Owners Week Magazine by barbarachang

Guide to Buying and Selling a Small Business

How To Buy A Cigar Company:

Buying A Barber Shop:

Landscaping In South Florida:

Owning A Day Spa:

After a stint as a small-time cigar peddler, Oscar Boruchin’s persistence and patience allowed him to buy his own cigar store.

The male grooming market set to hit S1 billion by 2018. There’s never been a better time to start running a barber shop.

For the aspiring small business owner who likes to work outside, landscaping is an enticing realm to explore.

Wendy Solomon, owner of North Carolina-based Flawless Day Spa, has been in the business of helping others relax.

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Guide to Buying and Selling a Small Business 17

Goodbye, Overdue Receivables:

How Family Business Owners Should Bring The Next Generation Into The Company:

When Mom And Pop Can’t Sell The Farm (or in This Case, the Theme Park):

How To Build Your Business Exit Strategy:

Overdue receivables are one of the most common and serious frustrations entrepreneurs face.

How to plan the transition

It’s not easy selling a Wild West Town theme park located 60 miles northwest of Chicago.

The world of running a business is everchanging, with questions and new opportunities always arising.

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Owners Week Guide to Buying A Small Busines

CONTENTS 02

How To Buy A Cigar Company: After a stint as a small-time cigar peddler, Oscar Boruchin’s persistence and patience allowed him to buy his own cigar store.

How To Buy A Motorcycle Shop: The owner of Joe Carson Motor Sales started riding motorcycles when he was 14. He has owned his business for 50 years and has no plans of retiring.

Why Many Birmingham Family Business Are Selling Instead Of Passing It Down: not all family-owned businesses stay in the family. In fact, experts are saying they’re seeing more and more family-owned businesses in Birmingham sell rather than transition to the next generation.

Selling A Business For Maximum Value In A Challenging M&A Market: With $936 billion of uninvested private equity capital inching down market, why do 46% to 80% of lower middle market sell-side transactions fail to close?

Goodbye, Overdue Receivables: Overdue receivables are one of the most common and serious frustrations entrepreneurs face–and one of the most easily avoidable.

Buying A Barber Shop: The male grooming market set to hit S1 billion by 2018. There’s never been a better time to start running a barber shop.

Landscaping In South Florida: For the aspiring small business owner who likes to work outside, landscaping is an enticing realm to explore.

Buying a Pool Route Businesses: Pool cleaning is a year-round business in South Florida, and acquiring a pool service route offers notable advantages. Routes do not require a large investment and can be homebased.

How Family Business Owners Should Bring The Next Generation Into The Company: How to plan the transition so that your next generation can find their own path in the world and then successfully boomerang back into roles in the family business.

HVAC With a Cool Touch: In the world of HVAC, business owners made an average salary of $580,000 last year. One might call that a lucrative small business or say it sounds too good to be true.

Buying A Trucking Company: The trucking business is a staple in the American economy and as long as goods are being sold, semi-truck businesses will be in demand. Nearly 71 percent of all U.S. freight is carried by trucks.

How To Sell A Professional Practice: If you’re a professional looking to sell your practice, the best way to locate prospective buyers and make a transition often depends on your time horizon and location.

Owning A Day Spa: Wendy Solomon, owner of North Carolina-based Flawless Day Spa, has been in the business of helping others relax and feel beautiful since the start of 2012.

How To Choose The Right Way To Cash Out Of Your Business: Selling a business isn’t simple, but most entrepreneurs have more options than they realize. Taking the wrong approach could have serious financial consequences.

Buying A Tattoo Parlor: Fifty years ago, it seemed that only bikers, gang members and ex-cons wore tattoos. These days, everyone from business executives and college professors to retirees and teens have at least one.

When Mom And Pop Can’t Sell The Farm (or in This Case, the Theme Park): It’s not easy selling a Wild West Town theme park located 60 miles northwest of Chicago, as Larry and Helene Donley have discovered.

How To Build Your Business Exit Strategy: The world of running a business is everchanging, with questions and new opportunities always arising. The opportunity to sell a business might be one that requires a little more analysis.

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HOW TO BUY A CIGAR COMPANY Company: Mike’s Cigars Location: Little Havana, Miami Employees: 4 Annual Revenue: $351,000 Cash Flow: $124,000 Year Established: 1998

Owners Week Guide to Buying A Small Busines

Oscar Boruchin has lived the American Dream. He emigrated to Miami from Cuba to escape Castro’s Communist regime. After a stint as a smalltime cigar peddler, Oscar’s persistence and patience allowed him to buy his own cigar store. But that was only the beginning. His passion for cigars and hard work led to a 20-year career at General Cigar Company. Eventually, he left General to re-enter the retail world, buying into Mike’s Cigars in Miami. He quickly incorporated his knowledge of the cigar industry by developing other segments of the business. Today, Mike’s Cigars is not only one of the top cigar retailers in the country, it is also the home of a very successful wholesale and mailorder business, and the producer of the celebrated Licenciados, 8-9-8 Collection, and Bauza brands. Oscar recently sat down with SMOKE to discuss cigars, the Cuban embargo, and the future.

Smoke: When did the romance of cigars strike you? Boruchin: It’s funny, in Cuba I never participated in the cigar industry. But I started smoking cigars that cost 25 cents, and then H. Upmann #4 when I was 16 years old. I’ve loved cigars ever since. I got into the business much later. When I first came to the United States in 1961, I was driving a taxi. I concentrated on picking up Hispanic people, because I didn’t speak English too well. One day, I was picking up a couple at the airport. When we arrived at their destination, their family wasn’t there to pay for the fare. They didn’t have any money, so they gave me a box of cigars, which I took to a tobacco shop in Miami Beach and sold for $10. It dawned on me that if I parked the taxi at the airport, and I bought cigars for $9, and then sold them for $10, I would make more money than I was driving a taxi. Smoke: What were you doing in Cuba, and why did you leave? Boruchin: I got married when I was 24, and my father-in-law was big in the leather business. I went into that business with him for three years, until we lost the business in Cuba. Then I came to the U.S. I was 27, had a one-year old baby, and I never looked back.

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HOW TO BUY A MOTORCYCLE SHOP Company: Heaven Cycle Location: South Miami, FL Employees: 8 Annual Revenue: $720,000 Cash Flow: $218,000 Year Established: 1969

Joe Carson has spent 60 years behind bars. Handlebars, that is. The owner of Joe Carson Motor Sales started riding motorcycles when he was 14. He has owned his business for 50 years and has no plans of retiring. “No,” Carson said. “If they figure out a way to clone my body I’ll be here another 50 years.” Such dedication has made Carson’s business a Fairfield classic. “There’s one secret,and it’s not a secret,” he said. “Find something you love to do and stay with it.” The Honda and Harley-Davidson dealership at 2930 Helena Drive sells and services motorcycles and some all-terrain vehicles, along with selling parts. The business has been at its current location since 2001 after being on Lincoln Avenue in Lancaster for 30 years and a couple short-term locations before that. “We’ve always emphasized the service end of things,” Carson, a Vietnam veteran, said. OWNERS WEEK | 03

Owners Week Guide to Buying A Small Busines

“That’s been kind of failing thing anymore. People buy stuff and it’s like they don’t connect with the service. Back in the old days people bought motorcycles based on the service that the dealer was going to give them.” He said service is important because riders don’t want to waste the good summer weather with their motorcycle languishing in the shop for repairs. “A mantra that we adopted is to do everything you can to get your customers back out riding safely,” Carson said. The business has eight employees. The number was once around 15, but Carson said the motorcycle business has slowed down some. He said part of the reason is people today don’t thirst for adventure like they once did, while others are too engrossed in virtual reality entertainment options. “And parents have become very protective of their kids,” Carson said. “Now it’s like, ‘You can’t ride your bicycle to school. It’s to dangerous. Someone might kidnap you.’ You can’t do this, you can’t do that. Well, gee, living is kind of dangerous, isn’t it?” He said most motorcyclists are fatalistic, though. “It’s like Vietnam,” Carson said. “When your numbers up, your numbers up. You can wear two helmets and three flack jackets, but it still ain’t going to help you. You’re gone. And people today, they cling so hard to life they forget to live it.

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BUYING A BARBER SHOP Have your beard oil, badger hair brushes and Brylcreem at the ready - with the male grooming market set to hit £1 billion by 2018, there’s never been a better time to start running a barber shop.

Company: Fresh Spot Location: Design District, FL Employees: 4 Annual Revenue: $360,000 Cash Flow: $106,000 Year Established: 1998

It’s no secret – men have well and truly reclaimed the verb ‘to pamper’ from the opposite sex, and there’s now no stigma whatsoever attached to blokes spending as much on their appearance as their female counterparts. According to a recent report by Salon Services which surveyed over 2,500 salon owners, nine out of ten of these hairdressers experienced an increase in takings from men last year and a quarter of customers are now male, compared to 19 percent a year ago. A 2014 report conducted by NetVoucherCodes.co.uk, and analysed by Industry magazine HJI revealed that 57 percent of men surveyed use 6 or more grooming products a day, an impressive quarter of them used between 11 and 16 items and a staggering 7 per cent claimed to use over 16 products to perfect their look each morning! So with a market ripe for preening, let’s get down to logistics – how do you run a successful barber shop? Location is absolutely vital to the success of a barber shop. However many regular clients you may clock up, passing trade will be a key factor in achieving healthy profit margins.

Owners Week Guide to Buying A Small Busines

City centres and commercial districts are prime locations but you will pay a premium in rent – if you go for the big-time, you’ll need to be sure you’ll have enough custom to balance the books. Setting up shop on a busy commuter route is a good idea, as you get the footfall without having to fork out town-centre prices. Renting a small space on a ground floor of an office block, where you are visible to workers from all around is another way to run an affordable business, although you may need to adjust your opening hours to coincide with pre and post-work traffic Locating yourself near student accommodation is always a good idea as you will have a regular flow of image conscious young men. Also, never forget the power of association – if you can place your barber shop next to or near stylish and successful businesses your will have instant kudos as well as a ready-made clientele. So here’s the boring bit; brace yourselves – it’s not all hipster beards and barber shop banter! There are a fair few legal requirements in running a male-grooming business. As well as having appropriate insurance in place, as a barber shop owner you will have to adhere to the latest health and safety regulations. You will be legally required to ensure the wellbeing of employees and customers alike so before you start business, you should carry out a thorough risk assessment of the premises, draw up a policy for all involved in the business to adhere to and make sure you are providing more than the minimum standards in comfort

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and cleanliness. Guidelines relating to environmental health must also be followed – local authorities are strict about this and if your business does not comply with occupational health and safety rules, it can be closed down. It pays to keep one step ahead when it comes to health and safety – conduct regular assessments, especially when hiring new staff or installing new equipment, keep employees up to date with the latest policies and involve them in identifying potential risks. Whatever insurance you have, it will be unlikely to cover the costs of a serious incident and don’t forget - nothing can repair a damaged reputation. Of course, to run a good barber shop, you and your staff must have up to date training. Taking a course at a leading hair academy that leads to a recognised qualification – such as an NVQ level 2 in men’s hair dressing – is essential, although not cheap at around £4000 for a 10 week course. Refresher courses are also available at around £2500 for six weeks training and even the most experienced barbers should consider the odd day course at a leading academy to keep up with the latest trends in men’s hairdressing and how to adapt them to different hair textures and clients. For those who have never run a barber shop before but plan to do so.

