[Speaker 1] (0:00 – 0:39)
Hi, I’m Armand Roman, host of the Founders Guidepost. You’ve built your business over decades, and now it’s time to think about that once-in-a-lifetime exit. You’ve come to the right place.
Here, you will hear business exit professionals talk about what you should know before exit. Besides hosting the Founders Guidepost, I’m CEO and founder of Axiom Founders Family Office, working with founders to help preserve their American success story. And it all begins with a founder stress test.
We also host the Scottsdale Founders Forum for the founder considering exiting in the next 36 months. Here’s to your hard work and to your American success story. Enjoy.
[Speaker 2] (0:40 – 1:34)
Hi, and welcome to the Founders Guidepost. If you’re a regular subscriber or watcher of the videos, you’ll kind of notice that there’s a new voice, and that’s me, Tom Markey, on the other half of Axiom Founders Family Office. We’re starting a new series for our office based on trying to add value to founders.
Our founders earlier this month got a checklist, which included a bunch of series of questions on what you should be thinking about as a founder if you’re going to sell your business, dispose of your business, or be forced out of your business. Today, me and my business partner, Armando Roman, will be going over this checklist to kind of give our thoughts and viewpoints on what you should be thinking about as a business owner when it comes time to exit. Let me pass over to Armando Roman on the other half of Founders Family Office.
[Speaker 1] (1:34 – 4:22)
Great. Thank you, Tom. Let me pull this checklist up here.
We use checklists, of course, for a lot of things here at Axiom. The idea is that we can be as thorough as possible. The checklist that we’re looking at now that’s up on the screen is really a starting point checklist of things to think about for the sale, disposition, or succession of a business.
For most business founders out there who are now thinking of stepping out of that company, they’ve never done this before. It can be very emotional, very overwhelming. Depending on the buyer and the situation, it can be a lot of stress and anxiety happening with a very, very short window to get everything done.
The reason these checklists can be really, really helpful is it helps that things don’t get missed. We’re going to talk just slightly about some of the things on the checklist here. Just begin from left to right.
The first item on there is the future success and continuation of your business highly dependent on you or your employees or a key person is individual skills, knowledge, and expertise. The reason that matters is if there are key people who matter with the continuity of the business, then you’ve got to make sure those people stay on after the business is sold. That might mean doing things like having some type of non-qualified deferred compensation, or maybe employment agreements, or maybe there’s a lot of ways to get the restricted stock units to keep people on board, but lots of ways to make sure that those people are incentivized to stay with the company after the sale.
Lots of ways to get there. The next point on there is, do you wish to have your children or any other family members take over the business? Well, that’s a whole another set of concerns because then you bring the family into the picture.
Regardless of what may make sense from a business standpoint, because of the family relationships, it might take twice as long to really get that to happen. It’s just planning ahead is what that pertains to. The next point on there, do you plan to remain involved in the business after you sell or retire?
Some people want to walk away on day one and just be done, but a lot of times the buyer wants that continuity and wants that transfer of ownership, transfer of skills and expertise in transferring their relationships to the new owner of the business. That’s one of those negotiation points that needs to happen within the company so that the business first and foremost has continuity and it remains valuable going forward. Then for you personally, if this is you selling that company, that you get what you want out of that once in a lifetime transaction.
Tom, you want to add anything to that?
[Speaker 2] (4:23 – 4:41)
Yeah, maybe you can share on that second point about some of the experience we’ve had in this office as far as businesses where not all the family members want to be a part of that business continuity. How has our office kind of maybe added value to some of these businesses and their families?
[Speaker 1] (4:42 – 6:06)
Well, that’s a good point because navigating the relationships is very important. If you talk with most family members or people in a family, first and foremost, they want that family to remain a family, especially when it’s mom and dad who started the company and now mom and dad are bringing in their adult children. Mom and dad want those kids, their adult children and those siblings to remain a family, to still have a good time at the holidays and Christmas and that.
Helping to navigate that, what we can add value to that part of it is having those conversations. Sometimes within families, it’s very difficult to bring up things that really need to be spoken. They need to be addressed.
We can make sure to bring those to light, being sensitive, of course, to the relationships so that we can help the family navigate that going forward. Not always easy to do. Sometimes the adult child, maybe they’re not the right adult child.
