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When I ask business owners about the possibility of installing an employee incentive plan, I often hear one of two responses:

• “I would like to do something to reward my key employees for their performance. ” OR
• “You know, one of my best employees left last week for a company for more money. I think I’d better do something to stay competitive in the marketplace. ”

May I suggest that these two motives are not nearly self-serving enough? The purpose of installing a bonus plan for your employees is to motivate them to help you reach your exit goals.

While owners differ about when they want to leave their companies or how they wish to leave, the underlying ownership goal is consistent: to leave the company in style. No matter what type of employee incentive plan you create, it should be designed to support your fundamental exit goals by motivating your key employees to stay with your company and build its value.

Consider the following realities:

• Few owners will take an extended vacation much less cut back on their involvement without leaving capable management in place to run the business.
• Most sophisticated buyers will not seriously consider a company that lacks a good management team;
• Many, if not most companies, are sold to key employees; and
• Transferring a business to children can be especially risky in the absence of key employees who will remain with the new owners.

Whether your goal is to sell to a third party, transfer the business to children or to employees, the success of your strategy depends on the presence of motivated key employees.

We measure the effectiveness of an employee incentive plan in part by how well it motivates key employees to increase the value of a business. Effective plans necessarily reward employees as they increase the value of the business.

Usually, this means that owners (and their advisors) must develop an incentive formula that links increases in the income or cash flow of the business to the employees’ rewards. In its simplest form the incentive plan gives the key employee a cash bonus. Part of the bonus is paid currently and part is subject to vesting thus handcuffing the employee to the business.

Let’s look at how one fictional owner set up his company’s incentive plan.

After meeting with his advisors, Mel Houston decided to give two of his key employees 30 percent of the company’s pre-tax income above $100,000 (the company’s historic performance level). After Mel installed this plan, the company’s pre-tax income increased to $300,000 so his key employees shared 30 percent of the excess income ($200,000) or $60,000.

Because Mel wanted to retain his key employees over a long period of time, he decided to pay half of this bonus after the company’s year end, and subject the other half to a non-qualified deferred compensation plan with vesting over several years.

Mel’s plan (like yours should) provides that as the cash flow of his business increases (and thus the value of the business increases), he rewards his key employees accordingly. In doing so, both he and his key employees attain their goals.

Keep in mind that the formula you and your advisors create for your company can and should reflect the specific characteristics of your business. The head of the sales department might be rewarded for increasing the adjusted gross profit margin. A chef in a restaurant might be rewarded for reducing food costs (without affecting the quality of the meals served). Whatever factor you identify as a key to increasing the value of your company can be incorporated into your key employee incentive planning.

If you would like to discuss your options for installing employee incentive plans to support your exit goals, please contact me.

This article contains excerpts from an article in The Exit Planning Review™  published by Business Enterprise Institute, Inc. Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning.  Please contact us or if you would like to sign up for a free subscription to The Exit Planning Review™, if you have any questions or want additional Exit Planning information.

Faced with a barrage of bad economic news, business owners wonder first how they will survive in what promises to be a tough environment and then, if they’ll be able to leave their companies when they planned. Before we can help owners to answer that question, let’s look at their three options: (1) hunker down until the market recovers; (2) actively work to build business value; or (3) sell now for whatever you can get.

Before we look at the pros and cons of each option, remember that there is no “right” or “one-size-fits-all” answer. You and your advisors need to sit down and look at your particular circumstances before choosing the path that is right for you.

Option One: Batten Down the Hatches

• How old are you and how long do you want to work?
• To whom did you plan to transfer your company: a third party? children? key employees?
• Exactly how much money do you need from the sale of your company to support a comfortable retirement?

These are the questions that you and your advisors must answer as you analyze whether this strategy is the right one for you.

How long do you want to work? We find that owners who have time on their side (they are nowhere near retirement age) are looking at this option as their best one. Before you join them, we hope you’ll finish reading this newsletter.

