When we talk about value in the context of exit planning, we divide the discussion into three areas: building value, protecting value, and minimizing income taxes. The following is a summary of each area.
When considering building value, we first will ask, “What do you, as the owner, need to do to create a successful company that can operate without you?” Topics include developing a market focus, creating a top management team, and adopting a proper financial focus and corresponding policies.
Second, we ask, “Which characteristics will buyers pay handsomely for?” We call these characteristics Value Drivers, and they include (but aren’t limited to) the following:
- A stable and motivated management team.
- Operating systems that improve cash flow sustainability.
- Understanding and nurturing the company’s competitive advantage.
- A solid and diversified customer base.
- A realistic growth strategy.
- Effective financial controls.
- Good and improving cash flow.
Protecting value relates to both internal and external threats. Instead of handling these threats as they occur, owners must identify threats and know how to avoid them before they happen. Some examples include protecting propriety information and trade secrets; preventing employees from doing harm to the business when they leave by taking customers, employees, and business relationships; and anticipating and evaluating outside threats to owners’ companies.
Minimizing Income Taxes
The lifeblood of every business—and therefore the best indicator of value—is cash flow. Our discussion includes how to preserve cash flow and value from income taxation (legally, of course). Income taxes collected on the sale of a business interest can range from 0 to over 50%. Of course, each tax-efficient design and the tools used to implement those designs usually have disadvantages along with their advantages. However, to date, we have not identified any upside to paying more than necessary to your silent partner, Uncle Sam.
If you would like more-detailed information about Value Drivers, contact us and let our team of highly trained, experienced professionals work with you to successfully exit your Company. Contact us today for a no-cost consultation.