Do Not Forget Insurance When Planning Your Exit

All business owners will one day exit their business – voluntarily or involuntarily.  Insurance is a vital tool for ensuring you are prepared for an involuntary exit due to death or disability. 

 

Two of our recent files at VSP involved a shareholder death.  Our valuation expertise was required in connection with a buyout of the surviving spouse’s equity interest.  Thankfully life insurance was in place to provide income replacement for the surviving family members and for purposes of funding the buyout.

 

Life insurance, disability insurance, critical illness and long-term care should be considered to ensure you are prepared for an involuntary exit due to death or disability.  As a business owner, do you have sufficient life insurance in place?  Does your insurance provider have the knowledge and experience to deal with the various tax and other issues relevant to business owners?

I recently sat down with Cory Budovitch from Independent Financial Concepts Group (www.ifcg.com) in Toronto, Ontario.  Cory has over two decades of experience working with business owners and incorporated professionals on insurance and exit planning issues.  Cory is also a member of the Million Dollar Roundtable, an international, independent association of less than 1 percent of the world’s life insurance and financial services professionals who demonstrate exceptional professional knowledge, strict ethical conduct and outstanding client service. 

 

I know that Cory takes great pride in his process and in developing a personal relationship with each and every one of his clients.  I was interested in Cory’s thoughts on the top four things a business owner should be aware of when it comes to using an insurance professional throughout the exit planning process.  According to Cory, an effective insurance professional should:

1. understand the process – your insurance professional should take the time to understand your current situation and your goals (personal, family and business).  He/she should walk you through the process in an intelligible fashion answering any questions you have along the way so you understand what to expect;
2. consider all options – your insurance professional should identify all of your options and work with you to ensure you make the best decision for you and your family.  Options may include: where to hold the insurance policy; what investment vehicles to use; and where and when to withdraw money and how it will be taxed;
3. put you first – your insurance professional should invest the time to understand you and put your needs and interests above all else.  He/she should have a long-term outlook and be willing to walk you through the process at your pace.  Being able to come up with creative solutions to your issues that will not put you at risk is also extremely important; and
4. conduct regular reviews – you should review the type of insurance and coverage with your insurance advisor at least annually.  Has your business increased in value?  Have you acquired a secondary residence, gone through a divorce, had a death in the family, had a new child or had a change in your health status?  If so, your insurance needs may have changed.

In addition to the above, Cory routinely collaborates with other professional advisors (e.g. accountant, tax & estate lawyer, business valuators, actuaries, etc.) as part of a business owner’s exit planning process.  According to Cory, "It is vital to have an insurance professional that can work well with other professionals.  Effective communication with the other professionals, especially the accountant, is critical to understanding how a particular strategy will ensure the business owner’s goals are met."

 

My time with Cory was very interesting.  Not only does Cory have the knowledge and experience to ensure business owners are prepared for an involuntary exit due to death or disability, but he also helps business owners extract money from their companies while reducing their taxes and earning a measurable return on their investments.

 

If you are looking for an insurance professional or want a second opinion on your insurance needs you can contact Cory at corybud@ifcg.com.  Relationship, integrity and trust are extremely important to Cory.  He is fully committed to his process and will take the time needed to understand you and your situation.

 

To determine if your current coverage is sufficient a business valuation may be required.  To find out the value of your business or to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

Take a Picture of Your Business to Enhance its Value!

A few weeks ago a friend of mine was telling me about a new exercise routine he had been following to help him lose weight and improve his overall health.  It was visually apparent to me that he had achieved success with this new program.  When he showed me his progression through weekly photos of himself, however, I immediately bought into his exercise routine as well as his commitment and motivation to its success.  

 

More recently, my brother sent me a current photo of himself and one from one month earlier.  He is currently training for a competition and I wanted to see his progress to date.  He has bodyweight and bodyfat targets to hit and he hired a physique coach to help him develop an exercise and diet routine.  After one month, the improvement is noticeable but admittedly he has more work to do to meet his goals.  The pictures, he tells me, help keep him motivated and committed to his exercise and diet routine.  They also help him assess his progress to date and identify what areas need further improvement.

