“Ed came into our business and sorted out some very complicated accounting issues related to leasing and tax consequences. He was super low-key when dealing with some high strung partners and extremely effective. He really got our mess organized and moving on to the next steps. Highly recommend Ed for difficult situations in unique business circumstances.”
- Vern Brown, President, 1st Midwest Ag Capital Corporation
Sir Edmund Hillary was not the first person to climb Mount Everest, he was the first person to climb to the top and make it back alive. In the exact same way, business owners that create a successful business and then fail to sell it for what it is worth are like the mountain climbers that climbed the mountain and failed to make it back down the mountain alive. The business owner looking to sell their successful “closely-held” business must be prepared to meet any unexpected obstacle when the time comes to finally exit the business.
When exiting the business, the most important question business owners must ask themselves is, “How do I prepare the business for sale at a price favorable to both the buyer and the seller?” Experience indicates the best price for the business is based upon the establishment of a favorable EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). EBITDA represents the actual cash value of the business to an independent buyer. Statistics show the success of a sale of the business depends upon the assistance of an Exit Strategy “quarterback”.
In his recent book, “The Exit Strategy Handbook“, Jerry Mills, founder of B2B CFO®, the nations largest CFO consulting firm, outlined the 10 steps needed to be monitored by the Exit Strategy “quarterback”. Of these 10 exit steps, the most critical include: (1) The coordination of an Exit Strategy Success Team, (2) The management of the Exit Strategy Data Room, and (3) The tracking of the Exit Strategy planning procedures.
- Exit Strategy Success Team - The Exit Strategy Success Team provides professional services required to prepare the business for sale. The Success Team “quarterback” coordinates the activities of eight business professionals: (1) Attorney, (2) Investment Banker, (3) Insurance Advisor, (4) Public Accountant, (5) Banker, (6) Wealth Manager, (7) Tax Specialist, and (8) Internal Employee Management Team.
- Exit Strategy Data Room – Exit Strategy information is made available to investors and is maintained in the Exit Strategy Data Room. The Success Team “quarterback” oversees the management of the Data Room information which includes confidential documentation from the following: Finance, Contracts, Legal Liabilities, Labor Relations, Human Resources, Tax Requirements, Marketing Programs, Debt Obligations, Environmental Issues, Intellectual Property Rights, Real Estate Transactions and Information Technology.
- Exit Strategy Dashboard – The Exit Strategy Dashboard is used to coordinate the completion of assignments by the Success Team. As the assignments are completed, the Exit Strategy “quarterback” uses the Dashboard to track the changes in the value of the business and monitor the potential return-on-investment to the business owner. At the same time, the Dashboard lists documents maintained in the Data Room.
In the end, there is no easy way to prepare the business for sale. However, if the business owner uses an Exit Strategy “quarterback” to oversee the Exit Strategy process, they will be better able to sell their business and maximize their final return-on-investment, thus making it back down the business mountain alive after a successful climb to the top!
Exit planning is a process whereby you, the business owner, are prepared to cash in on your business, take care of your personal goals, and do so in a manner and time period that accommodate you and other stakeholders, as well as at a time when you can optimize your exit value. There are three areas of this type of planning – planning, preparing, and passing it on.
First, you need to prepare yourself for the exit. Next you need to prepare your company to grow and survive without you. Finally, it is critical that you develop an opinion of the market factors and timing that will most positively influence the success of your exit. These three areas of planning are all critically important to a successful exit and if you are like most owners of privately-held businesses who have the majority of personal wealth tied to your business, then you can use these three areas of exit planning to assist you in being ready for that fateful day when you no longer own and run your business. Today, I would like to discuss the first phase – planning!
The Planning Phase
Simply put, planning means looking ahead to the future to be prepared for what may come. The challenge is that most business owners do not think too far ahead in their running of their business. Therefore, this planning period requires a commitment and should be a focused period of time where you are taking stock of what you most want to achieve with your business and with your personal goals.
The questions that you are trying to answer in this time period include:
- Will I have enough money after my exit to fund my retirement or my next phase of life?
- What are my goals for my life after my exit – what do I want to do next?
- Will my business be able to continue without me?
- How can I grow the value of my business to make for a stronger company that I am passing on to others?
- How will relationships change with my customers, vendors, employees and community?