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Owners Week Guide to Buying A Small Busines

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Owners Week Guide to Buying A Small Busines

Landscaping In South Florida

Buying a Pool Route Businesses

HVAC With a Cool Touch

Boynton Landscaping Boynton Beach, FL

LW Pool Services Coral Springs, FL

Tri-County HVAC Westchester, Miami

For the aspiring small business owner who likes to work outside, landscaping is an enticing realm to explore. Landscaping allows even the smallest companies to carve out their own piece of business. Forbes research also found that the majority of the businesses in the industry are actually small businesses. “The top three landscaping companies account for less than 5% of the overall market revenue and the top 150 companies across the country count for less than 20%.” Landscaping is truly a local business with few brand names that extend across large areas. Companies outside of the top 150 are the overwhelming base of the industry with a lot of single owner landscaping businesses.

Pool cleaning is a year-round business in South Florida, and acquiring a pool service route offers notable advantages. Routes do not require a large investment and can be home-based. Many of them sell for the price of a new car – albeit an expensive new car. In Florida, pool cleaners take an openbook test for certification. Pool service routes are labor-intensive enterprises that pulls in it’s owner to act as the operator, unless the route is large enough with existing technicians. Moving ahead to searching for a pool service route to buy, you will likely be comparing portfolios of clients including service hotels, spas, gyms, apartments, and homes. Most pool businesses perform three levels of service.

In the world of HVAC, business owners made an average salary of $580,000 last year. One might call that a lucrative small business or say it sounds too good to be true. The average salary of HVAC business owners was published after a recent survey of professionals in the industry. It finds a few handful of owners are raking in millions and inflating the average salary. At the base of the industry about half the group is making less than $100,000 a year. In South Florida, there are thousands of licensed HVAC technicians and established businesses in the market. The possibility of buying or selling an existing HVAC businesses is starting to pick up steam.

Employees: 13 Annual Revenue: $909,000 Cash Flow: $160,000 Year Established: 2001

Employees: 4 Annual Revenue: $85,200 Cash Flow: $65,200 Year Established: 1993

Employees: 18 Annual Revenue: $2,500,000 Cash Flow: $497,000 Year Established: 2017 OWNERS WEEK | 06

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Owners Week Guide to Buying A Small Busines

BUYING A TRUCKING COMPANY The trucking business is a staple in the American economy and as long as goods are being sold, semitruck businesses will be in demand. Nearly 71 percent of all U.S. freight is carried by trucks.

Company: Johnson Logistics Location: Broward, FL Employees: 8 Annual Revenue: $1,695,000 Cash Flow: $306,000 Year Established: 1976

The industry generated $700 billion in annual revenue in 2017, according to the American Trucking Associations latest figures. Comparatively speaking, the convenience store industry generated $233.0 billion in 2016, according to the National Association of Convenience Stores. The industry has also seen a growth in sales as privately held general freight trucking companies experienced nearly a 15 percent jump on average in 2017 according to analytics firm SageWorks. Still, running a profitable trucking business means being able to generate revenue in an industry where the profit margins are slim. Depending on the region, hauling can be competitive. Apex Capital Corp, a full service factoring company for truckers, estimates that the operating ratio for the trucking industry averages about 95.2. This means for every dollar in revenue a trucking company earns, it can cost 95.2 cents to operate, leaving a remaining profit of just 4.8 cents for every dollar. It can cost about $180,000 yearly to operate a single commercial truck, according to the Truck Driver OWNERS WEEK | 07

Institute. About 25% of that will go towards paying your driver. The largest operational expense for active trucks is diesel fuel. TDI estimates that the average commercial hauler consumes about $70,000 worth of diesel fuel in a year driving between 115,000 and 125,000 miles. Also, routine maintenance for a single truck, including services such as alternators, wiring, and brakes, and tires can cost around $15,000 a year. So remember, researching is the most important thing potential business owners can do when buying a trucking company. Experts often mention the importance of research and being fully aware of everything before acting. Even when they throw out suggestions, their goal is to not just take their word for it but really understand the topic before jumping in. Some might say experts often truly beat the dead horse to drive home the importance of really being prepared. Perhaps, but no one can ever accuse them of not pushing research and becoming more knowledgeable. But there is more you can do, another important thing you can do when buying a trucking company is to look into the staff. Who will stay on and who will not. Learn about the vendors, both within the industry and those who support your operation. Make sure you have a clear picture of the overall operation when you consider buying a trucking company.

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OWNING A DAY SPA Wendy Solomon, owner of North Carolina-based Flawless Day Spa, has been in the business of helping others relax and feel beautiful since the start of 2012.

Company: RG Salon & Spa Location: Fort Lauderdale, FL Employees: 12 Annual Revenue: $760,000 Cash Flow: $143,000 Year Established: 2006

As a former esthetician, her passion started with rejuvenating her clients’ skin, but not long after, it went beyond skin deep. “As an esthetician, I am fascinated by skin care, and so my initial desire was to help clients with their skincare needs,” Solomon told Groupon.com. “But I have seen that it is much larger than skin care—it has to do with self-esteem, selfcare, and how those we have touched impact others around them,” Solomon continued. Solomon references how far her industry has come from its humble beginnings as a Romanera tradition to heal and treat aches and pains after arduous journeys. The modern small business day spa offers more than massages and relaxation treatments. In addition to the usual amenities, spas now offer hair treatments along with manicures and pedicures. The modern spa has become more than a place to relax; it’s become a place for customers to feel beautiful. Despite a recent emphasis on beauty services, Solomon maintains that her business still offers the core offerings many small businesses in the field continue to provide. “As the spa has grown and included massage and holistic treatments, it has given us the

Owners Week Guide to Buying A Small Busines

opportunity to provide a much deeper level of service, to help connect with the mind, body, and spirit, and really make lasting changes in people’s lives—inside and out,” Solomon says. Like Solomon’s job path, a career in the spa industry often starts as esthetician, who after licensing and certification, can expect to earn an average salary of $17,237 at the entry level. With more experience, the average salary climbs to $37,641. According to spa industry insider Skip Williams, the average small business day spa owner can expect to make anywhere between $80,000 and $100,000. Williams goes on to note that unlike other fields, owning a day spa does not require any formal education or specialized schooling. A new, never before licensed business must obtain licenses to offer services like massage therapy or related homeopathic offerings, this according to licensed massage therapist and spa blogger Ivy Hultquist. Purchasing an existing business, however, would allow those looking to break into the industry to acquire an existing spa with established licensing and staff, eliminating the need to apply for a brand-new license from scratch. With steadily increasing revenue and promising earning projections for the future, the industry remains a lucrative opportunity for new small business investors looking to cash in on caring for others.

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Owners Week Guide to Buying A Small Busines

BUYING A TATOO PARLOR Fifty years ago, it seemed that only bikers, gang members and ex-cons wore tattoos. These days, everyone from business executives and college professors to retirees and teens have at least one.

Company: Babylon Tattoo Location: Fort Lauderdale, FL Employees: 4 Annual Revenue: $357,000 Cash Flow: $94,000 Year Established: 2003

In South Florida, people with body art are as common as palm trees and sun showers, which makes a tattoo parlor a worthwhile business to buy. To start a tattoo business from the ground up requires fulfilling stringent State licensing and certification. Artists/operators have to take a test that covers bloodborne pathogens, communicable diseases, and state standards for operating the industry. Once those requirements are fulfilled, applicants must present a certificate of OWNERS WEEK | 09

completion, government-issued photo ID and a $60 application fee. If you don’t want to start from scratch, a ready-made solution is to purchase an existing business while retaining the services of resident artists. Working with an experienced resident artist can maximize revenues for the owner and manage operational aspects of the business. Here are a few reasons why tattoo shops look like such a stable investment. Tattoo artists work as independent contractors. They are required to pay taxes, license and insurance fees. Because they work by commission, shop owners typically retain a 40 percent share of an individual payment. Owners can also have artists pay a weekly or monthly booth rental fee, while allowing them to keep the rest of the money they make. What’s more, owners can secure profits by insisting that artists sign non compete agreements, which would restrict them from working in competing parlors. They can also arrange to prevent artists from working on the side without splitting that money. It’s a cash rich business with repeat customers who are getting younger and more plentiful. Four out of ten U.S. adults ages 18-69 have at least one tattoo with a quarter of them reporting that they have more than one, according to a survey conducted by Statista. Thirty-eight percent of young people ages 18 to 29 have at least one tattoo, according to a report cited by the Pew Research Center. The industry generated a whopping $1.6 billion in revenue, according to the market research firm IBISWorld. As tattoos have become more mainstream, with people inking their arms, hands, necks and – gasp! – faces, the Wall Street Journal projects the body art industry to grow at an annualized rate of 7.7 percent. South Florida has more than its fair share of parlors. In fact, Miami has more of them per capita than any other city in the country with 24 per 100,000 people. Still the demand remains and tattoos have become destigmatized and more readily accepted in the American workplace. The traditional parlor as we know it is changing. Tattoo operations have also evolved to offer more services such as laser tattoo removal and body piercing.

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ANGEL COKER Experienced banking and legal reporter who has worked for many different newspapers and business publications throughout the years. She currently writes stories for the Birmingham Business Journal.

Why Many Birmingham Family Business Are Selling Instead Of Passing It Down More than 29 percent of business owners are expected to exit their business in the next five years, and 54 percent in the next ten years.

Birmingham entrepreneur Drew Goneke worked in the warehouse at his father’s flooring company in Mobile during the summers growing up, but he was never interested in being involved in the family business as a career. But, in a roundabout way, that’s exactly what happened. What became interesting to Goneke was using the internet to modernize the business and sell materials on a national scale. In 2007, his father provided the seed money for him to start an online showroom, based in Birmingham, that

Owners Week Guide to Buying A Small Busines

internet to modernize the business and sell materials on a national scale. In 2007, his father provided the seed money for him to start an online showroom, based in Birmingham, that ships across the country. Coming full circle, Goneke purchased the online company, known as South Cypress, from his father and is now in the process of merging his father’s company, Sun Flooring, with South Cypress. But not all family-owned businesses stay in the family. I’n fact, experts are saying they’re seeing more and more family-owned businesses in Birmingham sell rather than transition to the next generation. “I think that’s an overwhelming trend,” Goneke said. He said if his father hadn’t been willing to change the dynamic of the business in order to grow, he wouldn’t be continuing his father’s legacy. That is one of the biggest reasons experts are saying family-owned businesses are selling rather than passing down – because many children of baby boomer-generation business owners just aren’t interested in their parent’s or grandparent’s company. It’s a trend that has resulted in a number of longtime private Birmingham companies being acquired in recent years, resulting in a number of new entrants to the local business scene.

in order to extract value to retire and live the lifestyle they want to live. Legg also said a lot of times, owners can sell the business and make enough money to retire in addition to setting up trust funds and the like for future generations. And in many cases, family dynamics can get in the way, said Denson Franklin, a partner at Bradley Arant whose practice includes mergers and acquisitions. Franklin said family conflict can prompt a business owner to sell to keep from having to determine who gets what, especially if there are multiple family members to consider and only one that is trusted enough to continue operations of the company.