 

That’s when it hit me.  Business owners that want to increase the value of their business can learn from this approach.  If you want to improve the value your business, you should take its picture at regular intervals.

 

Taking a picture of your business, by having an independent business valuation, will help you monitor the progress of your business and motivate you to focus on the tasks required to achieve your goals.  If you want to attract multiple purchasers when it comes time to sell your business and receive top dollar, taking pictures of your business will also strengthen your credibility in the eyes of potential purchasers.

 

Audited (or reviewed) financial statements provide credibility to a certain degree but they only speak to the company’s historical financial results.  A growth plan (with financial projections) and a business valuation reflect the future of the business which is critical to potential purchasers because value is based on future cash flows.

 

Have you ever wondered why before and after photos are so effective at selling a diet or exercise routine?  Have you ever been tempted to buy a diet book, exercise program or nutrition plan based on the before and after photo testimonials?

 

Just as you can monitor your individual progress on a diet or exercise routine by taking periodic photos of yourself, you can monitor the progress of your business by having an independent business valuation conducted at regular intervals.

Just as taking pictures of yourself helps with your motivation and commitment to a routine, obtaining annual independent business valuations will keep you motivated and committed to the implementation of your value enhancement action plan. 

 

And finally, just as before and after photos add credibility to your diet or exercise program, periodic independent business valuations will add credibility to your growth and value enhancement plans.

 

I will be keeping tabs on my friend and my brother in the coming weeks.  Success is contagious and their success to date is motivating me to reassess my own diet and exercise routines.  Wish me luck!

 

If you want to take a picture of your business by having an independent business valuation, contact me at jason@vspltd.ca.  If you have any questions regarding the exit planning process in general or want to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

 

Why You Should Discuss Exit Planning With Your Accountant

According to a Canadian Federation of Independent Business (CFIB) study, nearly two thirds of companies consider their accountant (and lawyer) the most valuable source of information. [1]

 

In 2009, the CEO of the Canadian Association of Family Enterprise (CAFE), Lawrence Barns, was quoted as saying "When family businesses are asked who their most trusted adviser is, 73% say it is their accountant." [1]  

 

Does this include you?  Is your accountant your most trusted advisor?  Is he/she aware of when and how you plan to exit your business?  When you meet with your accountant to review the annual financial statements and corporate income tax returns, does the topic of exit, succession or business transition come up?  It should!  Your accountant should be an integral member of your exit planning team and must be involved throughout the process from beginning to end.

 

I recently sat down with Jeff Ambrose, CPA, CA, Partner with HSM LLP (www.hsmllpcas.com) and Principal with Valuation Support Partners Ltd. (www.vspltd.ca) in Markham, Ontario.  Jeff has over 25 years experience in consulting with companies on accounting, financing, sales and acquisitions, profit growth, marketing, business management, corporate structuring, business valuations, business modeling and income taxes.  Jeff is actively involved in developing estate and succession planning solutions for owner managed businesses.  I have had the opportunity to work closely with Jeff and see how much his clients trust him and value his advice.  He truly is the most trusted advisor to many of his clients. 

 

According to Jeff, from an exit planning perspective, the top 4 things business owners should regularly discuss with their accountant are as follows:

1. Tax Planning Advice – tax planning is something that should be done early in the exit planning process.  If one of your goals is to minimize income taxes on the eventual sale of your business your accountant can help you determine and implement the appropriate strategies (i.e. estate planning, family trusts, capital gains exemption qualification, corporate-owned life insurance, etc.).    
2. Business and Succession Plan Preparation – in order to be attractive to potential purchasers you must have a concise business plan with financial projections that clearly show how the company will address its weaknesses/threats and exploit its strengths/opportunities to deliver future growth.  As part of the plan, or as a separate plan, the owner must identify the most likely exit strategy and what is required to get there.  With financial acumen and intimate knowledge of your business, your accountant is uniquely qualified to assist with this.
3. Financial Statement Preparation – if you plan to sell your business within the next 5 years, potential buyers will want to see that you have reviewed or audited financial statements (as opposed to a notice to reader).  This will help streamline the due diligence process and increase your odds of getting a deal done.  You should find out if your accountant is willing and able to provide reviewed or audited financial statements.
4. Pre-Sale Diligence Binder – if you are serious about selling your business on the open market and attracting a premium price, a pre-sale due diligence binder will be invaluable.  Your accountant can help you build this binder and keep it current to help streamline the due diligence process and increase your odds of getting a deal done. For more on building the pre-sale diligence binder, http://jasonkwiatkowski.blogspot.ca/2013/06/start-building-your-sellers-pre-sale.html

 

These items should be discussed regularly because exit planning is a dynamic process and not a one-time quick fix solution.  As an accountant and business valuator, Jeff routinely has exit planning conversations with his clients.  He works closely with his clients and other professionals (including lawyers, insurance professionals, bankers, family business advisors, etc.), on issues surrounding exit planning to ensure his client’s goals and objectives will be met.  According to Jeff, what is most important in the process, however, is documentation. Without proper documentation some of the best plans fail.

My time with Jeff was very informative.  It seems to me that your accountant should be a critical member of your exit planning advisor team from beginning to end.  If you want to minimize taxes, maximize net proceeds and protect your family’s wealth you need an accountant with exit planning experience that you trust.  Whether you are planning an internal transfer or an external sale, you will need to consult your accountant on issues surrounding your financial statements, tax and estate planning, business plan preparation, business acquisitions and sales and pre-sale due diligence preparation.

 

For more information on how an accountant and business valuator can help with your exit planning efforts, contact Jeff at jeff@hsmllpcas.com or jeff@vspltd.ca.  If you have questions regarding the exit planning process in general or want to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

 

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[1]  Source: Ten Ways To Add Value, CA Magazine, August 2009.

 

 

 

Take a Vacation to Increase the Value of Your Business

Building a business can be very demanding and extremely time consuming.  You may be accustomed to working long hours and overseeing all aspects of your company’s operations.  However, if you want to build a business for a successful transition you may have to work smarter and not necessarily harder.

 

According to the researchers at the "Sellability Score", companies that operate smoothly without their owner for a period of three months are 50 percent more likely to get an offer to be acquired when compared to more owner-dependent businesses. [1]

 

This was not surprising to me as a business valuator given that a key value driver for most businesses is economic dependence, in particular dependence on the company’s owner.  Owner dependence will be a major area of investigation for potential buyers as they will want assurance that your customers, suppliers and employee/management team will remain with the company after the owner is gone.

 

There is no better reason for taking an uninterrupted vacation than to see how your company performs without you.  The better your company runs without you, the more valuable it will be when you’re ready to sell.

 

In order to assess your company’s ability to handle your absence, you should start by taking a short vacation, leaving your computer at home and turning on the out-of-office notification.  Upon your return, you may find that your employees got resourceful and found answers to a lot of the questions they would have asked you if you had been available.  If that happens, that’s a good thing, and a sign you should start planning an even longer vacation.

 

There is no doubt that you will also come back to an inbox full of issues that need your personal attention.  Instead of busily addressing each problem in a feverish attempt to clean out your inbox, you should slow down and look at each issue through the lens of a possible problem with your: i) people; ii) systems; or iii) authorizations. 

 

1.  People

Start with your people and answer the following questions:

• Why did this issue end up on my desk?
• Who else is qualified to answer this question and why was that person not consulted?
• If nobody else is qualified, who can be trained to answer this question in the future?

2.  Systems

Take a look at your systems and procedures.  Could the issue have been dealt with if you had a system or a set of rules in place?  The best systems are hardwired and do not require human interpretation.  However, if you are not able to create a technical fix, then at least give employees a set of rules to follow in the future.