The planning phase raises all of the important questions and issues that need to be addressed and that you can reasonably foresee today. An exit from the business is a large change and the planning process is about developing answers to challenging questions that help you set the stage for making adjustments, both personally and professionally, to your business and your life.
Stay tuned to learn more about the other two phases of exit planning! In the meantime, I welcome you to contact me to get the planning process started today so that you too can be prepared to exit successfully from your privately-held business!
The Fiscal Cliff Explained
“Fiscal cliff” is the popular shorthand term used to describe the problem that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.
Among the laws set to change at midnight on December 31, 2012, are:
- the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers),
- the end of certain tax breaks for businesses,
- shifts in the alternative minimum tax that would take a larger bite,
- the end of the tax cuts from 2001-2003, and
- the beginning of taxes related to President Obama’s health care law.
At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”
In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:
They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.
They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.
They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.
Can a Compromise be Reached?
The oncoming fiscal cliff is a concern for investors since the highly partisan nature of the current political environment could make a compromise difficult to reach. This problem isn’t new, after all: lawmakers have had three years to address this issue, but Congress – mired in political gridlock – has largely put off the search for a solution rather than seeking to solve the problem directly. Republicans want to cut spending and avoid raising taxes, while Democrats are looking for a combination of spending cuts and tax increases. Although both parties want to avoid the fiscal cliff, compromise is seen as being difficult to achieve – particularly in an election year. There’s a strong possibility that Congress won’t act until the eleventh hour. Another potential obstacle is that the next Congress won’t be sworn in until January 3, after the deadline.
The most likely outcome is another set of stop-gap measures that would delay a more permanent policy change until 2013 or later. Still, the non-partisan Congressional Budget Office (CBO) estimates that if Congress takes the middle ground – extending the Bush-era tax cuts but cancelling the automatic spending cuts – the result, in the short term, would be modest growth but no major economic hit.
Possible Effects of the Fiscal Cliff
If the current laws slated for 2013 go into effect, the impact on the economy could be dramatic. While the combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion, the CBO estimates that the policies set to go into effect would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession (i.e., negative growth). At the same time, it predicts unemployment would rise by almost a full percentage point, with a loss of about two million jobs. A Wall St. Journal article from May 16, 2012 estimates the following impact in dollar terms: “In all, according to an analysis by J.P. Morgan economist Michael Feroli, $280 billion would be pulled out of the economy by the sun-setting of the Bush tax cuts; $125 billion from the expiration of the Obama payroll-tax holiday; $40 billion from the expiration of emergency unemployment benefits; and $98 billion from Budget Control Act spending cuts. In all, the tax increases and spending cuts make up about 3.5% of GDP, with the Bush tax cuts making up about half of that, according to the J.P. Morgan report.” Amid an already-fragile recovery and elevated unemployment, the economy is not in a position to avoid this type of shock.
The cost of indecision is likely to have an effect on the economy before 2013 even begins. The CBO anticipates that a lack of resolution will cause households and businesses to begin changing their spending in anticipation of the changes, possible reducing GDP before 2012 is even over.
Having said this, it’s important to keep in mind that while the term “cliff” indicates an immediate disaster at the beginning of 2013, the impact of the changes – while destructive over a full year – will be gradual at first. What’s more, Congress can act to change laws retroactively after the deadline. As a result, the fiscal cliff won’t necessarily be an impediment to growth even if Congress doesn’t address the issue until after 2013 has already begun.
The Next Crisis
Unfortunately, the fiscal cliff isn’t the only problem facing the United States right now. At some point in the first quarter, the country will again hit the “debt ceiling” – the same issue that roiled the markets in the summer of 2011 and prompted the automatic spending cuts that make up a portion of the fiscal cliff.
On October 21, The Wall Street Journal ran an article titled, “Be Prepared for the Unexpected”. The article outlined a variety of steps that business should take to keep an unexpected event from turning into a disaster.
A few days later, Hurricane Sandy struck the East Coast with fury that we have not seen in a long time, leaving a path of death, injury, and destruction in its wake. For many business owners, the difference between rebuilding and closing is often decided based on recovery plans made long before calamity strikes. Is the data backed up on a regular basis, and stored remotely (or “on the cloud”)? Is there proper business interruption insurance in place? Have you thought through contingency plans?