To whom do you plan to transfer your company? If your original exit plan was to transfer your company to your children and they are approaching transfer age, you may wish to move your exit date forward. As the value of your company falls (on paper) it is a perfect time to consider beginning a gifting program and to transfer the company to your children while still reaching your financial and other objectives. A lower business value reduces gift tax complications and income taxes if you decide to sell part of the business to children. Additionally, simply transferring part of the business to children need not ultimately reduce the amount of money you receive from the business.

If your original goal was to transfer your company to your employees, this is an optimal time to begin that transfer. For example, a lower stock value means lower overall taxes in a well-designed transfer because more of the company’s cash flow can be paid directly to you rather than being used by the employee to buy your stock.

How much money do you need from the sale of your company to retire? This number varies from owner to owner depending on the type of retirement one chooses (annual world cruises or a simpler lifestyle) and on the value of the owner’s other assets (real estate, retirement plan accounts, stock portfolios, etc.). Another variable among owners is the type of assumptions they made about growth and income in their investment portfolios. If your original assumptions need to be a little more conservative, remember that you will need more money/capital from the sale of your company.

Option Two: Build Business Value

In boom times, building the value of a company drives every business owner. What many owners don’t recognize, however, is that tough times provide no reason to abandon that goal in favor of riding out the storm. In its recent study of 400 companies, Diamond Management & Technology Consultants looked at what led to success or failure during the last recession (1998-2004). Diamond found that just over half improved their gross profit margins because they: 1) made targeted rather than blanket cost-cuts; 2) were smart about automation, customer relationships and investments; 3) managed vendors to reduce and variabilize their costs; and 4) focused on core strengths. (“Don’t Waste A Crisis: Emerge a Winner by Applying Lessons From the Last Recession,” Diamond Management and Technology Consultants, Chicago, IL, October 13, 2008).

• Is this the time for you to cut back or to commit additional resources to marketing?
• Could your company benefit from hiring the top-notch talent that is becoming increasingly available as your competitors downsize?
• Is this the time to acquire smaller, less adaptable, less capitalized or less well-managed competitors? In this buyer’s market we see not only lower purchase prices, but also much more attractive seller-based financing and earn-outs.
• Have you designed incentive plans for your management team that reward long-term employment and provide short-term incentive to increase your bottom line? There are many ways to structure incentive standards so that they support your goals in a changing business environment.

These are the questions you and your advisors must ask and answer as you decide how to proceed.

Option Three: Sell Now

There are several types of owners who are choosing to sell their companies today rather than hunker down or actively build value. These include:

• Owners who just don’t have the fire in the belly to go to work each day ready to fight another battle.
• Owners who have “sale-able” companies that if sold at today’s less exuberant multiples, will support a comfortable retirement.

If you recognize yourself in either of these two categories, you will want to read the last issue of this newsletter series, “Should You Sell Your Company Now?” In it, we will look at what makes your company valuable to buyers in today’s Merger & Acquisition market.

This article contains excerpts from an article in The Exit Planning Review™  published by Business Enterprise Institute, Inc. Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning.  Please contact us or if you would like to sign up for a free subscription to The Exit Planning Review™, if you have any questions or want additional Exit Planning information.

We talk to business owners every day who “plan” to exit their companies via a sale to a third party because they believe that they’ll get more cash up front (and more overall) than if they sell their companies to insiders (family members or employees). Consequently, they believe there is far less risk selling to a third party than to insiders.
Are they correct? As diplomatically as possible, we suggest that they just might be dead wrong.

Third Party Sales Involve Risk
1. Sales to third parties are less risky than sales to insiders only if a business can be sold for all cash or if there’s simply no time to implement a carefully designed sale to an insider.
Investment banker Kevin Short reminds owners that unless a company meets the following criteria:
• has more than $1 million (or even $2 million) in EBITDA;
• is in a attractive market sector;
• has strong fundamentals; and
• enjoys a unique competitive advantage;
it is unlikely to sell to a third party—for substantially all cash.