3.  Authorizations

You may be a bottleneck in your own company if you alone control the spending.  Employees may know what to do but are simply not authorized to address the issue.  You need to give this more thought. Here are some things to consider:

• Put a customer service rule in place that gives your front line staff the authority to make a customer happy in any way they see fit provided it could be done for under $100;
• Authorize certain employees to spend a pre-determined amount with a specific supplier each month without coming to you first; or
• Give certain employees an annual budget, an amount they can spend without seeking your approval.

 

Given the fires that may need to be extinguished after the fact, taking a holiday may seem more of a hassle than it’s worth.  But if you transform the aftermath of a vacation into systems and training that allow employees to act on their own, you will find the vacation is worth what you paid for it many times over: your business will increase in value as it becomes less dependent on you personally.

 

For more information about enhancing the value of your business or to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

 

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[1] The Sellability Score is an online questionnaire that allows a business owner to assess the "sellability" of the company. If this is of interest, you can find out your company’s Sellability Score: http://sellabilityscore.com/vsp/jason-kwiatkowski.

 

Why Your Exit Planning Team Needs a Business Valuator

An independent business valuation is critical to your exit planning for many reasons.  After identifying your goals and determining your financial needs, a current business valuation is the next step in the exit planning process (http://jasonkwiatkowski.blogspot.ca/2012/05/exit-planning-6-step-process.html). 

Other independent sources also recognize the importance of a business valuation in exit planning:

"At present, being able to measure the value of the business is a critical aspect of the business succession plan."

CFIB Research, November 2012

"It is important to get a professional business valuation, since owners may grossly overestimate or underestimate the value of their business."

RBC Business Succession Planning: Your Essential Roadmap

We are on the cusp of something unprecedented.  $3.7 trillion in business wealth in Canada (or 550,000 businesses) is expected to change hands over the coming decade.  Now, more than ever, business owners need to be prepared for the eventual exit from their business.  Not being prepared will have serious consequences.  With the increasing supply of businesses for sale over this period, business owners (and businesses) that are not adequately prepared will end up selling for a significant discount or face liquidation.
 

Exit planning is about regaining control over how and when you exit your business and being prepared for an unplanned exit due to disability, divorce, departure or death.  It is never too early to begin your exit planning.  It is, after all, a process that takes time and requires the involvement of various experts with specialized expertise at different stages of the process. 

 

Here are 4 reasons why you need a business valuation professional on your exit planning advisor team:

1. Enhance Your Business Value – A valuation provides a benchmark from which to measure value enhancement. The valuation process helps identify a business’ key value drivers. Documenting the increase in value over time will increase the business’ attractiveness, which will help maximize the price a purchaser will be willing to pay;
2. Manage Your Wealth – Your business may represent a significant portion of your family’s wealth. You cannot manage and protect your wealth without knowing the value of your assets, including your business. A valuation also prepares you for an unsolicited offer or necessary tax and estate planning (e.g. estate freeze, share reorganization, family trust, etc.);
3. Prevent Costly Legal Disputes – Shareholder and matrimonial disputes can be costly, time consuming and emotionally draining. The value of the business is often a key issue in these disputes. An independent valuation allows shareholders and spouses to discuss and agree on the value of the business before any potential disputes arise; and
4. Manage Value Expectations – An experienced, professional business valuator can help you manage your expectations regarding the value of your business. This is critical for getting a deal done regardless of whether the sale is to an external third party, another shareholder, a management/employee group or a family member.

Not involving a business valuator early in the exit planning process can have serious consequences. I was jointly retained in a shareholder buyout that quickly developed into a legal dispute over the value of the business. Significant professional fees were incurred as each side retained legal counsel and three other professional valuators became involved. The shareholders could have benefited from an independent valuation earlier in the process to ensure they were on the same page regarding value. By the time I was retained the buyer and seller value expectations were widely divergent - a dispute was almost inevitable. 

Don’t let this happen to you. Start your exit planning early and get a professional business valuation to help manage your wealth and value expectations, enhance the value of your business and avoid costly legal disputes.