Maybe it belongs to somebody else because they have the right skill set, demeanor, temper, all those kinds of things. That just gets to the point that when the family is trying to transition this to one of the adult children or several of them, that it be done with a thoughtful process, keeping in mind those relationships in the family and understanding how important those are to the founders of the business and to the success of that family.
[Speaker 2] (6:08 – 6:18)
Awesome. That’s great, Armando. A key point is, is the business important to the family?
Heck, yeah, it is. But is it keeping all the family members talking to each other important? Yeah, that’s probably a little bit more of a priority.
[Speaker 1] (6:19 – 9:15)
Yep. Yep. So let’s go down to the next section right below there, valuation and appraisal issues.
Do you need to review whether you should hire outside experts to help with the evaluation appraisal of your business? And the answer probably is yes, but it’s really getting to the heart of what is this company worth? And that is a lot more difficult than what you might think because sure, you can run numbers, run it through software and have an idea from a number standpoint of what the value of that company might be based on profit, based on EBITDA.
But to a strategic buyer, they might pay a lot more than those numbers to acquire that business if it makes sense to them. So even though you might go through some kind of a process to assign a value based on, again, crunchy numbers, you don’t want to take that to the bank as if that is the right number. It could be 30% more than what you’re seeing or even more than that.
It just depends. That’s why navigating the exit and going through the right process to get to the right buyer at the right price, it is a process and that’s why it matters to go through that step. That next point on there, do you need to review ways you can potentially improve the valuation slash appraisal of your business?
And what that means is, are there things you can change in the company? Maybe you have five product lines and one of those product lines is losing money every year. Well, if you get rid of that losing product line, that is going to take that value of the company and bump it up.
Why? Because you just increased profits. And if you’re selling at a multiple, say a multiple of five times profits, and you’ve just gone up $100,000, that means another half a million dollars of sale value is what you created simply by terminating a losing product line.
So yes, it’s really, really important to understand the business lines that you have and understanding what drives value in the company. The next point on there, are there any business assets that you wish to keep and not include in the sale of your business? Well, you know, this is often the case when a business owns the real estate that houses the company.
And many times people, before they sell, think what they might want to do is sell the business and keep that building as another source of income, rental income. So if that is what you want to do, then you want to make sure that that building is owned in a separate legal entity, that you’ve got a legal separation, that the books, records, and accounting taxes, all that are completely separate. So that when you go to those potential buyers of your business, they understand that if they buy the operating business, they’re buying that.
If they also want the building, that’s a whole separate negotiation because it has an entirely separate value. Tom, things you’d like to add or comment on?
[Speaker 2] (9:15 – 10:32)
Yeah, talk about a loaded subject, holy cow. A couple of key points here I’d like to add is that we kind of recommend you getting an annual appraisal, but that’s unrealistic, at least, you know, a value every couple of years, just like you look at the value of your home and you see the real estate prices out here jumping up and down, it’s good to do that with your business. You’re in a better position than when you go to think about maybe exiting.
The other thing is valuation of business, it’s a difficult subject, it’s hard to calculate, but we want to make sure that you, the business owner, when it does come time to disclose your business, sale, exit, that you get the right amount of value out of your business because in private equity, whoever’s going to buy your business, they’re going to have their experts doing their appraisal and evaluation. You want to make sure you have your experts in your team that get the right number for you and your family and represent the dollar amounts going into your family because we’ve done some white papers and we’ve seen sometimes estimates of over a trillion dollars have disappeared from the economy because these business owners are not getting the value out of their businesses that they should be getting. That’s money that could have went to the next generation back into the community, back into their churches, their schools, etc. So let’s make sure you understand the value of your business.
[Speaker 1] (10:33 – 13:39)
Right. Good points. So I’ll go to the upper right-hand corner, valuation appraisal issues continued.
Does your business have any pending and or potential liability issues, say lawsuits, disputes with IRS, audits, property damage, etc.? Anything that causes question in the buyer’s mind is going to decrease your value. They’re going to knock down that price for things that could go wrong.
So you want to get those cleaned up before the potential buyer ever even walks in your door or begins conversations with you, which is why planning ahead for that sale is really critical. Two, three, four or five years ahead of time is going to give you the time you might need to clean up some of those issues. The next point, do you need to review whether there are any particular business expenses?
And the example of compensation packages, return replant contributions that are significantly above or below market rates. And part of what that really gets to is a buyer is going to look at your company through a different lens. He or she will be looking at a market perspective.
