IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Allan VanderHamm of Berntson Porter & Company, PLLC (www.bpcpa.com).
Business Sale Exit Planning – Knowledge is Power
When you set about starting your business, you likely had big goals and expansive dreams about its success. Whether success meant having an impact on your community, making as much money as possible, or something else, you probably wanted your business to become the ideal firm in your market.
As you build your business toward the ideal, you concurrently build your business’ value, which is a key aspect of a successful Exit Plan.
Does this mean that hiccups, stalls, or unforeseen failures in the growth of your business’ value will directly affect your business exit? While that can be true, proper planning helps mitigate those kinds of fluctuations. Consider the situations of two owners, Wendell Heath and Aspen Taylor.
Wendell Heath and Aspen Taylor each founded construction companies as C corporations in the late 1980s, in similar but non-competing markets. In the early 2000s, Wendell and Aspen each decided that they wanted to leave their businesses by 2010. They each had their businesses appraised for $5 million. Both wanted to increase their businesses’ value to $8 million.
Wendell began by investing heavily in equipment and hired a slew of employees to keep up with the high housing demand. He typically found himself working 60-hour weeks. The only advisor he spoke to was his CPA, and he only spoke to her during tax season. Despite his CPA’s suggestions, he did not consider converting his corporation to an S corporation, saying that he’d do it later after he built his business’ value. He figured hard work and dirt under his nails got him this far, so it would also bring him to a successful retirement.
Aspen began by speaking to her CPA, alerting him of her desire to exit within 8–10 years. Her CPA directed her to an Exit Planning Advisor, who suggested that she begin installing a strong management team, complete with incentive programs and covenants not to compete.
Over five years, Aspen went from working 60-hour weeks to 30-hour weeks. Her Exit Planning Advisor also connected her with a tax specialist—who helped minimize her taxes on income and convert her C corporation to an S corporation—and a business broker, who helped her buy two smaller competitors to broaden her market share. She hired a management coach to identify and train four key employees who could either buy or run the company when she was ready to exit.
In 2008, both companies were hit by the Great Recession.
Wendell’s cash flow fell dramatically. He was forced to lay off most of the people he had hired several years earlier. The equipment he’d invested in often sat unused. Although his business was valued at just $6 million, he took it to market because he was tired of working 60-hour weeks. The best offer he got was for $5.5 million, which resulted in a $2.25 million payout.
Aspen’s company felt pain during the recession, but her layoffs were minimal, thanks to the cash she had saved through strategic tax planning. The two companies she bought years earlier increased her business’ value to $15 million, and her strong management team made her company attractive to buyers despite the Great Recession. Her conversion to an S corporation lowered the taxes on her company’s sale. In 2010, she exited her business with $10 million post-tax.
Past success rarely predicts future performance. Much can happen between when you decide to exit your business and when you actually exit. If planning for and minimizing the hiccups, stalls, and unforeseen failures in the growth of your business’ value is important to you, we can help guide you through the process.
Allan VanderHamm, CPA, ABV, CVA, CM&AA, CExP, is a Principal and the Director of Business Transition and Valuation Services at Berntson Porter & Company, PLLC, a consulting and planning CPA firm in Bellevue. Allan’s practice focuses on designing and implementing comprehensive owner exit plans, completing successful merger and acquisition transactions, and preparing effective business valuations. If you have questions about the content of this article or any area relevant to Mr. VanderHamm’s expertise please contact him at (425) 454-7990 or avanderhamm@bpcpa.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.