The Facts of Business Life (49 page)

Being able to accurately value your company is not the only advantage of knowing business at Level 5, and some of the additional advantages are discussed later. What is ironic about all this, however, is that the more you know about business, the more complicated the exit decision becomes, but also the more likely you are to make the right choice. Conversely, the less you know about business, the easier the decision-making process will be, and the more it will be based on erroneous assumptions, unsubstantiated claims, and emotion, which is obviously not the way to attract serious buyers.

The Benefits of Knowing Business at Level 5

• Knowing business enables you to more accurately value your business today and in the future.
  
• Knowing business helps you use valuation as a “compass” by which you can determine the best direction to move your company in order to realize its maximum exit value.
  
• Knowing business shows you the importance of facing the inevitable, and gives you the time you need to set the business up for maximum payout, to create the best possible situation for your successor, or to close it down.
  
• Knowing business enables you to develop an appreciation of the many business concepts the exit decision entails.
  
• Knowing business helps you understand your exit decision is about business and not just about what you want and need.
  

If you don't know all the Facts of Business Life at this level, you will be severely limited in your understanding of the value of your product, that is, your business. And if you are, you will be handicapped in determining, creating, and explaining its optimal value to any potential buyer, whether you decide on an asset or a share sale. In fact, it could mean that your buyer will have a better understanding of the value of your business than you do, and that is not a position you want to be in. But it's a position a buyer would love to be in because he or she would then be given the opportunity to possibly “steal” your business. In business, knowledge is king, and not least of all when you are exiting it.

When you are selling your business as a product, the more you understand about business, your product, and your buyer, the easier it is to explain and justify the price. For example, if you can tell a prospective buyer about future opportunities and how your employees are trained to take advantage of these opportunities, and tie it into expected future profits, you can make a compelling argument that adds value to your business. Similarly, if you can explain to a competitor who is considering buying your business how the economies of scale will lower the overall costs of both businesses, and the profit windfall this could create, you are much more likely to get the optimal price for your company.

Having a good understanding of business is important if you choose to pass your company to a family member as well. Not only will it help you determine the best candidate to take over, if you pass along not only the company but also your understanding of business, you will be doing all you can to ensure his or her success. Bear in mind, too, that when there is a successor, the “fair value” of the business can become a family issue, especially if the successor becomes the owner. Others in the family will have to be convinced that their payouts are adequate compensation for their loss of the benefits and income from the business. In addition, the more you know about business—including issues like taxation, asset protection, and prospects for the future—the smoother the transition will be for you, your family, and the business.

Finally, if you choose to close your business down, you must remember that your business assets have value and should accordingly be sold for as much as possible. For example, your business's customers can have value to some of your competitors, so knowing who these competitors are and who would pay the most for this asset is obviously important. Similarly, if your business has been around for a while, your company's brand name may have value. In addition, knowing accounting and the difference between book value and market or replacement value can mean more money in your pocket. The point is that just because you're closing down your business doesn't mean the business assets don't have value, and the more you know about business the easier it is to determine which of those assets have value, what that value is, and who would pay the most.

One of the basic facts of business is that successful businesses are invariably built on the relationship between a company and its customers. Most successful owners realize this, and when they can show prospective buyers their employees have good relationships with their customers it increases the good will or blue sky value of their companies. If, for example, when selling your business you can give the buyer confidence that it will continue to run as it has in the past, even without you, the higher your payout is likely to be. However, if you don't show a buyer that you understand the importance of people and processes in operating the business, it will likely be viewed as a flaw and probably result in a lower price being offered. Similarly, if your employees are poorly trained and exhibit unprofessional attitudes, a prospective buyer is likely to pick it up quickly, and to take it into consideration in making an offer, to your detriment. The point, of course, is that the more you know about business, and the more you make sure your people act the way they should to foster success, the more likely you are to realize the greatest amount possible from the sale of the company.

Your employees also play a critical role when succession is involved. No successor wants to lose good employees, their knowledge of how the business operates, or the relationships they have with customers. The best way you can avoid this is to do all you can to make sure the employees do not feel threatened by the change and to make your successor understand the importance of upholding the companies DNA. It is also essential that you give your successor the room to develop his or her own relationship with the key employees as well as with the rest of the staff, and not cast too large a shadow.

Finally, if you choose to close down your company, even though your employees will no longer have any business value to you, they will have value to the companies you used to compete against. Helping them find new places to work, and explaining their value to one of your former competitors will not help your business, but it's the right thing to do, and it's a gesture your employees will always appreciate, however things work out in the future.

