisors must conduct open and frank discussions about the pros and cons of each path.

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Family Succession Planning Via Sale to Third Party When Exit Objectives Clash http://partners31.com/business-planning/family-succession-planning-via-sale-to-third-party-when-exit-objectives-clash/ http://partners31.com/business-planning/family-succession-planning-via-sale-to-third-party-when-exit-objectives-clash/#respond Fri, 15 Jun 2012 20:38:35 +0000 http://partners31.com/?p=879 Many business owners facing imminent exit have the enviable but difficult choice of either selling the business to an outside third party and achieving their financial objectives or, conversely, transferring the business to loyal, motivated,  key employees or family. This is nothing more, or less, than a clash of exit objectives. Take John Conover for […]

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business exit objectives

Make sure you know where you're headed!

Many business owners facing imminent exit have the enviable but difficult choice of either selling the business to an outside third party and achieving their financial objectives or, conversely, transferring the business to loyal, motivated,  key employees or family. This is nothing more, or less, than a clash of exit objectives.

Take John Conover for example. John Conover’s automotive after-market business succeeded beyond his wildest dreams, and just as he started thinking about throttling back, a much larger and well-respected company offered to buy his business at a price that met all John’s exit planning objectives. John hesitated because he really wanted to sell the business to his management team, a group of three capable, loyal, long-term employees, one of whom was his son.

The management team sale presented one simple problem:  they did not have enough money.  John’s objectives seemed hopelessly conflicted.  Should he please his pocketbook or follow his heart?

This is a common problem in businesses with sufficient value to attract third party cash buyers or mergers and acquisitions brokers.  The important lesson here is that an experienced advisor can help you understand and compare various options to resolve these seemingly conflicting exit objectives.

In John’s case, the would-be buyer was eager and even insistent, e current management team stay with the business through the sale process.  Because of its greater size, the buyer could offer the key employees greater income and benefits.  Further, John wanted to reward with cash his son, the key management team, and several long-term employees for whom ownership was not practical or advisable.

Using readily available estate planning techniques, John gave about ten percent of the company value to his son.  Thus, his son was poised and funded to begin his own company if he chose not to remain with the new owner.

Upon reflection, John realized what he really wanted was to reward key employees for the value they added to the company rather than actually selling them the company.  He also realized the insider transfer could potentially burden his son and employees with a mountain of debt.  This was hardly a risk-free transaction! By gifting to his son and providing deferred compensation to his key employees, John not only attained his financial and departure objectives while minimizing his risk, but he also provided a generous bonus to his key employees and a jumpstart to his son’s new business, while helping to minimize their risk as well.

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First Things First: Prioritizing Your Objectives http://partners31.com/business-planning/first-things-first-prioritizing-your-objectives/ http://partners31.com/business-planning/first-things-first-prioritizing-your-objectives/#respond Sun, 29 Apr 2012 21:51:38 +0000 http://partners31.com/?p=1210   You’ve got to be very careful if you don’t know where you’re going, because you might not get there–Yogi Berra It’s not always easy to interpret Yogi Berra. But perhaps he is pointing out how important it is to know exactly where you and your business are headed. There will come a time when […]

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Wants Vs Needs - Balance

 

You’ve got to be very careful if you don’t know where you’re going, because you might not get there–Yogi Berra

It’s not always easy to interpret Yogi Berra. But perhaps he is pointing out how important it is to know exactly where you and your business are headed. There will come a time when you leave behind the daily worry and stress of business ownership; have you defined your exit objectives yet? Many owners haven’t defined WHERE they want to be when the time comes, so they don’t know HOW to get there. Unless you prioritize your exit objectives, they may conflict with one another and you’ll find yourself unable to make much headway.

The clearest example may be business owner Bill Wilson. He recently told me he wished to leave his business within three years, be financially secure enough to enjoy his current lifestyle, and transfer his business to key employees. He felt he would be ready to leave right away.