Reasons to sell The driving factor behind the sale of more and more familyowned businesses is many of them are owned by baby boomers, who are reaching retirement age at a rate of 10,000 people a day, according to the Pew Research Center. “What we’re basically facing is a babyboomer generation that’s aging and owns a lot of businesses, especially on the smaller scale,” said Wesley Legg, president and chief operations officer of Founders Advisors. “From what I’ve heard, most of them are not passing those down to the next generation for a variety of reasons.” In addition to younger generations having different interests, Legg said one of the biggest factors is retirement. For those whose equity in their business represents their retirement funds, they may need to sell OWNERS WEEK | 10

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Markets and failure to plan for succession, among other things, can also lead to a sale, Legg said. The statistics According to the 2016 Securian Small Business Owner Life Stage Study, 29 percent of business owners are expected to exit their business in the next five years, and 54 percent are expected to exit in the next 10 years. But many don’t have a succession plan for when that time comes. According to the 2018 MassMutual Business Owner Perspectives Study, which polled 914 small-business owners, 64 percent of business owners have a succession plan in place for their business. However, one out of four — or 25 percent — in line to take over a small business are not aware they are the chosen successor.

The study also found that 30 percent of those who plan to exit their business want to leave the business to a family member. The number who plan to pass down their business has significantly decreased since the 2011 Peak Family Business Survey that found 70 percent of family businesses would like to pass their business to the next generation, with the probability of only 30 percent being successful with the transition. Legg said some family-owned businesses are more likely to be passed down than others. He said the larger the business and the further it has gone generationally, the more likely it will stay in the family, like Birmingham-based Wood Fruitticher, which has been family-owned since 1913 and generates hundreds of millions of dollars in revenue each year. But it is less likely for the smaller and younger businesses to continue, he said. While many studies say family-owned businesses are more likely to sell lately, Legg said it is dependent on each unique situation. “There are different options. It doesn’t have to be all or nothing,” Legg said. Sale options Some business owners are also exploring other ways to sell large stakes in the OWNERS WEEK | 11

Owners Week Guide to Buying A Small Busines

companies while still keeping family members involved. “Say a father owns a company and wants to pass it to his kids. One of the struggles with that is, how do they … extract the value they’ve created while also giving the next generation an opportunity,” Legg said. “There’s a variety of ways to do that.” He said there is the private equity recapitalization option where a business owner can sell a portion of the company to private equity partners while leaving a portion of the company to the next generation. For example, he said an owner could sell 70 percent to private equity partners and retain 30 percent for the next generation. He said private equity partners typically want to keep the current management, put capital into it and grow it for a few years before selling it as a larger business – hopefully growing the 30 percent

who is qualified or interested in stepping in to run the family business… A sale to an ESOP does not preclude a family member from owning the company in the future.” Carls said her organization has seen an increased interest in ESOPs over the past 10 years because of tax savings available to those who opt to take that route but also for reasons beyond as it provides a legacy for the company and incentives to employees. But no matter the route a business owner chooses, Legg said it is critical to begin succession planning early, as failure to plan can often lead to a sale outside of the owner’s original intentions.

left to the family member.

selling a business now more attractive to owners considering their retirement options. And those high valuations are converging with baby boomers looking to exit their businesses and a recordhigh capital available in the private equity market waiting to be deployed, said Jim Key, a CPA at Warren Averett who focuses his practice on real estate.

That way the business stays in the family, while the owner’s retirement is funded. Another option is a management buyout, where the next generation purchases the business from the owner using investor money and negotiates ownership of a percentage of the business, Legg said. Selling to a strategic buyer who owns a similar business in another market is also something to consider, said Hanny Akl, who leads Warren Averett’s Transaction Advisory Services practice. But he said that often includes consolidation, leading to the shutdown of a local facility and roll up of their supply into a different facility, leading to loss of jobs in the community. An employee stock ownership plan (ESOP) is an option if owners not only want to ensure jobs for their employees but also want to sell the business to their employees. This maintains jobs and a good corporate citizenship in the community. “An ESOP is a great alternative to an outside sale or transfer to another family member,” said Regina Carls, managing director of the ESOP Advisory Group at J.P. Morgan. “Not every company has a family member

It’s a good time to sell Franklin said valuations in the marketplace for businesses are high right now, and the economy is still on the upswing, which makes

“It’s a perfect storm of folks trying to exit their businesses at the same time there’s a lot of people who are trying to invest into businesses through institutional capital,” Akl said. “We happen to be in a position where all industries are booming. The economy is in a great spot … and there’s a lot of capital out there to invest in these businesses. So, if there was ever a time to sell your company, now’s the time.” And Birmingham has a nice selection of companies from many different strong sectors – health care, technology, manufacturing – which makes Birmingham an attractive market to investors, Key said. With some economists predicting a slight recession in the years to come, many experts are advising business owners who are looking to retire in the next three to five years to sell now if they don’t intend to pass down.

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Owners Week Guide to Buying A Small Busines

Owner Preparedness and Greed Drive the Outcome MATRIX OF OUTCOMES High Strong

Outstanding

Weak

Fail to Close

Preparedness (Determination)

Low Moderate The usual answer is that companies are not ready for buyers’ examination and owners can be overly optimistic or even too greedy. In my 30+ years of experience serving in the roles of president, CFO, principal investor, investment banker, consultant, and operating turnaround expert, I’ve improved the operating performance of ten businesses and completed 27 M&A, investment, and financing transactions totaling $1.3 billion.

Selling A Business For Maximum Value In A Challenging M&A Market With $936 billion of uninvested private equity capital inching down market, why do 46% to 80% of lower middle market sell-side transactions fail to close?

Based on this experience, in this article, I describe common reasons deals fail, and I outline what an owner can do to drive a better outcome. I make the case that business owners can do much more to put themselves in the driver’s seat. My advice on how to sell your business boils down to (1) take the time and do the work to prepare for an exit transaction and (2) apply “intelligent greed” to close your best deal. An interim CFO can help you boost company performance, prepare for the sale process, understand your valuation range, and target and analyze potential buyers you might not have considered. Selling a Business: Master the Owner’s Conflicts and Expectations Monetizing your life’s work is your reward for years of building it. And of course, that motivates you to pursue a sale of the business. However, the large proportion of unsuccessful deals shows that the gap between price and seller expectations is a huge problem that sellers do not anticipate. This article provides a pragmatic approach to fix the imbalance many sellers experience where their expectations far exceed what a buyer will pay. First, you, the owner, need to overcome your natural trepidation and apply the same determination to sell the business that you applied to build it. Those owners who close deals manage to get over those doubts. Don’t waffle–decide. Commit early to a process and

Price (Greed)

High

make it work. This article examines the steps an owner and the company can take to improve the odds of closing the transaction, and at a higher price. An owner’s willingness from the outset of the process to take those steps both confirms the owner’s determination and increases the company’s preparedness. According to a survey of 264 business brokers in 36 states conducted by the International Business Brokers Association, fewer than half of sellers of companies up to $50 million follow a planned sale procedure. Overlay that with the top five reasons buyers give for not closing, and consider that at least four of these are under the seller’s control. Selling a Business: Boost Company Performance This may seem painfully obvious. However, you’d be surprised to find that most companies do not take the time and effort to make the quick fixes, consider the bigger fixes, or build a growth plan so the buyer/ investor can see the potential value of the acquisition.

WILLIAM B. DOYLE, JR. A Princeton engineering and Stanford MBA graduate, Bill has managed growth businesses, turned around struggling operations, served as CFO, and completed 27 investment, sale, and financing transactions totaling $1.3 billion. OWNERS WEEK | 12

Chapter 1 Made By Hand

Owners Week Guide to Buying A Small Busines

What You Can Do to Boost Company Performance Here are some actions you can take to optimize company performance: Analyze the business. The following analyses can surface ideas such as culling product lines or extending them, re-negotiating problem contracts, targeting higher value customers, and a range of other options to boost profits. The most revealing analyses will vary by company and industry, but these almost always identify potential profitability improvements. Quick fixes. Selective price increases are an oft-overlooked, quick, and powerful path to improving revenues and profitability. Most other quick fixes tend to be expense-oriented, such as sub-leasing unused real estate, refinancing expensive equipment leases, and plugging other profit leaks. Consider this example: A snack food manufacturer where I served as an investor and advisor had not bid the price of its second largest component of COGS materials in several years; bidding the item to four suppliers (including the incumbent) reduced its cost by 24%, lowering COGS by 7%. Bigger, longer-term fixes. These may take a year or more to produce earnings, but they can yield big benefits. For example, when I was helping a payment processing company suffering from production bottlenecks, we added low-cost processing equipment at pinch points, which eliminated 25% of direct labor hours in a business where direct labor constitutes 45% of total revenues. Not only did this improve profitability, it also dramatically increased scheduling flexibility and shortened lead times. Growth plan. Any buyer or investor must make a case to its investment committee for the postinvestment value of your company. You, who know the business best, have an opportunity to lay out the value in a way to

appeal to the most skeptical committee members by backing up your projections and assumptions with customer acquisition data, trends, market information and other defensible support. Your audience will include operating people, marketers, accountants, and certainly some MBAs, and your roadmap for the future can make your company rise to the top of the list of opportunities they consider. An interim CFO can help you apply these profit improvement and growth initiatives. I explain below why boosting profitability powerfully increases the value of your company. Your company value will be increased by a multiple of the improvement of your earnings. Your growth plan extends and expands these improvements. Boosting EBITDA may also increase your multiple—if a company with $2 million EBITDA is worth $10 million, that same company with $5 million EBITDA could be worth $50+ million. The EBITDA Multiple Every dollar you can add to profits increases the value of your company by a multiple of that dollar because buyers and their advisors value an acquisition as a multiple of its earnings. The following chart shows how most companies worth less than $75 million are valued at multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA) ranging from 3.0x to 9.0x (see below). The EBITDA multiple for your company will be based on your industry, growth prospects, scale, and certain other factors. I discuss valuation calculations later in this article. The Expanding EBITDA Multiple Furthermore, if you can increase your earnings enough to raise the scale of your company, your earnings could be multiplied by a higher number because larger companies generally command higher earnings multiples than smaller companies (everything else equal:

EBITDA Multiples for Deals Closed Q2 2016, Valued Less Than $75 Million Q1%

24.4%

Q2%

17.1% 13.8%

20.0%

18.5% 15.4%

14.6% 12.2%

14.6%

13.8% 10.8%

7.3% 4.9%

3.1%

Less than 3.0 x

3.1 - 4.0 x

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4.1 - 5.0 x

5.1 - 6.0 x

6.1 - 7.0 x

7.1 - 8.0 x

4.6%

4.9%

8.1 - 9.0 x

> 9.0 x

in the same industry and with the same growth rate, etc.). This is because (1) more capital is available for larger transactions—private equity funds, in particular, are constrained by minimum deal size limitations—because large corporations with high stock prices and excellent access to capital markets can afford larger deals and also need them to be large enough to make material contributions to the acquirers; and (2) companies with more than $3 – $5 million in EBITDA are generally operated by deeper management teams that can run the business after the owner pockets transaction proceeds and leaves. A company can increase its scale and multiple by increasing its own profitability, which this article describes, or by acquisition. An example is an aerospace components manufacturer with lean manufacturing credentials and sole source Boeing contracts that was not able to attract private equity funding because of its small scale and lean management team. When that company entered into an acquisition agreement with a supplier of a complementary product (without lean manufacturing strengths), the combined company demonstrated $40 million in sales and a deeper management team, which attracted letters of interest from two private equity investors. I was a manager of the investment fund that acquired a controlling interest in the combined companies.

