Just as important as losing some weight, or going back to the Gym, business owners need to think about some New Year’s resolutions that will directly impact risk factors that affect the value of their business.
1. Diversify your customer base
Having more than 25% of your sales attributable to one or two customers is a recipe for disaster. The reasons are obvious yet, many business owners fail to try and diversify their customer base, which increases their business risk and lowers valuations.
2. It can’t be all about you
Potential buyers and lenders look at businesses that are run with the owner significantly involved in all, or most, of the company functions as a red flag. What if something happens and you can’t come to work tomorrow? The answer better be that there is a clear second in charge or, better yet, the tasks you typically perform would be spread out amongst several individuals who have the ability to handle the duties competently when you’re not around.
3. Clean up the books
Many owner’s operate their business to manage their tax bills but, having those vehicles on the books, or paying your college age son/daughter for sharpening pencils, makes the company financial picture a little foggy. Try to separate personal expenses from true business expenses and make sure you claim all income. Potential buyers and lenders base decisions largely on the company financial condition and clarity.
4. Take advantage of the current estate and capital gains tax situation
Current Federal Estate Tax Law allows a $5 million personal exemption for you and your spouse. That’s a total of $10 million that you can gift to your children and not pay estate tax on at the Federal level. Also, the current capital gains tax rate is 15%. The good news is; you don’t have to “expire” in order to take advantage of this exemption or rate. Be warned, that exemption and the capital gains rate are due to sunset on 12/31/12. No One knows what the new exemption or rate will be but, given the current fiscal climate, it is doubtful they will get any better for taxpayers.
5. Get a grip on your Cost of Capital
Your cost of capital is the “all in rate” at which you borrow money to finance business operations and the return on your investment into the business. Don’t fool yourself by undervaluing your time and the risk you take on being an entrepreneur. IBM may have a cost of capital around 7-10% but, a small business will have one in the 20%-40%. Bottom line: If the business isn’t giving you a Return on Investment in that range you’re just treading water, at best or, slowly sinking, at worst.
Finally, give some thought to starting to form an exit plan. The vertical exit (walking out) is greatly preferred to the horizontal exit (carried out) and leaving voluntarily, under your timing and terms, will spare your family and employees the additional pain of inheriting a business ill prepared for your passing when you do finally make that inevitable, horizontal exit.
Cliff Olin, MBA, CM&AA, CEPA and principal at Olin Capital Advisors, a small to mid market, mergers and acquisitions advisory and exit planning firm. Cliff is a Certified Exit Planning Advisor and has spoken to many groups regarding Exit/Transition Planning. He can be reached at colin@olincapital.com.
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