Your accountant may or may not be qualified to provide a professional business valuation. It may be worthwhile to find a valuator with exit planning credentials. When you interview prospective business valuators, here are some questions to ask before making your selection:

  
History - how long have you been valuing businesses?
Experience - how many businesses have you valued and in which industries?
Testimonials - do you have any testimonials or references?
Process – what is your process for valuing a business and assisting with the exit planning?
Reporting – what are the reporting options?

For more information about working with a business valuator or to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

Contemplating an External Sale? Do Not Proceed Without an M&A Professional!

A seasoned M&A professional with experience selling similar businesses can help with positioning your business for sale, finding potential buyers, managing the entire sale process and representing you in negotiations with potential buyers.

 

I recently sat down with Don Hilton, Founder and Managing Partner, of Distinct Capital Partners Inc. (www.distinctcapitalpartners.com) in Toronto, Ontario.  Distinct Capital provides investment banking, corporate finance and advisory services to shareholders of owner operated businesses with revenues between $5M to $100M.  Don has over 30 years of experience in investment banking with several Canadian investment dealers and has worked closely with business owners to assist them through the sale process.

I wanted to understand what a business owner should expect when working with an M&A professional throughout the sale process.  According to Don, 4 key issues in this regard include:

1. Begin With Goals and Options – to properly represent, assist and advise you, the M&A professional must understand your goals (e.g. maximize price, leave legacy, etc.) and explore the exit options (e.g. strategic buyers, financial buyers, entrepreneurs, management, etc.) with you.  In addition, do you want an immediate exit or will you consider staying on under an employment contract to assist in the transition;
 
2. A Time Consuming Process – the sale process is a time consuming process that can take 6 to 9 months from beginning to end and you need to stay focused on your business during this time.  The M&A professional can take on many tasks (e.g. prepare the teaser document, offer memorandum, buyer search, etc.) and ensure your involvement only when required (e.g. management presentations, Q&A, negotiating table, etc.);
 
3. The Man in the Middle – many business owners have never been through the sale process.  The M&A professional has experience and is your representative at the negotiating table to deal with other professional advisors involved in due diligence and issues such as deal price and structure.  The M&A professional is skillful at negotiation, not emotionally involved in the business and will not take things personally, thereby increasing the odds of getting a deal done; and
 
4. Getting the Deal Done – the M&A professional’s sole function is to sell the business.  As a result, there is a much better chance that a deal will be closed in less time.  The M&A professional is motivated to complete a transaction as he/she is generally paid when you get paid and a good broker can and should be able to sell your business for a higher price than you could on your own.
 

Don generally gets involved in the exit planning process once the business owner has decided to embark on the sale process.  He routinely works closely with other professional advisors including the business owner’s accountant, lawyer, tax specialist and business valuator.

 

Not relying on an M&A professional to assist in the sale of your business can have serious consequences.  A few years ago, one of Don’s prospects decided he was better suited to sell his own business (after learning that Don’s assessment of business value was lower than his).  Although the business owner did find a prospective buyer, he was ultimately not as skilled as he thought.  The deal fell apart after one year of intense due diligence and time consuming negotiations.  Much time, effort and money was wasted.  The value of the business also suffered because the owner was not entirely focused on managing the business over this period of time. 

 

Don’t let this happen to you.  When it comes to selling your business, finding the right buyer can be daunting and very time consuming if you try to do it yourself.  A seasoned M&A professional understands the market, has a network of potential buyers and can weed out the "tire kickers" from the serious buyers with sufficient financial resources.  When you interview prospective advisors, here are some questions to ask before making your selection:

• History - how long have you been selling businesses?
• Experience - how many businesses have you sold and in which industries?
• Testimonials - do you have any testimonials?
• Process - how do you find, locate and qualify buyers?
• Success rate - what is your closing ratio?

For more information about working with an M&A professional to help market and sell your business, contact Don at www.distinctcapitalpartners.com.  If you have any questions regarding the exit planning process in general or want to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

 

 

Why You Need the Right Lawyer on Your Exit Planning Advisor Team!