Selling a Business: Make Your Financials a Sound Foundation for a Transaction Financial Statements and Controls There can be an inherent disconnect between your and the buyer’s understanding of the role of financial statements. You need your financial statements to be accurate, but they may be constructed to tell you what you need to know and to avoid overpaying taxes; generally accepted accounting principles (GAAP) may not be important to you. However, it’s different for the buyer/investor. The lead executive loses his or her job if the financials turn out to be inaccurate. This happened to Hewlett Packard when it acquired Autonomy, and Caterpillar, which got bulldozed buying Siwei. The takeaway here is that financial presentation and controls are critical to buyers/investors’ comfort that your

Chapter 1 Made By Hand

company will not damage their careers. Get an outsider’s diagnosis. When I serve as CFO or when I’m preparing a client for sale, I conduct an early review of the client’s financial statements, controls, and projections as if I represent a prospective buyer. Here are some examples of indicators that may alarm potential buyers: • Overdue accounts receivable and slowturning inventory may reveal customer dissatisfaction, unforeseen shifts in demand, or less-than-diligent working capital management. • Shifts in accounting classifications, change in outside accountants, or write-offs of inventory point to potential accounting irregularities. • Weak basic controls such as the purchasing agent not overseeing inventory, rigor of inventory procedures, and cash management practices flag potential for fraud. Get ready for prime time. Accordingly, prepare your financials on a GAAP basis and anticipate extensive due diligence review. You will almost certainly need your outside accountant to help prepare as well as provide support as buyers/investors pore over the financials. You can present your business in a way the buyer/ investors can evaluate with confidence in your data and will not be as tempted to discount your value for downside risk. Projections The essence of an acquisition is: The buyer pays the seller in exchange for the future benefit to the buyer of owning the acquired business. Your projections describe those benefits, and the way you present them can provide the buyer confidence that the value will be realized. So, projections are the foundation of the proceeds you will receive as well a great opportunity for you to explain benefits (i.e., sell the deal) and boost buyer confidence. So you need to do projections. While financial projections need to accurately portray expected future performance, they necessarily require important assumptions. They should be favorable enough to generate enthusiasm among buyers and still remain convincing. Add to that an acquirer, particularly a strategic one, probably tries to maximize quarterly earnings, which you risk diluting. That puts a cap on what the acquirer can pay (see the discussion below on analyzing and

Owners Week Guide to Buying A Small Busines

understanding your prospective buyers). It also sensitizes the buyer to risks that a postclosing earnings shortfall would reduce their per-share earnings and jeopardize the stock price of the acquirer, an acquisition Rubicon that may lead the buyer to put a risk discount on the price it will pay for your company. Accordingly, your projections should be anchored in current reality (your

Ultimately, a strategic buyer swooped in before the close and paid a substantial premium over the private equity firm’s price, which illustrates potential benefits of running a complete process and casting a wide net for buyers/investors. As negotiations progress, you can discuss why make key assumptions, which can keep discussions going and educate the buyer on the value of your business.

Valuation as Multiple of EBITDA for all Buyout Transactions Debt / EBITDA

8.9% 3.6x

8.2% 3.8x

Equity / EBITDA

7.3% 3.6x

5.2x

4.4x

3.6x

2007

2008

2009

8.1% 3.5x

Valuation / EBITDA

9.2% 4.2x

8.5% 3.9x

4.6x

5.0x

4.5x

2010

2011

2012

10.5%

4.3x

5.3x

4.7x

5.4x

5.6x

5.2x

5.8x

2014

2015

2016

2017

8.9%

9.4%

3.5x

3.9x

5.4x

2013

9.9%

financial statements) and build into a believable future (your financial model). Build your three-statement operating model. You need a financial model that describes the business, demonstrates that your accounting capabilities are sound, and allows you to present credible future value for your prospective investor. A three-statement operating model will include linked income statement, balance sheet, and statement of cash flows, “driven” by the most important business parameters you experience every day, such as prospect conversion rates, customer-by-customer sales, pricing, and headcount. Your three-statement operating model extends your three-statement historical financials to a credible projection of future business performance. Use the model. The buyer/investor’s financial team will need to sign off on any deal. A thoughtful, workable financial model makes the acquisition process much easier for them and will give you at least a shot at setting the basis for your negotiations. An example of the impact of a financial model: As investment bankers selling a bank data processor to a large private equity investor, we were able to support profit projections by line of business and demonstrate tax advantages of a provision that allowed the buyer to benefit from asset purchase tax advantages from a stock sale transaction (in this case a 338(h)(10) tax election), which substantially boosted the value to the buyer of this acquisition by the present value of future tax savings, which were 40% of pretax earnings.

Selling a Business: Know What Your Company Is Worth and Consider All Potential Buyers You may find yourself negotiating with (i) a strategic buyer larger than you are who knows the market well or (ii) a professional investor who negotiates transactions with companies like yours for a living or (iii) both. And you are conducting the single most important transaction of your career. While hope is not a business valuation methodology, your advantage is that nobody cares like you do. And you can prepare. Calculate Your Company’s Value When selling a business, work with your advisor to conduct the core three business valuation analyses: (I) MARKET VALUES OF COMPARABLE PUBLICLY TRADED COMPANIES (STOCK MARKET VALUATION) This valuation methodology considers publicly traded companies in industries as similar to yours as possible and calculates the market value of those companies as a ratio

of their key financial indicators—principally, revenues, earnings, and growth, historical and projected. It applies those ratios to

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Chapter 1 Made By Hand

your financial indicators and applies a private company discount to arrive at one range of value for your company.

(II) TRANSACTION VALUES FOR COMPARABLE BUSINESSES ACQUIRED (M&A VALUATION) This considers transaction valuation of companies in industries related to yours that have sold. Similar to the analysis above, it calculates the ratio of those transaction values to the companies’ key financial indicators and applies those ratios to your company’s metrics to estimate a second range of value for your company. (III) DISCOUNTED CASH FLOW ANALYSIS (DCF VALUATION) Based on the principle that the value of a business is the present value of its future cash flows, this method focuses on your projections and value as a stream of future earnings. It discounts them to the present at a rate that reflects your cost of capital to estimate the third value range for your business. These standard three business valuation methodologies provide a common starting point for a buyer/investor’s analysis, and you should know how you come out. Certain business valuation methodologies are more relevant for particular companies, industries, and circumstances, but you should be familiar with each of them and understand which are more relevant, and why. To illustrate with an example, the following chart depicts the three value ranges for a sample company. M&A is not a science. Buyers and sellers negotiate acquisitions, so a valuation analysis cannot predict a transaction price. Here, you are establishing a reasonable range for your own expectations, setting the stage for discussions, and bolstering your case for a higher value for your company. Generate a Comprehensive List of Potential Buyers Creating a list of potential buyers is a good start, but remember that your company is really worth what the highest paying willing buyer will pay. To identify your most promising buyers and top price, you need to consider what you are worth to specific prospective buyers. The first step is to identify as many potential buyers as you can. They can include competitors and potential competitors, suppliers of complementary OWNERS WEEK | 15

Owners Week Guide to Buying A Small Busines

products or services, customers and potential customers, suppliers and potential suppliers, financial buyers such as buyout firms, and international buyers in each of these categories. In my experience, the most motivated buyers are often suppliers of complementary products or services, and potential foreign buyers are often overlooked. So, conduct a thorough analysis of your industry, including international players. Evaluate which financial buyers have an interest or experience in related businesses, particularly focusing on their portfolio companies. Below is a sample profile of competitors of a client company whose business is tracking first responders’ readiness. The profile includes all of the domestic industry players and for each shows its presence and strength in the various lines of business (red = particularly strong/black = strong/gray = weak), any of which might represent reasons the client company could add value to the competitor if it were to purchase this company. Sample Profile of Competitors You will similarly profile suppliers, customers, relevant portfolio companies of target private equity investors, and international players. Consider what value you add to each potential acquirer by expanding their sales, giving them entry to your markets, allowing them to sell your products or services, transferring to them your customer contracts, and/or consolidating operations to reduce costs. Next, consider how each potential acquirer is valued. A public company with a high stock price might boost its own earnings per share even if it pays a high price for your business. A private equity firm reaching the end of its investment window (the period they are allowed to invest) may be highly motivated to close a deal since it will lose access to its investment capital soon.

Evaluate acquirers’ appetite to spend cash or stock. This could make a substantial tax difference to you as well as importantly affect your risk from exposure to their overall business post-sale. Finally, special considerations such as declared interest in expanding into your geographic or product arena flag potentially highly motivated buyers. By approaching the greatest number of potential buyers and understanding your value to each, you put yourself in the best position to sell your company at or above the high end of your estimated ranges of value. You will reach this higher target valuation range by negotiating with the buyers to whom you’re worth the most because of some combination of (i) business fit, (ii) buyer stock price, and (iii) unforeseen/unforeseeable circumstances such as a financial buyer approaching the end of its contractual investment period. An example from my role as an investment banker, after meeting the corporate development group of a newly unregulated telecommunications company seeking acquisitions: Shortly afterward, selling a business in the marketing information industry, I worked with the seller to define a strategy for applying that prospective buyer’s resources to a national rollout for marketing data. The transaction price significantly exceeded other prospective buyers’ offers; conversely, the acquirer made a small (for that company), successful foray into applying its scale to selling market information.

Now that you are in a position to know your value to specific buyers and formulate intelligent greed to negotiate the best price from promising buyers, let’s discuss the sale process.