Disasters come in many forms. There are the great big natural ones, like hurricanes and tornadoes. And there are the more business specific ones, like losing your computer records without having backed them up properly. Or a fire. Or employee theft. Either way, it can cause your business irreparable harm, and be something from which you do not recover.
Roughly 25% of small businesses fail to reopen after a major disaster, according to the Institute for Business & Home Safety.
But protecting your business from the unexpected does not necessarily require a great deal of time, money, or effort. It starts with written instructions describing how you business functions, who does what, a list of all your security passwords, and who your contacts are at key vendors. Throw in a robust program for backing up all your important data and computer records (and storing it offsite), and you are well on the way to recovery should the worst occur.
Business interruption insurance is another important feature of any disaster recovery plan. What happens if you can not reopen for days, or weeks?
In addition, you should thing about having enough cash on had to keep the business running for two to three months. While some new businesses may view this as a luxury, you need to have access to cash should sales dry up because of some unplanned problem.
The credit crunch is now impacting small businesses – and it is crucial that they prepare themselves for it. Banks, nervous about the prospect of more borrowers defaulting on loans, have for months been tightening their rules when it comes to lending money to consumers and major corporations. And now, industry experts say lending jitters are being extended to small firms as well, making it harder for them to find loans.
In past years, credit was relatively easy to come by as banks, particularly larger ones, aggressively pursued entrepreneurs, offering larger loans at cheap rates to untested companies. Now, with the balance sheets of many large banks weakened, lending to smaller businesses has been curtailed as well. However, many community bank and credit union executives say that for now, they have neither toughened lending standards nor raised interest rates on loans to small businesses.
Some businesses that received loans in recent years are falling behind on payments – and default rates are expected to accelerate. As a result, experts say some lenders are already tightening their lending criteria and they expect more to follow suit.
So small companies may want to think about ways to insulate themselves from the credit crunch.
Here are some suggestions:
- Pick a lender that caters to your situation.
- Keep detailed and professional financial records.
- Be prepared to put up personal assets, like homes, as collateral, which can make a big difference for young companies seeking funding.
The Best Lender for You
One of the most important decisions small businesses face as they hunt for loans is which lender to turn to. Business owners should keep in mind how different types of lenders evaluate loan applications.
Big institutions that promise speedy approvals or rejections of applications, generally rely on credit-scoring models based on the business owner’s personal credit history. By contrast, community banks, credit unions and other smaller lenders often lean more heavily on their knowledge of the local economy and the would-be borrower’s business model and track record of running or launching businesses.
Lease financing companies have been aggressive in providing low document leases – usually up to about $75,000 – and can be great sources for equipment and asset financing.
Credit unions are nonprofit institutions owned by their depositors. They tend to make smaller loans than banks and have been making a big push to attract more small-business customers. In addition, entrepreneurs should look for lenders with programs aimed at specific types of small businesses: women, minorities, veterans. Of course, when applying for a loan, it also helps to have an existing relationship with the lender.
While some banks had been hawking loans that don’t require business owners to provide much financial documentation beyond recent tax returns, that’s now changing in a big way.
When applying for loans, small businesses should be ready to produce cash-flow statements, balance sheets, and even financial plans. Having these documents on hand is likely to impress bankers and could tip the scales in favor of getting a loan approved. Companies should consider hiring part-time, high-level professional financial help to improve documentation and help present a professional image to bankers.
Entrepreneurs in search of funding also need to be prepared to put their personal assets, like a home, on the line. But experts say that while banks are getting more skittish and with home values falling in many parts of the country, business owners shouldn’t count on that as the only collateral.
Bottom line…things will continue to get tougher for small business financing, and banks will tend to favor companies that have their financial houses in order, that produce reliable and accurate financial statements, and that can demonstrate a deep understanding of their business model. If you could use some help in preparing for a loan please give me a call. I can help you put your “best financial foot forward” and become your advocate.
Unless you have been living in a cave, you know by now that the Patient Affordable Care Act (PPAC), sometimes referred to as Obamacare, has been passed by Congress. You must also know then that in June of this year the United States Supreme Court deemed health care reform to be constitutional and accordingly upheld the PPAC in its entirety. Although the lion’s share of the impact of this law will be felt/enjoyed by consumers there will certainly be an impact on businesses of all kinds. In some cases that impact is already being felt. Considering that, beyond wages and salaries, employee benefits are becoming the largest operating expense for most company budgets, it certainly behooves business owners to get ahead of the curve and understand the impact of this law.
