Is your business designed to be sold? Let's look at two nearly identical businesses. Each is selling the same product or service into the same market. Each business is grossing $5 million in sales and netting $500,000 in profit. Each pays the same salary and benefits to its owner.

The owner of Company A works 70 hours per week, works most weekends, and has never taken a vacation longer than a week. The owner of Company B works 20 hours per week at his company, is a leader of his professional trade organization, and volunteers in multiple community organizations. He is regularly off visiting his grown children and grandchildren in other cities around the country, spends a month every winter in the tropics, six weeks every summer at a cabin in the mountains, and plays golf or skis at least one day a week when he is in town.

Which business  would you pay more to own? Which is most like your business and your life?

Chances are that Company A is so dependent on the owner's presence in the business to close sales, solve problems and make every-day decisions that most buyers will have great difficulty replicating the performance of the business once the owner has sailed off into the sunset.

Company B, on the other hand, likely has systems that control most day-to-day activities, long-term employees who are incented to support the vision that the owner developed for the business, and are empowered to make decisions for the business and take actions that are aligned with that vision. The owner simply provides guidance and monitors development of the business and his employees according to the plan, and works with his key staff to evolve that plan as business conditions change.

And business sale price and sale potential is not the only issue here. What would happen to each company if the owner suddenly died or became incapacitated?  Not only may Company A be more difficult to sell at a good price, the entire company is at risk of quickly failing. Without the expertise of the owner, that business is probably unsellable.

If your business and the time you spend in it is more like that of Company A than that of Company B, then the time to develop and begin implementing a plan for change is now. One of the best ways to make that happen is to work  with an experienced coach who can guide you through the planning and implementation  process and connect you to an advisory group consisting of other owners and CEO's who meet in a peer coaching framework.  As peers, other CEOs can offer you a "been there.... done that" perspective. There is a level of trust and belonging  with these CEO peer groups such as TAB (The Alternative Board) that is difficult to gain in other ways.

Following is a short video that illustrates the value of a peer group.

According to the New York Museum of Modern Art (MOMA) after Jackson Pollock painted "One: Number 31, 1950" (shown above), Time magazine quoted an Italian critic who said, "It is easy to detect the following things in all of his paintings: Chaos. Absolute lack of harmony. Complete lack of structural organization. Total absence of technique, however rudimentary. Once again, chaos.” Pollock replied with a telegram stating, “No chaos, damn it.” 

MOMA commented that "Although he worked spontaneously and admitted chance effects into his work, Pollock asserted that he maintained control while making his drip paintings. A closer look at this work reveals some of the decisions made in the act of painting: the selection of colors; the use of contrasting matte and glossy paints; if the lines would be thick or thin, fast or slow; whether to wait for the paint to dry or to work wet-on-wet, so that different paints bleed and pool; and a host of others." 

The business owners I interact with often grapple with design issue such as: How do they create more efficient and effective policies, processes, and procedures? What meaning does their logo convey? What's the emotional appeal of their marketing materials? What colors should be chosen for products and why? What packaging materials should they use? How is their building furnished and decorated? What is their sales process? How are orders processed? And what is the look, feel, and functionality of their website?  

As a business owner myself, I'm constantly thinking about design: How can I make the process of buying and selling businesses simpler and more productive?   What innovations could deliver more value?  How can the business sale process be truncated?  How can I help buyers see a business from another perspective?

I think Andy Warhol was spot on when he said "Being good in business is the most fascinating kind of art.  Making money is art and working is art and good business is the best art." 

Many business brokers, CPAs, and bankers will tell business owner clients to expect a seller note or an earn out  when they sell their business.  In general, Codiligent views both seller notes and earn outs as having a high level of risk. If a business has significant risk factors and marketability challenges a seller note or earn out may be warranted. However, if a business has low risk factors and is highly marketable,  earn outs and seller notes should be kept to a minimum to reduce risk to the seller.    

A seller note is a loan provided to the buyer of a business by the seller. The loan is evidenced by a note and a loan agreement documenting the agreed upon terms of the debt. Typically, the buyer makes a down payment with installment payments thereafter. Terms can vary significantly from interest-only payments with a balloon, to fully amortizing loan payments. Most seller notes are generally between three and ten years in duration, are often secured by the assets of a business, and may include a personal guarantee from the buyer. It is worth noting, in cases when traditional bank debt is used to finance a portion of the business sale, that the bank will typically require that the seller note be subordinated to the bank’s debt. Subordinating the seller note allows a bank to have priority status in the event of a default. Additionally, when an SBA loan is utilized to finance the acquisition, SBA guidelines will usually require a seller to carry a note of 10-20% of the sale price of the business. 

