In all likelihood, you are absolutely critical to the success of your business. Without you, there is no business.
I want to fix that.
With a little luck and a lot of hard work, I can help you become an “Inconsequential Owner”.
At some level, all owners understand that they will someday leave the businesses they have created. Let’s assume for a moment that you leave your business permanently tomorrow. If you are an Inconsequential Owner, your exit will have no impact on the business, and that’s good for business value.
Buyers pay for business value, not for the departing owner.
If you constitute a significant part of your business’s value (i.e., you are a Consequential Owner) and you have left the scene, there will likely be few buyers interested in your business, and those who are interested likely will pay significantly less than they would had you been an Inconsequential Owner.
Master Planning is a process you can use to transform yourself into an Inconsequential Owner … for your sake, your family’s sake, and your business’s sake. While perhaps not the most flattering label, becoming an Inconsequential Owner not only increases your business’ value but also probably aligns with what your family and friends have been calling you to do for years!
All Master Plans should answer this question: “What needs to happen in my business (by the time I leave) that will enable me to:-
- achieve financial security for myself and my family; and
- allow me to move forward with the rest of my life, confident that I have been a good steward of the business?”
The details that constitute “what needs to happen” is discussed in a myriad of blogs that I can share with you any time.
For most owners, one of the first and most important things that “needs to happen” after figuring out where they are (i.e., current business value) and where they want to go (i.e., Exit Objectives) is to protect, create and sustain business value.
When I talk about value in this context of Master Planning, I’ve divided the discussion into three areas:
- protecting existing value;
- building new value; and
- minimizing income taxes.
The following is a summary of each area.
Protecting Existing Value
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 the business
Once the foundations of the existing value are protected, the focus can then turn onto building new value within the business.
Build New Value
When considering building value, I would ask;
“What do you, as the owner, need to do to create a successful business 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.
I would then ask;
“Which characteristics will buyers pay handsomely for?”
I 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 & supplier base
- A realistic growth strategy
- Effective financial controls
- Good and improving cash flow
When each of these Value Drivers are deemed “best-in-class” based on performance and history, then the business will also be deemed “best-in-class” and the subsequent valuation will be at the high end of the industry’s valuation metrics.
Don’t Forget the Taxes!
The lifeblood of every business—and therefore one of the best indicators of value—is cash flow. Master Planning includes how to preserve cash flow and value from income taxation (legally, of course).
Taxes collected on the sale of a business can range from 0% to over 50%. These can include income tax, capital gains tax and stamp duty.
To remedy any issue associated with taxation, it is vital you know well in advance the implications of your business structure and the various exit options at your disposal. The tax implications will affect the net value you receive from your business sale, which in turn affects your financial planning for the next phase of your life.
As Kerry Packer advised in 1991 to the Federal Government Select Committee into the print media …
“If anybody in this country doesn’t minimize their tax they want their head’s read. As a government I can tell you, you’re not spending it that well that we should be donating extra.”
I agree with Kerry. I have not identified any upside to paying more than necessary to your silent partner, the Australian Taxation Office. At the end of the day, the more you can legally save in tax, the more value you have built within your business.
Master Planning will help you identify how to find tax-efficient options by using the right advisors for your situation.
The Big Reward
I hope you begin to appreciate that while Master Planning and preparing yourself and your business for your ultimate business exit may seem to be a daunting task, it does not need to be.
Indeed, if you approach the task systematically, you will use only small chunks of time and effort for a potentially big reward.
The information contained in this article is general in nature and is not legal, tax or financial advice. Contact a lawyer or a tax or financial professional for information regarding your particular situation. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. Clients should consult their legal, accounting, tax or financial professional in specific cases. This article is not intended to give advice or represent our firm as qualified to advise on all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are for illustrative purposes only. Examples may include fictitious names and may not represent any particular person or entity. This article has been sourced from a licence agreement with Business Enterprise Institute, Inc.