A quick review of Bill’s personal financial statements by our skilled home care business advisors, however, revealed that most of his post-exit income would have to come from his business. But his business wasn’t large enough to attract cash buyers, and since he had not done the required exit planning, his employees had no funds to purchase his ownership interest. A long-term installment note seemed to be the only answer, but this was a risk Bill was unwilling to take.

If Mr. Wilson had taken the time to prioritize his exit objectives, the last resort outcome could have been avoided. For example, if financial security is your top priority, selling to a third party for cash may be the best, and quickest, exit path. But if attracting a qualified third party is unlikely, more time may be needed to devise and implement an exit strategy involving both cash and a transfer to an insider–child or employee.

On the other hand, if transferring the business to the party of choice is more important to you than financial security, and your planned exit time is approaching, financial security in the form of up-front cash must take a back seat. Or if you want to exit soon with cash, but your business cannot be sold immediately, do you wait until the home health care market conditions improve or do you sell now to employees?

As you can see from Mr. Wilson’s example, the three primary exit goals, listed below, must be considered simultaneously. You must prioritize each according to your needs. Rank the following factors from 1–most important to 3–least important.

  • Financial Security 1 2 3
  • Transfer to the party of your choice (e.g. key employees, co-owners, children) 1 2 3
  • Leaving the business when I want (whether this means immediately or never) 1 2 3

Prioritizing your objectives will help determine your exit path. While prioritizing your objectives is difficult, it can make your decisions much clearer. Complete the rankings so you can share them with your exit planning team.

One final word of advice: always solicit the input of your advisor team as you work through these decisions. It is always a good idea to get a fresh set of eyes and experienced mind to help you balance these competing objectives.

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Selling to Insiders – How Much Can you Sell your Home Care Business for? http://partners31.com/business-ownership/selling-to-insiders-how-much-can-you-sell-your-home-care-business-for/ http://partners31.com/business-ownership/selling-to-insiders-how-much-can-you-sell-your-home-care-business-for/#respond Mon, 09 Apr 2012 21:44:06 +0000 http://partners31.com/?p=971 If you wish to transfer your business to an insider(e.g. employees, children, co-owners) and want to receive full value, then generally that value cannot exceed four times your true cash flow.  We define “true cash flow” as the pre-tax money distributed to owners via salary, bonuses, company distributions such as S-distributions, and all rental payments […]

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selling your homecare business

You need to define "true cash flow"

If you wish to transfer your business to an insider(e.g. employees, children, co-owners) and want to receive full value, then generally that value cannot exceed four times your true cash flow.  We define “true cash flow” as the pre-tax money distributed to owners via salary, bonuses, company distributions such as S-distributions, and all rental payments exceeding the fair market rental value of business buildings or equipment.  Let’s see how true cash flow determines insider sale price.

Christine Roberts desired to sell her three floral shops to three store managers.  Her total true cash flow was $250,000 per year and she wanted 1.5 million, pre-tax, for the three stores, which grossed approximately 1.5 million total.  Not only did this amount meet her financial exit planning objectives, but one times gross revenue was a fair business valuation.

Even if Christine’s employees want to buy her business, which is a huge assumption we will examine in future posts, let’s look at some reasons why her prospects may be limited.

Her employees cannot afford the payments, which must come from business proceeds, nor can they borrow enough without proper exit planning.  The employees will pay Christine $150,000 per year ($250,000 post-sale cash flow minus 40% combined taxes = $150,000)*.  Not only must Christine pay capital gains on the $150,000, but it will also take her employees TEN years to make full payment.  Would any sane business owner agree to those terms?  And let’s not forget interest.  Assuming a long-term promissory note for 1.5 million at 8%, compounding monthly, and limiting total payments to $150,000, it would take just over ten years to pay!

The bottom line is that true cash flow cannot support Christine’s desired purchase price.  If she lowers her price to $1 million, the timeframe falls to under seven years.  If this is still too long, there are many other exit planning tools that can reduce the time or increase her asking price.  How?  Our mergers and acquisitions advisors at Partners31 can help answer that question, and many others.  Remember that your future cash flow determines, and limits, what your business receives from insider sales.

*Taxes vary depending upon applicable federal and state rates

 

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