So what are some of the changes that will affect business owners?
Most significantly, starting in 2014, the law will require employers to offer health insurance to employees. Specifically, businesses with 50 or more employees that do not offer coverage, or offer insurance that is too expensive or that does not meet minimum standards, may have to pay penalties. Considering that 96% of the nation’s firms with 50 or more employees already offer health insurance to their workers, might indicate that a small minority of firms will be ensnared by this penalty. However, there seems to be a prevailing opinion that companies may be financially better off by terminating insurance plans and paying the penalty instead. Just like all aspects of this law, the devil is in the details, but that may be a valid economic path for a business owner to take. However, recent studies have indicated that most employers do not intend to drop insurance coverage for their employees recognizing the competitive value of attracting and keeping good people. Regardless if you have more than 50 FTE’s, you will need to learn the specifics of the law to decide what is best for your organization.
What if you have less than 50 employees? These companies, which represent 75% of the firms in our country and employee 34 million people, won’t face any penalties for not offering coverage. However the government is already offering tax credits to small businesses and non-profits as encouragement to offer health insurance to its employees. These credits, which can be as much as 35% of the cost of premiums, require that the employer cover at least 50% of the premium charge and average annual salaries cannot exceed $50,000. The credit is scheduled to increase to 50% in 2014.
Another item that impacts all businesses is the requirement, effective September 23 of this year, that insurers must provide a summary of benefits and coverage (SBC) to participants and beneficiaries spelling out the specifics of the plan. Yet another change in the law has reduced the limit on pre-tax contributions to flexible spending accounts to $2,500.
There are a multitude of other changes that either have already kicked in, or will soon. For example, business owners (or any employee for that matter) who earn more than $200,000 per year will now have to pay an additional .9% Medicare tax on the amount in excess of $200,000.
Thousands of pages of law and related interpretations have already been written on this matter so this short space here cannot begin to do justice to the subject. But the message should be clear. Whether you consider this law to be the long overdue savior of beleaguered health care consumers or you are choosing to ignore it in the hopes that a Republican victory in November will make it go away, as a business owner you should be learning as much as you can. As always, the best place to start is with your business advisors. If I can be of any help, please don’t hesitate to call.
In the words of John Wooden, failure to plan is planning to fail.
Although every business wants to grow, some types of growth are certainly better than others. Let’s consider the following 2 options:
OPTION 1: Grow Sales by 20%, and net income increases 50%.
OPTION 2: Grow Sales by 50% (a lot more work and risk than Option 1), and net income only increases 20%.
The best way to grow is when net income growth out-paces sales revenue growth. For every additional unit of sales, we want to generate more profit, not less. How can we accomplish this? How can we assure that our increased efforts are yielding better, more profitable results?
Jim Collins, the author of Good to Great, found that the more an organization sticks to its core competency, the more opportunities the company had for the good kind of growth – the kind of growth where net income increases faster than sales!
What is your core competency? It’s what you do well and, when you do it, you’ve proven that it can make money. If you are a trade contractor, then it is your trade. If you are an attorney, then it is the law. If you are a widget manufacturer, then – I think you get the point.
I have experienced many occasions when, in its desire to grow, a company strays from its core competency and involves itself in a business and industry it doesn’t know very well. Sadly, these new ventures begin to drain time and resources (most importantly, CASH!) from the main business. In essence, the core competency of the firm subsidizes a less successful venture. As a result, everything begins to suffer.
Sticking to your competency requires a great deal of discipline, but it is the best way to grow your company. By sticking to your core, you will find the most profitability and enduring growth opportunities!
Business leaders do not start their organization hoping to spend a lot of time doing accounting and finance, but rather doing what they do best, to fill an unmet need or provide a great new service. All leaders, however, need to have a high enough level of financial intelligence to know they are making the best possible decisions for their business. In addition, the more financial intelligence their employees have, the better the decisions of the organization will be as a whole.
