Exiting a Business Profitably Is More About Analyzing Value Than About Good Luck
Valuation Experts Need to Be an Integral Part of Every Business Ownersâ€™ Initial Plan.
Herbert Kalman explains why business owners need to begin thinking about an eventual exit from their very beginning plans. Hereâ€™s solid advice on the value and structure of buy-sell agreements, formal business planning, annual valuations, networking, and other planning essentials.
Theyâ€™ve built it, worked it, survived the down side and now something has come up that requires leaving the business. Whether the owner leaves with the expected money in hand for all the years invested, whether surviving heirs will benefit, as he planned, is totally dependent on the arrangements made well before leaving becomes a reality.Â The advice garnered from a valuation professional should be an integral part of such planning.
Itâ€™s very typical for owners of privately held companies to put formal planning meetings at the bottom, rather than top, of their list of importance.Â Yet, your business broker friends will tell you that a business that can show solid planning and one directed toward making decisions that add value to the business, will sell for more than those businesses that cannot show such planning.Â It is even more critical for businesses with more than one owner to have formal planning meetings and insure that buy-sell agreements are updated to be consistent with current value and circumstances.
Exiting the business with cash isnâ€™t about good luckâ€”itâ€™s about bringing a valuation professional into the planning process as the business grows to provide business owners with options and solutions to meet their exit objectives and increase ongoing revenue in the process.
Consider the following real-life case study.Â A family owned business run by the 72-year-old founder and his 52-year-old son were ready to sell. The company grossed approximately $18 million and netted approximately $1.5 million pre-tax and after add-backs. The company was the largest privately owned business in the industry in Texas. There was no desire by the son to continue to run the business.Â We determined that there were only two likely buyers, both national competitors with local operations.Â Both had modern facilities locally with capacity.Â The third potential buyer was not in the area and was not interested in coming into a new market area and needing to modernize the plant.Â Initial inquiries to the two identified buyers received lukewarm response.Â We believed that the reason was that they knew they were the only two buyers.
We were consulted as to a plan to increase the value.Â The plan consisted of two parts.Â The first was to document the plans of the last several years during which the company was an industry leader in offering products with new safety features.Â The second was to plan a complete modernization of the plant to bring it into the 21st century. Such a modernization would accomplish two things; it would make the company more competitive in the market and would allow a third buyer to consider a purchase.
When word got out in the industry of this companyâ€™s plans, they were approached by one of the identified buyers with a â€śfull court press.â€ť The company was sold for 18.7 million!
The owners in this case study were savvy enough to solicit a valuation professional to address operating areas that would increase the companyâ€™s value to an outside buyer.Â You, the valuation professional can be an integral part of the business plan, providing business owners with what we call the Annual Business Checkup and Discussion of Value Analysis.Â Both provide business owners information about what drives value so they can make profitable decisions.
The Annual Business Checkup should be a formal presentation by a business owner(s) to the Board of Directors, whether or not a Board exists that includes accomplishments and disappointments that impacted the companyâ€™s value in the last year.
In the Discussion of Value, the valuation professional should have performed an analysis, which incorporates the analysis a valuation professional performs in valuing any company.Â The difference is that the deliverable may be an oral report and schedules that the owners may use in her report.
The valuation professional can add to this discussion by adding his opinions regarding accomplishments that can impact value.Â The Discussion of Value benefits the one owner business as well as the multi-owner business by providing the owners with an understanding of how the companyâ€™s value is impacted.Â
Business entities with more than one owner need a buy-sell agreement to have a method of buying out shareholders without a dispute. Oftentimes, attorneys have complicated formulas to determine the price.Â Other times, there is no agreement and the dispute ends up in court with the business paying a large price to solve the problem.Â The newest concept is having the party instigating a buy-out setting a price the other partner must accept or may use to buy out the instigating party.
An alternative is a buy-sell agreement that requires the directors to meet annually to set a price for which the shareholderâ€™s shares can be redeemed.Â The valuation professional can provide guidance as to a price either by providing a full valuation report or a Discussion of Value with a recommended range of values from which the business owners may find an agreeable price. The business owners can increase their credibility by including the company accounting firm, attorney and banker in the meeting.Â These key professionals then can be part of the planning process and can make suggestions to help the company meet its goals rather than just react to needs identified by management.
Multiple benefits to the company and owner/s are:
- A price that fulfills the buy-sell agreement
- A formal business-planning meeting
- Better-informed professionals
Benefits to the valuation professional include:
- An annual valuation engagement (which may be less than a full valuation report)
- Becoming a key advisor to the business and likely the only person to be considered for estate planning valuation engagements
- Exposure to other professionals
Â Exit strategies are as important to consider at the start of building a business, as are the products and services it will offer.Â Itâ€™s never too late to suggest that the time to begin building value and planning for change is now!Â
Herbert Kalman is a CPA and CVA in Houston, Texas, where he has had a full service financial firm, specializing in valuation strategies for over 20 years.Â His approach to valuation and business solutions is unique.Â Actively involved in his profession, Kalman is a speaker for professional groups, a member of several national and local professional associations and an adjunct faculty member for the Center of Professional Education where he develops and presents seminars. He welcomes comments and can be reached by phone at 713. 333.7474 or via e-mail at firstname.lastname@example.org.Â He invites visitors to view his web site: www.kalmancpa.com. Â
This article first appeared in the November/December 2004 issue of The Value Examiner.Â