Sample Value Ranges Under Three Valuation Methodologies Methodology

VALUATION

Stock Market M&A DCF $-

$20

$40

$60

$80

$100

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Selling a Business: Choose the Right Intermediary Choosing the right seller’s agent is a confusing morass: • Business broker or investment banker? • Industry specialist or generalist? • Regional or national? International? • Will I get the partner or a junior team? • I’m too small for the top firms even to be interested. • I’m a client once, but buyers repeat, so where does my agent’s loyalty lie? • The firm I like best charges an enormous minimum fee! If you think the market for your business is inefficient, the choice of a seller’s agent is worse. Perhaps the single most common seller’s mistake is not doing the legwork up front to select the best seller’s agent. The following chart shows general categories of intermediary, which broadly fit client revenue ranges. National and specialty boutique investment banks bring particular expertise in complex or international transactions. National investment banks can access public and private capital markets to fund transactions for their clients. Of course, their fee expectations are substantial. Certain considerations such as industryspecific experience, international exposure, commitment to staff your assignment with senior personnel, and the individuals on the team vary widely. You should conduct research on intermediaries and network to identify 5 to 10 candidates and then run a process to select the best agent for your company. Taking thoughtful control of the process makes all the difference: Market to the marketers. If you are taking the steps to prepare and present your business, prospective agents will see you as worth more, and as an easier client (the magic double for them!). If you can demonstrate your value to them as you would to a buyer, you can attract better agents. Bake them off. Invite prospective agents to present why they are the best firm for you. In the process, you will acquaint the losing participants with your business— they may hustle to bring in a buyer so they can get paid a buy-side fee!

Owners Week Guide to Buying A Small Busines

demonstrate your value to them as you would to a buyer, you can attract better agents. Bake them off. Invite prospective agents to present why they are the best firm for you. In the process, you will acquaint the losing participants with your business— they may hustle to bring in a buyer so they can get paid a buy-side fee! Oversee the process. Beware considering your selling agent to be your advisor or friend. Their value to you is to bring in prospects and assist negotiations. Your value to them is their fee. It is up to you to oversee the process without micromanaging it.

Value Ranges & Target Methodology

VALUATION

Stock Market M&A

TARGET

DCF $-

$20

$40

$60

$80

$100

Source : William B. Doyle, Toptal finance Expert

Recommended Action Steps for Selling a Business 1. Start early and take charge. 2. Identify and implement profit improvements. 3. Diagnose and upgrade accounting controls and capabilities. 4. Build your three-statement financial model. 5. Construct projections based on support you can defend. 6. Analyze your company’s value yourself. 7. Conduct detailed industry profile (customers, competitors, complementary product/service providers, suppliers, potential entrants). 8. Specify what you bring to specific buyers and refine your value to each. 9. Conduct a disciplined process to select the right seller’s agent.

Conclusion Selling your company is one of the most important events of your life, and you should approach it accordingly. The market for your business is inefficient and the range of possible outcomes is vast, so the potential value to you of doing it right is enormous. Fix both components of EXPECTATIONS » PRICE by setting realistic valuation expectations, increasing your company’s profits, identifying the most promising potential buyers/investors, and managing the entire process to maximize the price the most willing buyer will pay. In summary, combine preparedness with “intelligent greed” to achieve your best outcome, which an interim CFO on your team may help you achieve.

Overview of Sellside Agents Intermediary Type

Geography

Specialization

Target Client Revenue (Millions)

Target Buyer

#US Companies in Target

National Middle Market Investment Bank

International

M&A; Capital Markets

$50 - $1B

Corporate & Financial

42,000

Elite Boutique Investment Bank

National

M&A; Capital Markets

$50 - $1B

Corporate & Financial

42,000

Regional Boutique Investment Bank

Regional

M&A only

$10 - $100

Corporate & Financial

232,000

Business Broker

Local

Sellside only

$1- $10

Individuals

2,795,000

Source: Reference USA, InfoGroup

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SCOTT HOOVER A CPA who brings financial clarity to clients, from small firms using QuickBooks to larger companies. An entrepreneur at heart, he became a freelance CFO nine years ago and has assisted clients in a wide range of industries.

Goodbye, Overdue Acccount Receivables Overdue receivables are one of the most common and serious frustrations entrepreneurs face–and one of the most easily avoidable.

A few years ago, I worked with a company that had what I consider a “common” receivables position: • $1,000,000 in receivables on monthly sales of $1,250,000. Average of 25 days sales in receivables. • $60,000 of the receivables were 90+ days past invoice date. One year later they were averaging: • $625,000 in receivables on monthly sales of $1,300,000, or 14 days sales in receivables. • Only $3,000 of the receivables were 90+ days past invoice date. • $45,000 of old receivables had been converted to trade notes that were faithfully being paid down and carried a total remaining balance of $39,000. How did they do it?

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Owners Week Guide to Buying A Small Busines

Before getting to the answer, I’d like to suggest that overdue receivables are one of the most common and serious frustrations entrepreneurs face–and one of the most easily avoidable. In my work as a freelance CFO, I cannot begin to count how many receivables I’ve seen go bad. If you’ve been in any size of business for any length of time, you know what I’m talking about.

3. Line of credit interest expense to fund operations during the non-payment period. 4. Potential of maxing out the line of credit limit which creates a cash shortage and additional management stress. 5. Wage expense for a bookkeeper to send out statements and potentially revise invoices.

Every situation is different, but I’ve found a common pattern goes like this: 1. Company salesperson makes a sale to a client with little emphasis on payment terms. 2. Company delivers product or service, but the delivery is behind schedule or the final product does not meet client expectations. 3. Client withholds all payment until the product or service is improved to perfection. 4. Management of the company becomes frustrated that the client is using non-payment to hold them hostage until the rework is done. 5. Tense words are exchanged between the company and the client. 6. Situation descends into a black hole of mutual disrespect. 7. Original invoice begins to get stale on the AR aging schedule. 8. CFO notices the overdue receivable during month end financial review and mentions to management. 9. Management grimaces and calls the client “unreasonable,” but is “pretty confident” they will “eventually pay.” Unless you are in the upper 95th percentile of companies, this is a list you could about recite back to me in your sleep.

Improved Receivables Position Sales Before

After

500,000

1,000,000

1,500,000

Receivables Before

Why Overdue Receivables are a Problem

After

The real and hidden costs of overdue receivables are staggering. They include: 1. Opportunity cost of management time and energy wasted on dealing with the receivable. 2. Goodwill lost with a client and an increased likelihood the client will: - Not buy again. - Speak negatively of your company to others.

500,000

1,000,000

1,500,000

> 90 Days Before

After

20,000

40,000

60,000

80,000

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6. Cost of CFO and year-end financial statement auditor to analyze collectability of accounts. This is not a complete list. The negativity and cynicism that often stems from receivables conflict can have a real impact on the mood of management and the company. The effect of this and other intangibles makes it very difficult to truly quantify the full cost, but it’s probably higher than most entrepreneurs imagine. Does it have to be this way?

Breaking the Cycle How exactly did my client (and the select group of mid-sized companies who are like them) rein in receivables and put themselves on a better path? Here is a 6-step guide to breaking the cycle: 1. Implement a paradigm shift on deposits. Far too many companies and industries carry a defeatist attitude that asking for down payments “will never work in my industry.” I respectfully disagree. A contractor told me how they went to a construction conference and explained to fellow contractors how they require a 10% down payment on all jobs prior to starting the project. Their contractor friends looked at them in disbelief and asked, “how do you do that?” Their reply? “We just ask for it.” The concept sounds simple, but I am amazed at the number of entrepreneurs who do not see how upfront deposits could work in their industry. Down payments work in accounting, construction, retail, healthcare…virtually any situation you can think of. But it takes a management team committed to the concept and a sales team confident enough to simply “ask for money”. A properly implemented down payment program can literally drive receivables negative. Yes, you read that correctly. There are many businesses that collect more cash than they’ve delivered product or services for. The customer down payments serve as a line of credit that keeps the company cash positive. That is an extreme case of reining in

Owners Week Guide to Buying A Small Busines

receivables, but not out of reach in many situations. As a bonus, a down payment requirement helps screen customers who may not pay you in the end anyway. It also takes a qualified customer “off the market” because once people have written even a small check, they are far less likely to keep shopping around. 2. Create a culture of explaining terms. Sales teams sell. They are compensated for selling. Often that compensation is based on deals closed (not sales delivered or collected on). The focus is on getting clients to sign on the dotted line. However, an emphasis on securing sales can result in ignoring a critical key to collections: Explaining payment expectations up front to the customer. This is not a simple, offhand task. It involves ensuring: 1. The client has the ability to pay. 2. The people who control the funds at the client are aware of the terms and in agreement with them. 3. The client understands that the order will not proceed unless the terms are met. Salespeople are notoriously poor at these tasks, to the point that it could make sense to let someone else handle this part of the transaction. However, experience has taught me it works better when the salesperson does it. They are familiar with the client and are best positioned to find the right moment to make the payment terms clear. They can also reinforce the terms along the way. It must be ingrained into company culture by management and this expectation must flow from the sales manager all the way to the newest sales intern. Every sales team member needs to live with a slight dread of closing a deal without this discussion.

3. Make rework an emergency. Quite often, non-payment has its roots in client dissatisfaction. This is particularly true for companies in industries like construction, manufacturing and custom retail. Because of that, one key way to avoid overdue receivables is to treat rework as a near-emergency This requires a culture shift that involves the entire company, not just the sales team. For example, in a production setting, the shop supervisor and production workers need to be aware that rework jobs take priority. The entire shop workforce also needs to understand that quality control isn’t just about getting things right the first time–it’s about getting paid. I once worked with a manufacturer who had a “stop the presses” approach to rework. When the product came back for any reason, the shop knew that job was first in line to get rebuilt. When clients see effort going into making them happy it helps lessen the pain of dissatisfaction. The extra effort also shortens the period the client is without the product or service they ordered. Both will have a dramatic effect on payment. 4. Assign the right person to look at AR daily. Yes, daily. And surprisingly, it doesn’t have to be the bookkeeper or sales manager or an owner. I worked with a company who had a delivery man who took on the collections role and did a great job. He would go meet customers, talk with them, and collect overdue money. The client at the beginning of this article had a person with an incredible approach to collections. She kept track daily of what money came in and what remained to be collected. She made contact (mostly calls) daily as needed to keep money flowing. The other thing I learned from her was the exact procedure for drawing money out of slow payers. She would call them and just talk. She asked about them

The Real & Hidden Costs of Overdue Receivables

Oppotunity Cost Opportunity cost of management time and energy wasted on dealing with the receivable.

Lost Goodwill Goodwill lost with client and increased likelihood client won’t buy again, and speak negatively of you.

Financing Cost Line of credit interest expense to fund operations during non-payment period.

Cash Shortage Potential of maxing out line of credit limit which creates a cash shortage and additional management stress.

Wage Expenses Wage expense for bookkepper to send out statements and potentially revise invoices.

CFO & Auditor Cost Cost of CFO and year end financial statement auditor analyzing collectability of accounts.