Financial intelligence, although it is a recently defined term, has its roots back in 1954, when the management guru Peter Drucker wrote in his groundbreaking book, The Practice of Management, “[The worker] should know how his work relates to the work of the whole. He should know what he contributes to the enterprise…if he lacks information, he will lack both incentive and means to improve his performance… it is in the best interest of the organization that the worker has the information”. One piece of this information that Drucker was talking about is financial information. It is not enough that the employee has the information, but that the employee knows what it means and what to do with it.
Proponents of financial intelligence in organizations believe that if all employees understood financial information and how it is measured, then they would make decisions and take actions based upon this financial understanding to the benefit of the organization. If everyone knows the mission and goals of the organization and knows how the decisions they make help achieve these goals, the organization would be far better off.
Financial intelligence relates to the knowledge and skills of accounting and financial principles. It is not just theoretical knowledge, however, but requires practical real world application and experience. Overall financial intelligence requires understanding four key attributes:
- The Foundation: One must understand the basics of business measurement including the Income Statement, the Balance Sheet and the Cash Flow Statement. It also requires knowing the difference between cash and profit (there is a big difference), and why a balance sheet balances.
- The Art: Finance and accounting are both art and science. The two disciplines rely on estimates, assumptions, and rules to accomplish the end result. Financial intelligence ensures that one can identify where assumptions have been applied to the numbers and how applying different assumptions can lead to different conclusions. Understanding the assumptions behind a budget or forecast is critical to helping you make adjustments to your business when things don’t turn out the way you thought.
- Analysis: Financial intelligence means you know how to analyze the numbers to gain a deeper understanding of their meaning. This includes the ability to calculate surpluses, leverage, liquidity and various efficiency ratios and key indicators. When you understand the factors that make a program generate healthy surpluses, and how that factors into the overall success of your organization, you make better strategic decisions.
- The Big picture: Financial intelligence means you can understand your nonprofit business’s financial results in the context of the big picture: the overall economy, the competitive environment (other nonprofits and for-profit companies), regulations, and changing client needs.
Business leaders, managers, and employees in general who understand these principles and the effects of their decisions on the organization, will provide a competitive advantage to their organization.
Morgan Stanley Smith Barney has announced a new national alliance with B2B CFO, the largest CFO services firm in the United States. This agreement provides an innovative blueprint for a coordinated effort to meet both the corporate and personal wealth management needs of privately held businesses and their owners.
The relationship, formalized through Morgan Stanley Smith Barney’s Professional Alliance Group, allows B2B CFO to refer clients to Morgan Stanley Smith Barney and is the exclusive alliance of its kind for B2B CFO, which offers chief financial officer services to companies across the country. The firm has 216 Partners in 45 states, and advises more than 800 clients across North America. Additionally, B2B CFO has been recognized as one of the Inc. 500/5000 fastest growing companies for the last three years.
Through this relationship, clients referred by B2B CFO may access not only the wealth management expertise of Morgan Stanley Smith Barney financial advisors, but also a more integrated and coordinated approach to their finances and investments. The comprehensive approach of Morgan Stanley Smith Barney financial advisors covers a wide array of financial considerations of a business owner and is closely aligned with the business-specific financial guidance provided to clients by B2B CFO.
“This is an important professional alliance for Morgan Stanley Smith Barney,” said Michael Brunner, Senior Vice President and Financial Advisor in Morgan Stanley Smith Barney’s downtown Houston office. “This concept has the potential to provide a paradigm shift in the way privately held business owners manage their finances. Instead of the traditional ‘siloed’ approach that involves multiple advisors, business owners now have the ability to apply a comprehensive strategy to help reach their financial goals for both their family and business.”
Stephen Fox, Professional Alliance Group Director in Morgan Stanley Smith Barney’s Troy, Michigan office notes, “We are eager to work together with a company like B2B CFO. This is an excellent opportunity for Morgan Stanley Smith Barney to provide wealth management services that will complement and enhance the advice and counsel that is provided by B2B CFO advisors.”
The alliance combines the global resources of Morgan Stanley Smith Barney with the experience of B2B CFO.
“B2B CFO is excited about this professional alliance because of the added value it will bring to our clients,” said B2B CFO Founder and Chief Executive Officer Jerry L. Mills. “As one of the world’s largest investment firms, Morgan Stanley Smith Barney offers our clients access to world-class investment and wealth management consultation, and it also allows our clients increased access to capital, which is a priority for all business owners.”