Can your corporate lawyer assist with your exit planning efforts?  Perhaps.  Does your corporate lawyer have experience collaborating with other professional advisors and working with privately held business owners on the various issues involved in the exit planning process?

 

I wanted to find out why business owners should have a lawyer on their exit planning advisor team, in particular to understand: a) how to select an appropriate lawyer; and b) what the lawyer’s contributions to the exit planning process will be. 

 

In order to do so I sat down with David Shlagbaum and Errol Tenenbaum at Robins Appleby & Taub LLP www.robinsapplebyandtaub.com in Toronto, Ontario.  As Senior Partner with the firm’s corporate law team, David holds a Certificate in Family Business Advising awarded by the Family Firm Institute.  His practice is devoted to business law, advising businesses on organizational structures and a broad range of transactional and contractual matters.  David has a particular focus on guiding family owned businesses and entrepreneurs through the transition planning process.  As an Associate with the firm’s tax law team, Errol’s practice focuses on the needs of family-owned and closely-held businesses, specifically in the areas of taxation and estate & succession planning.  These are precisely the skill sets and experience you need in a lawyer on your exit planning advisor team.

 

According to David and Errol, the 4 key issues a business owner should be aware of when turning to a lawyer for exit planning advice include:

1. The Process Guide - Exit planning is a process and the business owner guides the process.  A good lawyer (and other professional advisors for that matter) recognizes this and seeks first to understand the client’s current situation (e.g. the personal, business and family goals, the desired outcome, the preferred exit option, the current value of the business, the required net proceeds to meet goals, etc.) before providing any advice;
2. The Tax Implications – Having identified relevant exit options (e.g. third party sale, shareholder or management buyout, redemption of shares over time, etc.), the lawyer can advise on the tax implications in order to quantify the net proceeds and identify any gaps between the current situation and what is required to meet the goals.  A common goal is to ensure the plan is structured in the most tax favorable way (i.e. minimize the taxes on immediate proceeds);
3. The What-Ifs - The lawyer can assist with various sensitivity analyses to ensure there is an effective strategy in place for protecting business value and family wealth.  What if an unsolicited offer is received?  What if there is a family death, disability, divorce or dispute?  Having a contingency plan, including a will and well crafted shareholders agreement, can assist in this regard by removing potential sources of family/shareholder conflict and being prepared for an involuntary exit; and 
4. Running The Business - Whether you plan to sell your business to a third party or transfer it to the next generation or an employee/management group, you should run your business "as if it’s for sale".  This requires taking a critical look at your business’ current situation.  Is your business salable? [1]  What is its current fair market value?  What must be done to get your business where it needs to be to achieve your goals? 

Both David and Errol routinely work with other professional advisors as part of the exit planning process and stress the importance of ensuring every member is equally informed and aware of all relevant issues.  One recent challenging engagement has David collaborating with the business owners and other professional advisors (i.e. accountant, corporate counsel, management consultant and human resources expert) as part of an advisory board with ongoing quarterly meetings to deal with various issues as part of the exit planning process.

My time with David and Errol was very enlightening.  It seems to me that a lawyer, and not just any lawyer, is a critical member of the exit planning advisor team from beginning to end.  If you want to minimize taxes, maximize net proceeds and protect your family’s wealth you must find a lawyer with family business exit planning experience that you connect with on a personal level.  Whether you are planning an internal transfer or an external sale, you will need to consult your lawyer on issues surrounding tax and estate planning, shareholder agreements, business acquisitions and sales, organizational structures, governance models and perhaps resolving shareholder and partner disputes. 

For more information about finding and working with a lawyer in your exit planning efforts, contact David or Errol at www.robinsapplebyandtaub.com.  If you have any questions regarding the exit planning process in general or want to learn more about our VSP Exit Starter Program, contact us at www.vspltd.ca.

1.  Take the Sellability Score questionnaire http://sellabilityscore.com/vsp/Jason-Kwiatkowski to find out how salable your business currently is.