Accounting and finance has a unique place at virtually all five levels of a company's life. From the creation of pro forma financial statements showing the cash needed and potential profits at Level 1, to providing support for your business's growth at Level 3, to helping you maintain success by alerting you to threats and opportunities at Level 4, to moving onto center stage as you begin developing and implementing your exit plan at Level 5, it is the one department that can tie all the business functions together. In addition, accounting and finance can describe and demonstrate how processes operate the business, how they work, and how they are controlled. What all of this means is that it is in a unique position to not only tell the story of the business's success but also to back it up with facts. And facts are what's needed whenever an owner exits because they help justify the value of the business to the buyer, to the owner's family if succession is chosen, and to whoever may buy the company's assets if it closes down.

When you are selling a business, for example, potential buyers will rely on those facts to make both their valuation and buying decisions. Buyers will also spend countless hours reviewing your financial statements, checking the balance in accounts such as inventory, and checking your business's use of generally accepted accounting principles (GAAP). This is critical for educated buyers because it tells them a great deal about the business, builds trust in what you are selling, and gives them an overall sense of how the business works and how it will work when you leave. This in turn gives them confidence, which will be reflected in how much money they will be willing to pay for the business. However, if your books are sloppy and don't accurately reflect the business, important questions will go unanswered because there are few facts to fall back on, except for whatever claims you may make, which will mean little without backup. And this, too, will be reflected in the money paid for the business. In other words, if you don't understand the power that financials have when selling your business, you will pay a huge price for it.

Accurate financial information is also important in a succession because it helps you justify the business's value to your family as well as back up any claims or questions. It also plays a role in calming emotions among family members, and is critical when an estate has assets to divide or sell, as well as when the government is to receive a percentage of your windfall. In addition, in a situation in which some members of the family know little about business and its complexities, if the information is accurate they can have an accountant review the business's accounting practices and satisfy themselves that they are being treated fairly. Not surprisingly, there have been many instances in which the lack of such information has resulted in families becoming divided.

Finally, as mentioned earlier, you may prefer to simply close your business down. In situations like this, the more you know about business in general, the better you will be able to improve the timing of your exit, prepare for it, and weigh your options and recognize what assets others may be interested in buying.

Making the decision to leave the company you've spent years building into a successful enterprise is in many cases a very difficult one. And to make matters worse, there are several traps you can fall into while you are in the process of deciding when and how you should leave. The first of these has to do with age. As with virtually everything else in life, the prospect of leaving your business looks different at 30 or 40 than it does at 50 or 60. Not surprisingly, the idea of exiting usually seems considerably more viable at higher ages. Someone at 60, for example, who wants to exit before he or she turns 65, is likely to be a lot more receptive to offers, or more aggressive in finding someone to buy the business, than someone who is only 40. And, in fact, a majority of owners do use age to determine when they will retire. I believe, however, that doing so is a mistake.

To my mind, age should have very little to do with your exit decision. We are all programmed to think of retirement in terms of age because the vast majority of people work for someone else, whether it be the government, large publicly traded companies, or small businesses. But as an owner, and therefore self-employed, you do not belong in this category. Unfortunately, some owners fall into this age trap. But you don't have to. You should make an effort to be more aware of your business value, your health, your interest in continuing to operate the company, and what you want for your family. Only when you have taken these into account will you be able to make a truly considered decision. And if you do, you will be able to make the decision that's right for you.

Another trap that some owners fall into is an emotional one. The bottom line, so to speak, is that the more emotional you are about the exit decision, as is true of virtually all decisions, the more likely you will be to make a mistake. The decision to leave, as well as such decisions as how much to accept for your company or what kind of conditions are included in the contract, should be made with as little emotion as you can manage. Doing so is not always easy, but it's nevertheless important that you make these decisions the same way you made all the other important decisions in your career—carefully, intelligently, and dispassionately. In fact, having a good, strong understanding of business will actually help you do this because when all the reasons to retire are compared to all the reasons to leave, what appeared to be a difficult decision can become remarkably clear.

A third trap you should do your best to avoid in making the exit decision has to do with, for lack of a better expression, exhaustion. The reality is that most owners can only take a business so far, not from a lack of talent or knowledge but from a lack of energy, that is, not being able to maintain the continuous mental discipline needed to run a business or keep up with the constant change that is a given in the war zone. In other words, owners get tired, and some things that used to be easy become challenges, just as they do for professional athletes. No one likes to see a great athlete stay too long and embarrass him or herself, and it's the same in business. At some point every owner reaches the top of his or her game, and they have to recognize when this is beginning to happen and start making decisions based on what's good for them and for their businesses. Not surprisingly, the more you know about business, the more likely you will be to recognize when that time has come, and the more effectively you will be able to deal with it, regardless of how you choose to make your exit.