What is the market value of this company? Do you have a competitive compensation package? Do you have a competitive benefits package to keep employees on board?
Because if you don’t, they will have to tweak those benefits packages, which means they’ll have to spend some money. It’s going to cost them more when they come on board because they will need to retain employees and attract new ones. So it has to be competitive.
The next point on there, does your business have income that greatly fluctuates or is inconsistent from year to year? Well, what does that mean? Things are sometimes cyclical, maybe dependent on interest rates or dependent on the economy.
And if so, are there ways you might be able to smooth those out? Because when a buyer is taking over your company, it’s rare that the buyer wants to just kind of keep things steady, eddy and going horizontal across that bar. Instead, typically what they want to do is buy that company and grow it.
So they need to see that when they become the owner of the business, that that company top line will grow and profit will grow. So if they see these dips and valleys along the way, that might make them uncomfortable. Are there ways that you can reduce those dips and valleys and maybe make it more consistent of a growth pattern?
That will certainly help. And the last point on there, does a large portion of your business revenue come from a small base of clients or customers? And this is the Walmart example.
If you’ve got a billion dollars of revenue and one customer, it’s Walmart. Well, what happens if Walmart goes away? You don’t have a business.
So the more concentrated your customers are, the more uncomfortable that potential buyer will be. So the buyer wants to see you’ve got a lot of customers and they all pay you equally in terms of the slice of the pie that makes up your revenue. So again, if you’ve only got a handful of customers, you need to spread that out, get more customers on board because you have what’s called a concentration risk in your revenue source.
Thoughts you want to add?
[Speaker 2] (13:39 – 13:58)
Sure. We are a family office. I think one thing we take great pride in is having an extensive professional network that is readily available in Arizona.
Armando, maybe touch on a couple of key members that might be able to help out a business owner with some of these questions here.
[Speaker 1] (13:58 – 15:03)
Certainly. We’ve made it our role, our task to make sure that we know who are the people at the top of the food chain in their respective areas, which means merger and acquisition attorneys, corporate attorneys, appraisers, investment bankers, tax CPAs who understand the buying and selling of companies. And those are specialties.
Not every attorney and or CPA really understands that space. So our role in terms of making sure we know who those people are and that they know who we are is that we can pick up the phone and call them when the situation arises and we need to have that conversation with them. And sometimes it’s a quick conversation over the phone because the client has some kind of a situation happening.
Other times it’s setting up a meeting with that other professional and the client and us so that we can have that dialogue to help get that other provider on the right foot with the client on day one, so they can be more efficient and more productive more quickly for them.
[Speaker 2] (15:03 – 15:22)
And I’ll add part-time CFO, or sometimes you’ll hear the term fractional CFO. We’ve got those experts that might be able to come into your business. And so instead of you having to hire a full-time CFO, they can work on a contract and get some of these questions answered and help you feel a lot better in the future.
[Speaker 3] (15:23 – 15:23)
Exactly.
[Speaker 1] (15:24 – 17:05)
So this next header, sale and disposition issues. Are you considering selling your business in some form of an installment sale to provide income? Well, those are really two different things.
As I read that header and I see to provide income, what that says to me is the seller is looking for an income stream after the sale of the business. Well, there are lots of ways to create an income stream and installment sale is only one of those ways. So really two different issues about income going forward beyond the sale, but then an installment sale, that can be a little bit tricky to navigate as well because that means that the buyer now owes you money.
So yes, he or she has bought your company and now you’re no longer part of the business, you’re doing your thing now, but they still owe you. And if they are relying on future profits of that company so that they can now have cash to pay you, well, how do you know that they’re going to run your company well? How do you know you’re ever going to actually receive any of those payments going forward?
And sure they’re obligated, there’s a paper that says they’re obligated, but if they don’t have the cash, they don’t have the cash. And that’s why you’ll see people file bankruptcy at times because they don’t have the cash. They have people they owe money to, they cannot make good on it.
So there’s a legal mechanism in place that allows them to file bankruptcy and be done. Well, that doesn’t leave you the seller in a good situation. So an installment sale, make sure you understand what that note is, what collateralizes that note so that you’re in a better position to receive something, to actually receive the cash down the road.
[Speaker 2] (17:06 – 17:07)
Great points, Armando.