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Owners Week Guide to Buying A Small Busines

and their business and found out how things were going. Eventually (and she took her time) she would bring up their invoice and ask when it would be paid. Invariably, they would say something like, “well we have a customer paying us Thursday and after that, we’ll put a check in the mail.” After hearing a comment like that, most people would let it go and hope the check comes as promised.

company sold a highly custom product, and invariably their clients had at least one unmet expectation when the product was delivered. By taking cash collection out of the equation upfront, it removed the risk of tainting the client relationship by asking for payment in the middle of the rework phase. A related but different approach is to simply shorten invoice due dates.

Not her. She kept meticulous notes and would call on the very day they had said their customer was paying them. If their customer still hadn’t paid, she would call back the next day, simply holding the client to what they said they would do.

This concept comes from Xero, the accounting software provider. By analyzing client invoice data, they’ve found that “invoices with short payment terms are more likely to go past due, but you still get your money sooner than if you give three or four weeks to pay.”

People intrinsically do want to keep their word, and she encouraged that by faithfully reminding them of their commitment. With this incessant follow up, they not only paid their overdue bill but often paid timely in the future to avoid the rigmarole. One key observation on this: You have to find the “way” the client communicates. Some clients work by email, some by phone, some with text messages, etc. Don’t make the mistake of using your company’s preferred method of communication and expecting the client to respond. 5. Rethink early payment terms. If you do steps 1–4 correctly, perhaps you will not need early payment terms. However, in my experience, most successful companies offer a discount if a client pays an invoice within a short time period (typically 10 days). These discounts can have a dramatic impact on days sales in receivables. The client I referenced in the beginning saw their receivables drop 40% within several months of implementing a 2% discount if paid by within 10 days. That gave the checking account a one-time pop of about $400,000. If you do the math, a 1 or 2% discount for payment in 10 days is a very steep fee to pay for having money in your pocket a few days early. However, as we discussed earlier, overdue receivables come with steep costs too, which is why many companies choose to pay the steep fee to avoid them altogether. One client I worked for offered a 3% discount if the client paid in full at the beginning of the project. If it had only been about the time value of money, it would have been a very stupid proposition. But it wasn’t just about the money. This OWNERS WEEK | 19

A word of caution: short due dates without early pay discounts can make you look aggressive and unreasonable, especially in certain industries. As you decide on a due date, consider how you would feel if you received your own invoice. 6. Use trade notes. Often, non-paying customers have cash flow issues. Rather than continuing to “beat a dead horse” by making endless calls or visits, when it gets to that point it often works best to cut over to a trade note (basically a formal loan). I think of one my clients who had a customer seven years ago who owed them $100,000. My client agreed to a payment plan and the owners of the non-paying company (which went out of business) have continued to chip away at the balance to this day. Through small monthly payments, combined with a few bigger pay-downs, the balance is now down around $20,000. If my client had pushed them hard for the whole sum at once or threatened legal action, I’m guessing most of the $100,000 would eventually have been written off. This method was a tool my client in the opening example used to collect several large >90-day receivables. They moved stale balances out of A/R into notes receivables and started collecting moderate monthly payments (often around $1,000 per month) complete with a reasonable interest charge. It took about 3 years to whittle the balances down to $0, but in the end, virtually everything was collected. And by implementing some of Steps 1-5, there were no new stale receivables to take the place of the paid ones. Here are some pointers on setting up trade notes: 1. Always meet in person to discuss and sign the paperwork, if possible. Drive 3 hours if

you have to. 2. Ask the client what monthly payment amount will work. Push them up a little, but not much. They have to be able to actually make the payment . 3. Require auto-withdrawals or preauthorized credit card transactions. The client has already proven they can’t send in a check; remove this roadblock for them. 4. Charge (reasonable) interest. If it is a sticking point, you could annually agree to apply the interest to the principal balance if they faithfully make the payments during the year. Most businesses, though, are fine with a reasonable interest charge. 5. Make sure you leave the meeting with a signed note and SOME MONEY. Even if it’s $25, the deal won’t be real to the client unless they part with hard cash. Very likely they can at least pay $250 or $500, or even a much larger amount depending on the overdue balance and size of the company

Eliminating Overdue Receivables is a Mindset It is quite common for companies to allow receivables to slip through the cracks. In some cases, there is no one who diligently monitors or even truly cares about the receivable balances. If someone does care (usually an owner) they feel (often rightly so) they are the only one who does. Which leads me to the summary point: Everybody in the organization needs to understand and care about account receivable management. It is helpful to remind employees that customers, not the company, write employee paychecks. Each employee must clearly understand the direct line between their actions and timely payment by the customer. Most of the steps to eliminating overdue receivables also align with the steps of running a business well and treating people fairly and respectfully. Diligent implementation of these steps will therefore not only reduce receivables but also put your company in a position of strength moving forward.

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How Family Business Owners Should Bring The Next Generation Into The Company Plan the transition so that your next generation can find their own path in the world and then successfully boomerang back into roles in the family business.

“Go find your passion,’’ Henry directed his children when they reached their late teens and early twenties. “Find your interests outside our family business and pursue them.’’ As inspiring as those words may have been, Henry, the patriarch of a successful automotive parts business, wasn’t simply freeing his children to follow their dreams. He was requiring it. Having watched too many other family businesses bring kids into the company early on and “damage’’ them, in his words, Henry was afraid of doing the same thing with his children, somehow coddling them or making life too easy.

Owners Week Guide to Buying A Small Busines

play in their large, multigenerational family business in their thirties, forties, and beyond. It was as though he had thought through his coaching for only the first half of a football game. In the “second half,” he found that his earlier advice needed to be reversed. He had to find a way for his now older and successful children to be attracted back to the family business — a place they’d bee n explicitly excluded from. That step, it turns out, is much harder and at least as important. Henry knew that family businesses last across generations only if they have engaged owners. Even Henry’s best independent, nonfamily board members lacked the long-term perspective that great owners instinctively have. “I never treat a rental car like one I own,” Henry would say. But even though his children may someday “own’’ the car, it wasn’t yet obvious to Henry how to develop their talents within the business — and how to make sure they all found their highest and best use. “What role can my artist daughter possibly have in our family business?” Henry pondered. “And my sons have a fierce sibling rivalry.” Planning the transition, so that your next generation can find their own path in the world and then successfully boomerang back into roles in the family business, is critical to the future of the family business you’ve worked so hard to build and perpetuate. In our experience advising family businesses, we have found that five elements

He was a big believer that the best development possible is “getting your butt kicked” as you learned the ropes outside your family business. So he watched with pride as each of his children found their own career path — one as a lawyer, one an artist, and the other a successful banker. Henry, however, had never given much thought to the roles his children would OWNERS WEEK | 20

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successfully guide the next generation back into the family business. Here’s how to get it right: Help the next generation find their right roles. Too often, owners focus on only one role for their next generation: the future CEO. But that’s too narrow a view. Multiple roles, beyond the CEO, are essential to effective ownership — roles that cannot be outsourced. They include being on the board, running the family office, running the “owner room’’ (see below), leading the family foundation, and leading the family council.

Owners Week Guide to Buying A Small Busines

Create a next-generation development program. Leading business familie develop programs to help the next generation become both good owners and potential future leaders. In our experience, these programs focus on five key objectives: business ownership skills and competencies, family business principles and practices, knowledge of the family business’s assets, understanding the family history and values, and developing personal leadership competencies. Typically the family’s ownership council would lead this program, drawing on outside experts and nonfamily executives to support the education.

Get the group dynamic right. In our experience, it’s essential to manage how the next-generation owners work together and communicate. As they enter the system, they will carry baggage from childhood, be in different places in their careers, and likely have different relationships with the family business. Set time aside for them to get to know each other again in this new environment and get to know their roles as owners — without you in the room. Have them discuss their interests and the breadth of their life’s commitments (personal, nuclear family, broad family, career, andr ole in family business). Help them find their collective voice. As the next generation eventually become owners, their board of directors will ask them what they as owners want from the business: Growth? Dividends? A sale? Show them that if they individually ask for conflicting goals from the board, their power as owners will dissipate. Appoint a current board member to work with them to find their collective voice as owners. Ask them to discuss their trade-off of five potentially conflicting owner interests: maximizing longterm business value, short-term dividends, philanthropic efforts, family employment, and family harmony.

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Give them room to operate. Top business families work in a mental model of four distinct “rooms’’ — the owner room, the family room, the manager room, and the board room. Make sure all owners understand the rules of each room and how to recognize what room they are in at any given time. Then, over time, challenge them to “furnish’’ each room with people and decision processes that will eventually work best for their generation. That won’t happen overnight — a healthy furnishing’ process may take five to 10

years to get right. When you set up a proper strategy for integrating your adult children into the business, you may be pleasantly surprised by how their experiences outside the business have prepared them to thrive. The goal is not only to help the next generation develop concrete leadership skills, but also to develop psychological ownership of the business. You never know, the artist daughter might just surprise you with her best work yet — as an owner.

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How To Sell A Professional Practice If you’re a professional looking to sell your practice, the best way to locate prospective buyers and make a transition often depends on your time horizon and location.

Owners Week Guide to Buying A Small Busines

If you’re a professional such as a doctor or accountant looking to sell your practice, the best way to locate prospective buyers and make a transition often depends on your time horizon and location. Many people, in anticipation of selling, eventually hire their eventual successor as an associate for a few years to smooth the transition for the doctors and clients. Some sellers also stay on as employees for at least a few months after a sale. Or maybe you want to sell all or part of your client list to someone in the same business to raise some cash or to take your work in a new direction. Before you go looking for buyers, get all your records neatly organized, and prepare a clear breakdown of the financials and client data so prospective buyers can get a handle on the offer. Ideally, your practice should be thriving when you sell it. All too often, professional practice providers scale back their businesses in anticipation of retirement. But that can greatly ding the sales price. Buyers want potential, but they pay for history. A business that has been declining in client numbers won’t fetch top dollar or necessarily appeal to buyers. Getting the practice accurately appraised also is key. Many sellers engage a professional appraiser who understands valuations in their industry. It’s a good idea to review the background and expertise of business appraisers before hiring them.

Most professional practices sell for a multiple of annual earnings or income, but that multiple depends on factors such as the industry, location and other conditions. Another possible benchmark is comparable sales — or recent sales of other similar practices. Such data for private businesses aren’t always easy to come by, but some sites, such as BVMarketData.com, offer subscriptions to databases with business-sales data. How you go about advertising this opportunity to other professionals depends on your industry and how locked in your business is to a particular geographic area. The most likely buyers are often others

working locally in your industry. For example, most dentists or accountants need to sell to other professionals in their immediate area, since most clients won’t travel too far from home for those services. These professionals often do best by directly approaching nearby competitors whom they know to be actively seeking new clients. Try approaching a large practice group that might be open to rapidly expanding its client base or extending its business into a neighboring town or new specialty. To find these people, check local advertisements, Yellow Pages or online directories. Old-fashioned networking through professional business groups can generate leads. You obviously don’t want to sound desperate to sell, but it can make sense have a candid conversation with other professionals in your industry. If geography is less important, consider advertising with national or regional trade groups or through societies and clubs specializing in your industry. Most have online classifieds and newsletters where members can advertise. Another option: Web sites that offer paid classifieds for

small-business owners and people looking to buy businesses, such as BizBuySell.com. If you’re having trouble finding a buyer — or simply don’t want to devote the time and energy to search — consider hiring a broker that specializes in your industry. Business brokers might know potential buyers and can advise you on how to value and market your business. But their services aren’t free. Most brokers charge a commission on the sales price that generally ranges from 8% to 12% of the sale price. Once you’ve found prospective buyer, you can improve your chances of closing the deal by promising to help with the transition. After all, there’s nothing to sell if all your clients flee and find new service providers. Some sellers offer to send clients a letter with a glowing recommendation of the buyer’s practice or give face-toface introductions. You might even consider working within the buyer’s practice for a brief period to transition your clients to the new location and staff.

