Friday, October 18, 2013
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Square Talk prepares owners on all aspects of good business

Preparing for transfer, sale or closure

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[October 18, 2013]  Given that over 50 percent of new businesses fail in the first three years, it is no wonder that a new entrepreneur focuses on the startup process to the exclusion of everything else. And given the vagaries of the economy from year to year and over the lifetime of a business, it is natural for an owner to constantly have to adjust the business to account for external change.

It's no wonder then that one of the most important decisions a business owner can make is often left until it is too late to make a rational and informed decision. This is a decision to sell a business or close it while taking the maximum profit necessary to maintain an accustomed lifestyle.

Bill Hoagland addressed this topic in the September edition of the Square Talk series he has instituted for Main Street Lincoln. Hoagland is executive director of Main Street and co-founder of the Jacy Group, a business consultancy with headquarters in Denver. Square Talk is presented in the Main Street Lincoln office from 11:30 a.m. to 1 p.m. on the last Wednesday of each month.

The decision to sell a business is fraught with all sorts of pitfalls and requires an extended period of time to make informed choices and smooth the process. Hoagland recommends a minimum of five years, and as many as seven, to make the decision to exit a business. The planning is complex and should incorporate as many experts as possible.

"The decision to exit a business is a very emotional process. The owner should call upon certified financial planners, accountants and legal advisers to help with the decision-making process," Hoagland said.

These professionals can help analyze the current state of the business and recommend changes that will enhance the value of the company, as well as help with the decision to sell or liquidate. Hoagland's experience helping companies focuses on those with a value between $500,000 and $20 million.

One of the most important initial steps is to identify the "gap." This is the amount of money a business owner needs after the sale to maintain a desired lifestyle versus what the business is actually worth. If the value of the business measured against the owner's current personal wealth is determined to be less than what the owner needs, then the "gap" has been identified.

The next step is to use the five- to seven-year lead time to enhance the value enough to grow revenue. This is where consultants may come into play to recommend value drivers that will make the business worth more and help identify potential purchasers.

Value drivers are just that -- tactics that are necessary but may have been neglected by the business owner. They include such things as identifying business fundamentals and doing strategic planning. Diversifying supplier relationships and collecting customer feedback are other areas addressed by value drivers.

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Finally, it may be necessary to change the way financial information is collected to more accurately reflect the value of the company. Also determine benchmarks to ensure that the company is accelerating its financials to meet the deadline for the transfer of ownership.

While these measures may seem fundamental to running a business, the day-to-day stress of business management may have caused them to be neglected.

It is also a good idea to get an outsider's feedback on the company, a fresh view of how it is being run. These are the areas that a potential buyer will go over with a fine-toothed comb to determine if the sale price is fair.

Finally, it will be necessary to determine the exit route from a company, namely finding who would be available to purchase the company. Hoagland referred to a Business Enterprise Institute list that reduces the potential buyers to eight categories. Some of these are selling to family members, which is the most common route; selling to current employees; or third parties. In some cases, business owners will find that simply closing the doors and liquidating the company is the best course.

Hoagland also identified a list of reasons why businesses don't sell. It is hoped that the application of the value drivers would reduce or eliminate these.

Of course, because of the dynamic changes that happen in our economy on a continuous basis, one important reason a business does not sell is that the service or products are outdated. The need for innovation is ongoing.

"Armed with the proper tools, advisers and time, you optimize your chance for leaving your business in style," Hoagland said.

The next Square Talk seminar will be on Oct. 30 at 11:30 a.m. in the Main Street office. The topic is "Effective Planning -- 2014 is closer than you think". It will address turning a business owner's vision into a strategy and then executing that strategy.


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