[Speaker 1] (17:07 – 19:12)
Right. Thank you. So let’s go to this next header.
Again, sale and disposition issues continued. Are you concerned about potential disputes occurring between business partners slash shareholders and their heirs at the time of sale or disposition? So this can get pretty ugly.
And what this really gets to is having everything nice and neat and clean and documented ahead of time. And when you have those things documented ahead of time, then sure you can still have disputes, you can still have issues that come up, but you can certainly minimize that from happening by having a good legal counsel to look at your documents and or create documents for you so that any of those potential issues that could come up, they’re addressed, they’re in writing, people agree to them and they’re signed off on.
So you want to get those, you don’t want to wait till that potentially becomes a problem when you’re trying to sell or after you’ve sold. Instead, nip it in the bud, address it ahead of time, and it takes that risk off the table or greatly reduces the chances of that risk becoming real. Next header.
Do you need to review which buy-sell approach, for example, entity owned approach, cross-purchase approach, hybrid approach, et cetera, is best suited for your situation? And this is really looking at making sure you as the seller of that business, what are you really trying to get to? And that’s what Tom and I often talk with our owners, our families in that, is what are you really trying to get to?
Because there might be a dozen ways to get to the same place, but given what you’re really trying to get to, one of those ways might be optimal. And that gets to this buy-sell approach, is that entity-owned approach, cross-purchase approach. Those are different ways to get to the same place, but really understanding what is the goal, what is motivating you, what are you really trying to get to?
And that will dictate which of those methods might be the better way to go.
[Speaker 2] (19:13 – 19:16)
Great points, Armando. And I’ll just kind of summarize and say that.
[Speaker 1] (19:17 – 19:31)
Are you wondering if you’ve missed anything in your planning? We hear that a lot from very smart, very successful people. And that’s why you may want to know more about our Founder Stress Test.
If so, go to axiomcorp.com.
[Speaker 2] (19:31 – 20:13)
Our business owners, who we primarily work with, so our family office works primarily with founders of businesses. They’ve done an incredible job accumulating wealth and building up these businesses. One thing we kind of see though, is they don’t always think about how to get out of these businesses.
What is their exit plan? And unfortunately, you’re getting out of your business in one way or the other. We’re looking at some terms there, disability, death, divorce, et cetera.
We’ve seen that come into our office where the business got in real trouble because of those triggering activities. So we want to make sure that our business owners think about that exit, not as a transaction, but as a kind of a plan, two, three or four year plan.
[Speaker 3] (20:14 – 20:18)
Right, because it is a process to go through to really have a successful exit.
[Speaker 2] (20:18 – 20:32)
Right. And then you can see some complicated terms there at the bottom there. That’s part of our job.
It’s going to get you comfortable with some of these terms that maybe aren’t so understandable in other issues.
[Speaker 1] (20:33 – 22:15)
Yeah. So I’ll just touch on that last header, tax issues. Do you need to review whether the sale of your business may affect other tax planning goals you have?
Well, if this is the biggest asset that you own, this will be the biggest tax payday of your life. So if that’s the case, it makes sense, of course, to get the right counsel, either a tax attorney or a tax CPA or otherwise, but get the right counsel so that you understand what the landscape looks like and make sure you plan ahead because it’s very possible that you may be able to do some restructuring and move things around a bit legally, of course, but rearrange things so that when it comes time to actually sell, you’re getting maybe a capital gains tax rate versus something else because capital gains is the lower tax rate. So again, making sure that you’ve got that right counsel way in advance, you’re having the conversations way in advance so that when that time arrives, whether you have planned the sale in advance or whether you have a disability or a certain health issue and now you have to sell, but regardless of how you get there, that you’re ready when that time comes. That next header up on top, if operating as a C-corporation, do you need to review ways to minimize the taxation of your business?
Yes, you don’t see a lot of C-corporations anymore these days, but we have seen companies that were started 40 years ago that are C-corporations where restructuring might be the best thing for them. Just again, emphasizing the point, you’ve got to have that tax counsel on board to look at your situation and make changes well in advance if that is advantageous to you. Tom, anything you want to add?
[Speaker 2] (22:15 – 22:44)
Sure. I don’t see enough of that. Wouldn’t you agree, Arnold?