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How To Choose The Right Way To Cash Out Of Your Business

Owners Week Guide to Buying A Small Busines

are generally protected against prior claims against the business. For example, the previous owners would most likely be responsible if an environmental claim were made against their former property or if an employee hired on their watch filed some sort of lawsuit. Stock purchasers, in contrast, are buying the company itself and thus are exposed to all of its potential problems. This is why most sales of small, closely-held businesses are structured as asset sales. Selling the business to its managers is also a popular option. An owner might go this route when the company has a trusted, entrepreneurial management team that wants to carry on the business. The biggest advantage of this strategy is that the owner doesn’t have to spend time trying to charm a buyer. The trade-off for an easier sale is that the price may be lower than what an outsider would pay.

third party determine the value of the shares, believing that it might mean accepting a lower price than they would get on the open market. Also, the company has to have cash on hand to buy back employee shares when workers leave. This can divert cash from other business uses and can be a real drain if several employees leave in close succession. Owners who want to sell their stake gradually, or who want to take some cash out of the business without giving up control, can recapitalize the business, or change its financial structure using instruments such as stock, preferred stock or debt. For example, suppose there is an outside buyer who’s interested in the business but doesn’t want to buy it outright just yet. The company might issue preferred stock and sell it to the potential buyer. This gives the owner a cash infusion while the buyer has a chance to become familiar with the company’s

Selling a business isn’t simple, but most entrepreneurs have more options than they realize. Taking the wrong approach could have serious financial consequences.

Selling a business isn’t simple, but most entrepreneurs have more options than they realize. Taking the wrong approach could have serious financial consequences for both the entrepreneur and the company. So it pays to know the pros and cons of several ways to cash out and to think carefully about which is the right fit for your business and you. An outright sale is probably the simplest way to exit a business. This approach makes sense when an owner’s family members have no interest in taking it over or when the owner can’t figure out how to take the company to the next level or meet challenges that may have arisen. There are two ways to cash out: An owner can sell the company’s assets outright, or he can sell his stock in the company (or units if it is a limited-liability company). Stock sales tend to benefit the seller, while asset sales are more beneficial to the buyer. Asset buyers are getting the company’s physical equipment, facilities and customers, as well as intangibles such as trademarks and goodwill, and as a result OWNERS WEEK | 23

Another option is to sell the company to its employees through an employee stockownership plan (ESOP). Setting up these plans can be a complex undertaking, but they have their advantages. For example, they’re a way an owner can remain with the company while taking money out of it. And it’s a way to reward employees and provide a long-term incentive for loyalty and hard work. Here’s how it works: The company sets up an independent trust (the ESOP) that buys the owner’s stock at a price set by an independent evaluator. The trust holds the stock for the employees for as long as they work for the company. When an employee leaves or retires, he can sell the stock back to the company at fair market value. Some entrepreneurs don’t like having to let a

operations before taking it over outright. Or if there’s no such buyer and the business has healthy cash flow, the company might take on debt to buy all or a portion of the owner’s stake. While there are many options for business owners whowant to cash out, the best way depends on the nature and health of the business and the owner’s intentions to stay with the company or move on. Understanding all of the options, and getting good advice from experienced business professionals, can make it easier to pursue the route that’s best for all involved.

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Owners Week Guide to Buying A Small Busines

When Mom and Pop Can’t Sell the Farm (or in This Case, the Theme Park) It’s not easy selling a Wild West Town theme park located 60 miles northwest of Chicago, as Larry and Helene Donley have discovered.

The octogenarian couple have run the place for 43 years and are finally ready to retire. But their sons, Randy and Mike, who are in their early 60s and have helped manage it, are keen for other challenges. And the three Donley grandchildren, who grew up playing cowboy games at the 23-acre amusement park, are off living their own lives. It seems quite likely that this quintessential family-owned business will be passed into the hands of an outsider. There is a hitch, however: The elder Donleys don’t want someone to change the property into, say, a concert space, as a potential buyer once suggested. Ideally, they want things to continue in their current Howdy Doody-esque form,

right down to the gold-panning pavilion, the live action Wild West show, and kiddie rides on the 19th-century miniature locomotive. Donley’s Wild West Town has been for sale, off and on, for a few years. The current asking price is $7 million, but Larry Donley has turned away people who didn’t seem willing or likely to preserve it as is. “I don’t believe anyone really interested in this place will tear it down,” he said in an interview on a recent Sunday. Developers have salivated over the property, which comes with a restaurant that has a liquor license and would be perfect, in their minds, for other commercial uses, like a concert stadium or an antique car dealership. They look at Donley’s Wild West Town and envision how quickly it could be razed. And while the senior Donleys know they could easily cash in by ceding to such tempting offers, they are resolute. Randy and Mike Donley say the theme park taps into their father’s inner child, and he seems to agree. “It reminds me of when I was a kid in the 1930s,” Larry Donley said. Such is the difficulty of selling a family heirloom business that no one else in the family really wants to run. Does this frustrate the younger generations? They say no, and insist they are committed to operating the park until they find that elusive buyer. “The park was never our dream,” Randy, the younger son, said of himself and his brother, who auction antique phonographs, jukeboxes and other 20thcentury Americana as their principal OWNERS WEEK | 24

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Owners Week Guide to Buying A Small Busines

occupation. As for their father, however, “He really believes that that person is out there.”

also evolved. “What you’re seeing are changing vacation habits,” Mr. Futrell said.

As with many amusement parks, the bulk of the revenue — some of it from the $17-a-person admission — has to come in between May and the end of October. Mike Donley wouldn’t discuss financial details, but he said the park had earned the family enough to sustain three generations over the decades. Mike and Randy Donley both say it is profitable.

Situated in a farming community with a population of roughly 750, Donley’s Wild West Town has plenty of local competition, from the Six Flags Great America to the north to the Santa’s Village Azoosment Park 22 miles to the south.

Jim Futrell, an amusement park historian, said a park the size of Wild West Town may bring in around $10 million annually, but that wouldn’t include the proceeds from a restaurant on the site run by twin brothers who only recently took it over and from other events held there, including auctions by Randy Donley. Places like Wild West Town are relics of a bygone era, trying to attract children who are more attracted to virtual reality and mobile apps than games of cops and robbers or cowboys and Indians. Similar family-owned theme parks dotted the country in the 1950s, profiting from increasingly prosperous Americans who took their vacations on the road after the opening of the Interstate System of highways. Roadside attractions had certain themes that would have been familiar to children of that era: Western-oriented spots like Frontier Town, which still lives on in Berlin, Md., or Christmas-themed sites like Santa’s Workshop, an amusement park in North Pole, N.Y. (also known as the town of Wilmington, which is about 140 miles north of Albany). Mr. Futrell, a director of the National Amusement Park Historical Association, said that bigger, flashier and more modern theme parks have squeezed out the smaller and more antiquated ones. They have dwindled from a few hundred in number to a few dozen, and those that remain have repositioned themselves by adding thrill rides or other types of attractions. As for the smaller theme parks that no longer exist, in many cases the families that owned them cashed in on their land holdings — at great profit — and closed up shop. The concept of the family road trip ha salso evolved. “What you’re seeing are changing vacation habits,” Mr. Futrell said. Situated in a farming community with a OWNERS WEEK | 25

Robert Kramer, the marketing director at Santa’s Village in East Dundee, Ill., said that operating a small amusement park comes with some modern challenges. Both Wild West Town and Santa’s Village focus on the 2-yearold-to-tween crowd. These days, those children are reluctant to put down their electronic devices for a day of unplugged, old-fashioned fun, he said. The increasingly far-flung nature of organized sports ties up family free time. And a glut of entertainment options, from bowling and paintball to bigger and more extravagant theme parks, also draws away potential customers. Santa’s Village opened in 1959 but closed in 2006, and its original owner is dead. Under new ownership

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Owners Week Guide to Buying A Small Busines

particularly for the Donley grandchildren. “As a child growing up, it was like a fairy tale,” said Shawnah Donley, 29, the daughter of Randy Donley. “It was our backyard, and we were part of what our family did for a living.” She grew up nearby and recalls school field trips to Wild West Town. After college, Ms. Donley got a job in the live action Wild West show, where her work caught the attention of a talent scout. That led to her professional career as a stunt actor, with credits that include the movie “Contagion” and the NBC television series “Chicago Fire.” She now lives in Chicago and also works as a real estate broker. But while she says her generation, which includes a younger brother and a cousin, hopes to see the park continue to operate, the fact that her family is looking to sell it isn’t a surprise. “It’s always something that we thought would happen,” she said. “We have our own interests and futures.”

and management, the park reopened in 2011 and has continued to add attractions, including a $1.5 million roller coaster that opened this year. Constant investment is needed, Mr. Kramer said, because “there are a ton of other options when it comes to family activities.” Parks tied to the Wild West or cowboys have struggled in particular, said Mr. Futrell, the historian, because that theme has lost its appeal with younger audiences. After all, “Bonanza” and “Gunsmoke” are no longer popular primetime television fare. A once family-owned Frontier Town in New York’s Hudson Valley shut down in the late 1990s, its buildings still vacant. Early this year, Gov. Andrew M. Cuomo of New York proposed a $32 million redevelopment of the 85-acre site, including a visitor information center, a campground, facilities for shows and festivals, and space for historic exhibits about Adirondack Park. Ponderosa Ranch, a theme park that operated on Lake Tahoe, Nev., set of “Bonanza,” shut down over a decade ago. Donley’s Wild West Town is still the site of many happy childhood memories —

The Donleys have always been collectors of trinkets and oddities. Larry Donley acquired the first seven acres of the property in 1972 so he could build a storehouse for the antique phonographs and other things he had begun collecting decades earlier. “I didn’t really know what stuff I had, and I still had too much,” he said. Back then, he owned a gas and service station in Berwyn, Ill., around 50 miles closer to Chicago, where he raised his family. But he would eventually sell that business. Randy and Mike Donley grew up watching their father collect these pieces of Americana and got into the game themselves, snapping up antique guns and military memorabilia and assorted pieces of American history like toys, lamps, telephones, phonographs, music boxes, telegraph equipment and war souvenirs. The first building on the park’s site became a museum and showcase for these items. Despite being right off Route 20 and barely three miles from the Illinois Railway Museum, visitor traffic was slow for the first couple of years. It wasn’t meant to be a theme park at all until Larry Donley built the town’s gold mine and gold-panning attraction to occupy the children of adults who visited the museum, which opened in 1974. “It all kind of evolved,” Mike Donley recalled.