2. Selling to a third party requires a third party wanting to buy. In a difficult M&A market, being in an attractive market sector is more important than ever. Again, according to Kevin Short, “hot” or “niche” industries include: power, alternative energy, health care, medical services and healthy-living products.
Companies engaged in construction, retail, real estate, automotive and consumer products will find it difficult, if not impossible, to attract a buyer in today’s (early 2012) marketplace.
For most companies, today’s M&A market is decidedly cool if not stone cold; few companies meet the criteria above. The most realistic owners quickly realize that there simply are no third parties interested in their companies.

3. Waiting involves risk. We suspect that some owners hold to the belief that there’s little risk in waiting for a third party buyer because it provides an excuse to “avoid the hassle” of planning. “No risk?” we ask.
• What if a qualified buyer doesn’t show up?
• What happens if, when you are ready to sell:
o the M&A market is dormant; or
o your industry niche has fallen out of favor; or
o your business and/or the economy is in decline or worse?
Why subject your future financial security to these uncertainties? Why not assume control of your exit—your life, really—by creating an exit strategy that allows you to:
• choose your buyer;
• name your sale price;
• control ownership until you are fully paid; and
• shift the burden of the company’s future performance from your back to the buyer’s?
Insider Sales Require Time to Plan.
While sales to insiders require work on the owner’s part, sales to third parties can require just as much work and be just as time consuming.
Once owners understand third party sales, they usually agree—especially if their companies are too small to attract qualified third party buyers—that transferring to insiders is a far better course than liquidation.
The Objection to Insider Transfers.
Let’s talk about the most common objections to an insider transfer: Insiders do not have money to begin buying your company.
That’s true—today. But they can and will if:
• Your company has a good management team that desires ownership;
• Your company has good cash flow; and
• You have ample time before leaving to design a tax-sensitive transfer plan and to implement that plan.
Insider Sales Yield Cash.
Owners can often get as much cash (with no more risk) in an insider transfer as they can from a third party sale if they have time to work with their advisors to design and to implement a plan.
If owners use time wisely, there’s no reason that the insider transfer cannot yield as much cash as the third party sale.

This article contains excerpts from an article in The Exit Planning Review™ published by Business Enterprise Institute, Inc. Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning. Please contact us or if you would like to sign up for a free subscription to The Exit Planning Review™, if you have any questions or want additional Exit Planning information.

When you’re running a business, your cash flow is critical.  There is much you can’t do without cash in your pocket, and even more that simply isn’t advisable to do without cash.

Here are 14 tips to help you manage your cash flow better:

1. Keep an eye on your budget at all times.  You’ll be able to manage your business better if you can anticipate cash shortages, and the only way to do that is if you’re watching your budget and expenses.
2. Get the invoice into the customer’s hands and don’t stand for late payments.  Don’t wait to send out invoices because it just delays payment.  As for those customers who think they can put off paying you, chase them down!
3. Create an alarm system.  It doesn’t take long to notice a pattern.  When certain things happen, you find yourself low on cash.  Use these indications to create an alarm system for your business which tells you that you could run out of cash.
4. Look for trade-offs.  When your cash flow is heading toward critical (or if it’s already there), look for some trade-offs in terms of your business objectives or profitability.
5. Shorten credit periods and factor debts.  Having customers that owe you money isn’t the same as having the cash in your pocket already.  Get the money in there faster by tightening up your payment guidelines.
6. Offer incentives.  Every business hits a dry spell once in a while, but you can overcome these dry spells by offering temporary incentives and discounts for new customers and/or customers who make their payments in cash rather than credit.
7. Let vendors compete for your business.  Cutting unnecessary costs is simple when you begin taking a look at your vendors to see who is willing to work with you and who isn’t.  Negotiate to get better payment periods and shorter lead times on deliveries.
8. Control your stock.  You should have a system in place that enables you to control your stock better so that your cash isn’t tied up in product that’s just sitting around.
9. Turn away business if you can’t finance it.  For long term contracts or large orders, get a deposit up front and/or establish payments at various stages rather than one lump sum later.
10. Take stock of your cash flow situation before embarking on any major business situations.  Anything that increases your overhead can become like an anchor on a sinking ship.  If you need to invest in new assets, consider leasing instead of purchasing.
11. It’s about who you know.  Establishing solid relationships with both suppliers and financiers is essential so that you have a place to go when things start to get rough in the cash department.
12. Arrange for financing before you need it.  It’s never a good idea to wait until you need financing to get it.  This just makes you a bigger target to be taken advantage of.  If you don’t have the cash to cover the interest on large purchases safely, then look for equity investments to set up the financing.
13. Dump the negatives.  Any assets that aren’t bringing in any money are just weighing you down.  Get rid of them by selling them or ending your business lines with negative cash flow.
14. Remember the short term fluctuations.  Keep several views of your budget in mind: weekly, monthly, and annually.  There are fluctuations that don’t show up in those short term budgets, and you can’t afford to forget about them.