When advertising a business for sale, offering a seller note increases marketability. Business sale websites have filters allowing buyers to search for businesses that offer seller financing. Many buyers perceive that if a seller isn’t offering at least some level of seller financing, it’s an indication that the seller is not confident of the business’ future performance. Codiligent disagrees with this – but it is a commonly held buyer perception.  

There are some benefits of utilizing seller notes which can include: 1) increasing the buyer pool to encourage more competition which could result in a higher sale price; 2) improving the probability of selling the business; 3) providing a seller with future income in the form of loan payments; and 4) spreading income out into future years which may allow a seller to better  manage their income tax brackets. Additionally, there are companies that will buy seasoned performing seller notes, but prices are often discounted by 15% to 30%.

An earn out refers to a pricing structure where a portion of the sale price is based on the performance of the business after the acquisition based on the company achieving certain negotiated conditions. Some examples include: reaching or maintaining a certain level of revenue, customer or employee retention, or the approval of a pending patent. An earn out usually poses a greater risk to a seller than a note, but in cases where there is significant risk to the buyer or where the seller would like more potential upside, an earn out can be appropriate.

Codiligent strives to find financially well-qualified buyers for the businesses it represents. Historically, Codiligent has successfully negotiated the sale of many businesses without utilizing seller notes and earn outs. In cases where seller notes have been utilized, the average note has been less than 11% of the transaction compared to the industry average of 43%. Only in rare instances have earn outs been utilized on Codiligent-represented transactions. 

Following are two short videos about earn-outs:

Ever wonder how small business owners collectively view political issues?  You might be interested in reading the National Small Business Association's report "The Politics of Small Business".  If you know many small business owners then many of the results may not surprise you.  For example, small business owners are independent, critical thinkers with only less than 18% voting a straight party ticket.

Some of the other results include:  

• Only 14% of respondents considered themselves to be moderate to strong liberals on fiscal issues / the economy.

• I know many people believe that increasing access to capital or improving lending are top political priorities of small business owners, but this survey shows that this is not at the top of business owners' concerns.  Survey respondents believe the top three things the federal government can do to help their business are:  1, reduce and reform taxes; 2, get out of the way; and 3, reduce and reform regulation.

• More than two-thirds believe policymakers inside the beltway have little to no understanding of small-business issues.

How would you like to see city, state, and local government help small businesses?

As an entrepreneur or tech executive, you frequently think about the future.  

• Are we filling an unmet need in the market?
• How will we reach out to prospective clients?
• How can we better position the company for growth?
• What does cash flow look like over the next year?  
• How will we spend our current funds and budget for the next year?
• Do I have the right people working on the right projects?
• What are we completing this sprint and does it work toward our long-term goals?
• What is our exit plan?

                           
How often do you consider these questions for your personal life?

An estate plan is commonly considered a document used solely to let the world know where your assets will go when you die, but the right estate plan can be so much more.

An estate plan provides guidance and protection during your life. It is an extension of your personal mission and the legacy you want to leave in this world. A good estate plan starts with a clear idea of where you are right now and your vision for the future.

• What are you passionate about?
• What do you value most?
• What impact do you want to have on your family, friends and the world at large?
• How much money will your investment strategy generate for passing to others in the long-term?
• What specific causes do you wish to contribute to?

Then it considers the impact of each component.

• Are there gaps in insurance coverages that increase the personal financial risk of leaving family members without enough to survive?
• What is the impact of your stock compensation package? Do shares immediately vest? Are shares held in private companies that are illiquid and unavailable for contributing to immediate needs?
• How will your ownership in ventures pass? Will enough cash be available to pay for income and estate taxes due upon passing?
• If you are a Founder, do you expect your company to exit or IPO in the next 3 to 5 years? See my article on the benefits of GRATs.
• Will your real estate be easily manageable or passed on to someone with the knowledge to manage it?
• How will you communicate your hopes and wishes to your family? How do you prepare them for unforeseen circumstances?
• Are your children ready for the impact of receiving a large number of assets now? How can you protect them for the future?

Finally, the supporting documents come together to support your vision and goals for your life. Your estate plan may include:

• Your last will and testament
• Health care directive and medical power of attorney
• Financial power of attorney
• Trusts
• Revised insurance policies
• New beneficiary and contingent beneficiary designations
• A letter or letters to your family and heirs to help them understand your wishes

Having no estate plan IS a plan. It is a plan to leave your family without clear direction of your intentions.

Reach out to us to ensure your life goals, values and legacy are aligned to support your life plan.

Rebecca J. Conner, CPA is a financial advisor to passionate technology executives and founders at Merriman Wealth Management. Follow her @SeaTechAdvisor and email rebecca@merriman.com