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The Business Owners’ Special Series (B.O.S.S.) No. 41

What does success mean to you? Success can be a very personal thing and defined in many ways. As business exit planning advisors, we suggest that business owners consider these two areas when defining success from a business and financial perspective:

  1. Make certain your business is ready for sale at all times. This means that you have examined your business from a buyer’s perspective, and you have taken the necessary steps to optimize business value.
  2. Ascertain that you are personally prepared to exit your business. This means that you know the business’s current value, and you are confident that this value will be sufficient to satisfy your lifestyle. You’ve done the planning and there is no doubt that your financial resources will sufficiently last your lifetime.

Your ultimate success in this endeavor will require having a strong team of advisors to assist you in areas that are outside of your expertise. Many business owners have undervalued businesses because they were apprehensive about spending money on the right advisors. This is a foolish notion. The right team of advisors will bring greater value and a higher sale price when you exit your business. It will also bring you peace of mind.

The following are a few examples of key advisors that you should have on your exit planning advisory team.

Attorneys: Don’t believe that one attorney can “do it all.”

  • If your business relies heavily on intellectual property (IP), you want to make certain that your IP is protected domestically and internationally. Think about your trademarks, tradenames, domain names, patents, processes, formulas and other IP. An intellectual property attorney can make certain you have maximized protection of these assets if they are a key aspect of your business.
  • Contracts are a key element in protecting the business relationship. You should have contracts with your key customers, vendors, landlords, lessors, business partners and anyone whose relationship is critical to your business operations and profitability. A business attorney should examine all your contracts and make certain they sufficiently protect your business, lock in key relationships, offer favorable terms from a buyer’s perspective and are transferable to a buyer when you sell your business.
  • A transaction attorney should advise you on legal issues that would be of concern to a buyer, so that any problem areas can be addressed long before you consider a sale.
  • On the personal side, you should have your estate plan completed and updated every few years. You want to make certain that your loved ones are well-protected in the event of your premature demise.

CPAs: A tax preparer, alone, is insufficient.

  • You need a certified public accountant (CPA) who can do more than prepare tax returns.
  • Engage your CPA to review your financial statements at least annually, with the view of preparing your business for sale, and include any accounting adjustments that a buyer will make. For example, if your books are kept on a “cash basis” method of accounting, consider switching to an “accrual basis” method of accounting because that is what sophisticated buyers want to see.
  • If you don’t maintain a three-year forecast, ask your CPA to assist you with doing this and update it annually.
  • A CPA can be engaged to examine accounting issues and tax issues that buyers will identify as “problem areas,” so that you can address them long before you consider selling your business.

Value advisors: This is one of the most overlooked areas by business owners.

  • A business valuation specialist is a key advisor. Never believe that you know your business’s value based on your own intuition or rules of thumb — neither one is a reliable benchmark. A business valuation specialist will use the same sophisticated methods that a buyer will use to value your business. Furthermore, they have access to databases of transactions of businesses that were recently sold in your industry. Business value is not stagnant. Getting a business valuation is necessary, and updating it every one or two years is critical to a business owner that wants to know their business’s true market value.
  • A Certified Exit Planning Advisor (CEPA) is a critical member of your advisory team. While a valuation specialist will tell you what your business is worth today, a CEPA will provide you with a value enhancement plan. This will include specific action steps to take, which will improve the value of your business. It’s not enough to know the value — you must also know what to do to improve the value.

Financial planner: You need one now if you don’t already have one.

  • Do not make the mistake of confusing a wealth manager with a financial planner. A wealth manager‘s job is to maximize the value of your liquid assets. A financial planner’s job is forward-thinking: they will help you determine if you are on track to reach your financial goals based on the value of your business and your other assets, and how to plan accordingly if you are not on track to achieve your financial objectives.
  • A financial planner will help you determine what the exit value (sale price) of your business needs to be so that your wealth, post-sale, will satisfy your retirement goals and last for your entire lifetime.

These are just a few of the advisors you should have on your advisory team to help you plan for a successful business exit. Each situation is different and will require additional advisors.

The takeaway from this is that you want to put your exit planning advisory team to work now — long before you plan to exit your business. This will give you and your advisors sufficient time to put an exit plan in place and execute that plan. The plan should give you confidence that you can exit your business at the highest price at any time, and your financial assets will be sufficient to accomplish your goals and last your lifetime.

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