Let Acceler8 help you diagnose and solve all of your cash flow problems.

“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now.” If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they think they cannot plan their exits.

Know that in your indecision, you are making a decision. As Winston Churchill observed, “I never worry about action, but only about inaction.” When you take a passive attitude toward the irrefutable fact that you will–one way or another–leave your business, you are deciding to settle for a least profitable exit for yourself and for your family.

If you are an owner who isn’t sure about what you want, or when you want to leave, why is it so important to decide to act today? Why can’t you wait?

• Preparing and transferring a company for top dollar takes time—on average about 5 years. Most of those years will be spent preparing the business for the transfer. If you decide to sell to employees or children (two groups who rarely have any money), they’ll need that time to earn the money to pay you for your interest.
• More time often equals greater reductions in risk. Time can be used to design and implement income tax-saving strategies, build value, strengthen your management team, begin a gradual transfer of ownership (not control) to key employees or children. If you wait too long, you probably won’t have time to implement these strategies and you’ll likely end up transferring your business on less-than-ideal terms.
• The market does not operate on your schedule and may not be paying peak prices when you are ready to sell to an outside party. Witness the state of the M&A market in 2008 and 2009: activity is almost non-existent in many business sectors and down in almost all.

If leaving a company you’ve worked so hard to build and having little or nothing to show for it, is unacceptable to you, let’s look at a few of your options.

Wait for a buyer. According to Deloitte’s Entrepreneurship UK: 2008 survey, 35 percent of business owners said they will wait for a third-party offer for their businesses. Owners in this group believe that one day a buyer will contact them, negotiate a sale, and that will be that. Well, this is a decision of sorts—but one that flies in the face of reality. While few businesses are being sold today, there will likely be a significant number of Baby Boomer business owners vying with you to sell their businesses when the M&A market recovers.

In a competitive buyer’s market, only the best-prepared businesses sell for top dollar. And the owners of those well-prepared businesses will be those who made the decision to act to prepare their company years ahead of the actual sale.

Liquidate. Liquidation is a common exit path for owners of companies whose cash flow is flat and has little probability of improving—absent the design and execution of a business/exit plan. If you find yourself in this group, we recommend that you meet with your tax and other advisors to do the planning necessary to create the most tax-efficient liquidation possible.

Decide to exit and plan accordingly. Start today and take the following steps:

1. Fix a departure date.
2. Determine your financial needs.
3. Decide whom you want to succeed you.
4. Have your business valued to see if: a) should you sell today; and/or b) it has the value necessary to meet your financial and other exit objectives.

Based on your objectives and the realities of your business, use a skilled Exit Planning Professional to forge a plan with accountability/decision deadlines.

Deciding to do something now to create the best possible exit path is not difficult. The failure to act, however, can potentially be fatal to a successful exit. The success of your business exit is simply too important to you (your family and your employees) to leave to chance. Why wait? Why decide not to decide?

This article contains excerpts from an article in The Exit Planning Review™  published by Business Enterprise Institute, Inc. Subsequent issues of The Exit Planning Review™ provide unbiased and advertising-free information about all aspects of Exit Planning.  Please contact us or if you would like to sign up for a free subscription to The Exit Planning Review™, if you have any questions or want additional Exit Planning information.