We don’t see enough CPAs. Don’t assume your CPA is going to be bringing these ideas and concepts, which our firm is agnostic when it comes to this stuff, but that tax code, man, it’s a big cumbersome, but there’s a lot of available tools that we can use to help you keep more money in your pocket after the exit of the business because Uncle Sam, he’s going to get you one way or the other.
[Speaker 1] (22:45 – 23:55)
Right. People may or may not know, but there really is a shortage of CPAs. So not to knock them for not knowing or guiding in advance, but often having been a licensed CPA for over 30 years, I’m no longer licensed, but I was licensed for a very long time.
I had my own tax practice for a very long time. And I can tell you that it’s not that unusual for a business owner next time you see them to call and say, hey, I sold my business or hey, I’m selling my business rather than saying, hey, I’m thinking of selling my business. Can we get together and talk about what that might look like when the taxes can be planned?
So sometimes that planning just isn’t looked at. And then other times the CPAs are just so darn busy with their tax practice and all the tax compliance that they’re looking at getting those tasks done. They’re very task oriented.
And until the business owner brings it to their attention and says, hey, I think I might be selling. Well, they’ll listen and they’ll help you with it. But you have to make sure that you tell them what you’re thinking because they certainly cannot read your mind.
[Speaker 2] (23:56 – 24:14)
You’ve even had some CPAs come to you and talk about exit planning. And one of your questions was, well, why don’t you think about the exit? And they were thinking about like right now.
Well, unfortunately, your hands are kind of tied at that point. So the sooner we can kind of start thinking about this tax planning, that’s a key issue. That can be a huge swing one way or the other.
[Speaker 1] (24:14 – 26:42)
Right. So these next questions, I’m going to read the headers and then talk about them in a kind of in a group here. Are you concerned that the value of your business may cause an estate tax issue for your heirs?
Are you concerned that the value of your business will cause estate illiquidity issues for your heirs? Do you need to review any additional benefits of cash value in life insurance policies used for buy sale agreements and or key person insurance? Are there any state specific issues you need to be aware of when selling or disposing of your business?
So this, of course, is all on the on the disposition, the sale of the company, also about estate tax and illiquidity, all that matters. And there’s a one of the one of the points here is about cash that may be in a life insurance policy. So a lot of things that need to get looked at before you begin to walk down that path with a potential buyer so that, again, the more of this that can be addressed ahead of time, then the less has to happen in a shorter amount of time to get to that sale finish line.
And anything that causes the buyer, you know, a little bit of question, maybe a little bit of raised eyebrows, anything that causes anything that just doesn’t sound right is going to take that price and just start to knock it down a little bit, a little bit, a little bit more if the price stays firm. Well, maybe there are conditions in the sales agreement that are added there so that what they what the seller pays you, that they can get some of that back if things don’t go the way they thought. So it’s not just that sales price, the money you get up front or the installment sale or the earn out after the fact.
It’s also what is written into that agreement, that that purchase sale agreement, because I heard an attorney say that that on that purchase sale agreement, 20 percent of that says, here’s the cash you get up front. Here’s here’s how you get your money. Eighty percent of the agreement is how do you have to pay it back to the person who bought your company?
So those legal terms are incredibly, incredibly important. I would I would strongly caution, don’t skimp on that attorney’s fees when it comes to to do this with this once in a lifetime transaction, because a good attorney who understands the space will help head off any of those or most, if not all of those potential issues as they do their work for you leading up to the sale.
[Speaker 2] (26:43 – 27:13)
Wow. Great job, Armando. You impressed me with your knowledge.
Thanks again for this episode of Founders Guideposts. We’re going to be providing these monthly updates on some checklists that we create specifically for founders, hopefully bringing value. If you need any questions on this, don’t be afraid to call our office at 480-367-900 or call me or Armando, email us.
We’ll be glad to help you out, answer any questions you might have.
[Speaker 1] (27:13 – 27:49)
Perfect. Great. Thank you, Tom.
This was this was very beneficial and helpful. Hopefully the right ears hear this and it causes them to ask some questions of themselves and the people they’re working with so they have a more successful outcome when the sale actually happens. Hope you enjoyed this episode of the Founders Guideposts.
Whether exit is on your immediate horizon or maybe 10 years down the road, there’s something here for you. Wondering if you’ve missed anything in your planning? Schedule your 30 minute founders strategy call at axiomcorp.com and congratulations on your business success. You are the American success story.
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