In addition to the museum and gold mine, the site has an operating antique train, a gentle roller coaster (the “Runaway Mine Cart”), a carousel and a water ride. There are also firing and archery ranges, a tomahawk throw and slingshot gallery. Employees dressed as cowboys give roping lessons and gun-spinning exhibitions. The town jail includes authentic 19th-century cells acquired from the jail in the town of Union. Visitors can coax the town marshal to arrest people. During the height of the season, the site employs about 100 people, many of them students at the local high schools. It draws visitors from a 60-mile radius in northern Illinois, attracting school and day care groups, church groups and camp attendees. Sid Schroepfer, who will be a high school senior in the fall, demonstrated his lassotwirling skills in the park one recent Sunday. This is a new job for him, and he said he liked it because he “gets to play cowboy all day.” “We are selling an experience for parents and grandparents and children,” Mike Donley said. “Everything is handson.” The park has given birth to some careers in show business. In addition to Shawnah Donley, there is Joey Dillon, a gun spinner who now coaches actors on gun handling for films and television. He credits his two seasons in the cast at Donley’s for starting his career. He grew up in rural California and developed an interest in gun spinning from watching old Westerns, and when he moved to Chicago to pursue a career in comedy, he fell into a job at Donley’s. “I look back on Donley’s as kind of my fun dorm days with a bunch of college-aged kids, hanging out with them at night and playing pranks backstage,” Mr. Dillon said. He is still in touch with some of his former colleagues, some 20 years later. Mr. Dillon wasn’t aware the property was up for sale. Taylor Fryza, who directs and acts in the park’s live shows, remembered visiting the town as a girl. “When you’re a little kid, it’s like stepping into a different world,” she said. Eventually she went to acting school in New York and returned home. She said she was not worried about the place being for sale. “You just put your best foot forward and do as many shows as you can,” she said.

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When it comes to the sale effort, the Donleys have displayed a little showmanship of their own. In what the family admits was largely a publicity stunt, they put the Wild West Town up for sale in last year’s Christmas catalog of Hammacher Schlemmer, where it stood out among the massage wands, radiocontrolled toys and exercise gadgets. Many years earlier — in 2003 — they listed it on eBay for $12 million, though they didn’t get many serious offers then, either. And so the operation chugs along, in nostalgia mode for some of its owners. “As much as we enjoyed it, as much as we loved it, it was hard work seven days a week,” Mike Donley said, adding that the grandchildren “didn’t see that as a future for them.” Larry and Helene Donley live in a house right next to the amusement park and work on the site every day. The family jokes they are likely to ask the next owners for a job. The brothers say they aren’t forcing a sale. “If they want to find another proprietor during their lifetimes, I’d rather let them do that,” Mike Donley said of his parents. “It’s another challenge for them.”

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Owners Week Guide to Buying A Small Busines

Chapter 1 Made By Hand

Owners Week Guide to Buying A Small Busines

“Every business owner should have an exit strategy in place,” Kose said. “Whether it’s three years or 20 years down the line. It could be moving (the business) to your kids or a junior partner, or it may be an outright sale.”

McAdoo sought valuation help from Chris Miller at 3 Roots Capital, which Miller said is “a good starting point,” in planning but generally doesn’t take into account cultural aspects that can make or break an acquisition.

What’s in an exit strategy?

“How does the product or service complement what we already do?” Miller said. “Is there a synergy? ... Is there raw talent the company wants to acquire?”

The time to put together an exit strategy is when you least expect to need it - when passion is flowing, Kose said. “One factor that drives growth is passion, and when you’re able to convey that to the team, the clients, customer base, they feed off that,” he said. “A tired, burnt out owner, people can see that and don’t want to be affiliated. Before you get to that point you need an exit strategy.” Build your strategy:

How To Build Your Business Exit Strategy The world of running a business is everchanging, with questions and new opportunities always arising. The opportunity to sell a business might be one that requires a little more analysis.

The world of running a business is everchanging, with questions and new opportunities always arising. The opportunity to sell a business might be one that requires a little more analysis. The analysis of this decision should even begin far before the opportunity presents itself, Doug Kose, president of Transworld Business Advisors, said.

Have financial records in order to reduce time spent determining past finances when it’s time to sell. Train key staff so the business can run without you. Nothing should fall apart when you walk out the door. Reduce concentrations. If you lose one or two accounts, it should not cripple your business. Get help with the valuation process. As an owner, you might not have an accurate picture of what your business is worth. Designsensory buys Best Behavior Creative Club Chris McAdoo, who founded BestBehavior Creative Club in 2009, can attest to the countless considerations that go into selling a company. He sold Best Behavior to Designsensory marketing and advertising agency in May, taking on a creative director role. McAdoo and Designsensory executive creative director Joseph Nother discussed a potential acquisition for more than a year before a decision was made.

In Nother and McAdoo’s case, the answer was yes across the board. “I have a particular way I like to do things, a particular way I like to deal with people,” McAdoo said. “As an entrepreneur, you’re always looking to grow in the right way, and I’ve always admired Designsensory. We shared a love for craft, a love for people and a culture that is a very positively driven culture.” McAdoo brought 15-20 clients to Designsensory, giving the firm approximately 40-50 active accounts. McAdoo said introducing his clients to a larger team will create space for bigger projects. “I wanted to be able to punch up a weight class,” McAdoo said. “I wasn’t ready to sell the company and go do something else. I was ready to push myself further in my artistic and entrepreneurial journey to work in those bigger spaces with a bigger team.” You sold your company. Now what? The average business takes eight to nine months to sell, Kose said. It’s important to have a plan for when it sells, to avoid a freetime overload. “(The plan could be) to take the funds and start another business,” Kose said. “Or maybe it’s to go to the beach. “Being in control of your own destiny - a lot of people are seeing that value. More people than ever before work for themselves. It’s a great time to be looking to sell your business.” OWNERS WEEK | 28

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Owners Week Guide to Buying A Small Busines

Discuss the owner’s tolerance for investment risk pre- and post-exit.

FINANCIAL ADVISOR FEES

Role Of The Financial Advisor In The Creation Of A Successful Exit Plan

Step Three Preserving, Protecting, and Promoting Value Discuss, design, and fund nonqualified employee benefits, such as deferred-compensation plans.

Assets under management 1% for a traditional in-person financial advisor.

“I’d like to leave/sell my business. Can you help me?” How you answer this question determines wheter you will represent your client and his or her company in the future.

Discuss, design, and fund qualified retirement plans, such as defined benefit plans.

Hourly fee $200 to $400

As a financial-planning professional, you have three primary responsibilities when working with your business-owner clients: • Inform and educate the owner about the Exit Planning Process. • Facilitate the Exit Planning Process by coordinating your activities with those of the owner and his or her other advisors. • Provide the services necessary to ensure the owner’s successful transition from the business. Step One Setting Exit Objectives Explain to the owner the need to quantify Exit Objectives. Perform a financial-needs analysis to determine retirement income needs and wants. Review and offer advice regarding personal investment strategies that are aligned with the Exit Plan. Step Two Determining Value And Price Determine the current amount of the owner’s investment assets. Determine the level of income needed (as well as the level of income wanted) after the owner’s exit. Prepare a financial plan for the owner and his or her spouse. OWNERS WEEK | 29

Step Four Converting Business Value Cash: Sale to A Third Party Determine whether the owner’s financial needs and other financially driven Exit Objectives can be met by expected net sale proceeds. Step Five Transferring the Business to Insiders: Children, Key Employees, or Co-Owners Review the owner’s financialindependence exit goal in light of the proposed transfer-of-ownership design to ensure that the owner’s goal of financial independence is attained. Step Six Contingency Planning for the Business Determine the amount of proceeds available to the owner’s surviving spouse if continuity plans are exercised. Determine whether additional capital and income are needed: Will there be enough income for the family based on available assets and the owner’s financialindependence goal for the family? Step Seven Wealth Preservation Planning Review the owner’s estate plan at the outset of the Exit Planning Process to ensure consistency with Exit Objectives. Determine the amount of capital needed for the owner’s surviving family to ensure their financial independence.

Flat annual fee (retainer) $2,000 to $7,500

Per-plan fee $1,000 to $3,000

Chapter 1 Made By Hand

Role Of The CPA In The Creation Of A Successful Exit Plan As a CPA and member of the owner’s Exit Planning team, you have three primary responsibilities and opportunities: • Inform and educate the owner about your role in the Exit Planning Process. • Facilitate the Exit Planning Process by coordinating your activities with those of the owner and his or her other advisors. • Provide services necessary to ensure the owner’s successful transition from the business. Because comprehensive Exit Planning requires financial analysis, modeling, valuation, estate tax analysis, tax planning, and counseling regarding the best way to promote business value and exit one’s business, your role can be significant. The tools and techniques frequently used by CPAs in their role as a member of the Exit Planning Advisor Team are listed below. Step One Setting Exit Objectives Advise the owner in setting Exit Objectives. Provide the owner and other advisors with information regarding the consistency and practicality of the desired Exit Planning Objectives. Analyze the owner’s financial goals and assumptions. Step Two Determining Value And Price Provide periodic and ongoing valuation services. Provide cash-flow projections

Owners Week Guide to Buying A Small Busines

Discuss methods to minimize valuation, as appropriate.

the tax ramifications of a sale to insiders.

Step Three Preserving, Protecting, and Promoting Value Perform the necessary tax planning to minimize the owner’s tax consequences upon exit.

Counsel the owner on cash flow– sensitive and tax-efficient transfer designs.

Discuss/consider creating multiple entities, as appropriate. Promote value via the following: The creation of sound financial information systems (including audits or reviewed statements if the owner’s goal is to sell to a third party). The creation of a financial model to measure and project growth. Reassessing debt management and future financing needs. Reassessing capital needs (from the perspective of the ultimate exit). Consulting services you now provide to owner-clients. Step Four Converting Business Value Cash: Sale to A Third Party Provide pre-sale tax and financial planning, beginning several years before the anticipated exit. Provide extensive financial and tax analysis/advice on the consequences of a sale. Prepare a 3-year audit, reviewed statements, or other financial information as needed by the buyer. Review and negotiate the owner’s financial representations and warranties. Step Five Transferring the Business to Insiders: Children, Key Employees, or Co-Owners Provide cash-flow modeling and ongoing (annual) valuation. Analyze

Periodic planning and assessment meetings with the owner and other advisors. Step Six Contingency Planning for the Business Provide a valuation formula for the BuySell and similar agreements. Perform a valuation for the Buy-Sell and similar agreements (Phantom Stock Plans, etc.). Analyze anticipated cash needs for the business should the owner die. (Included in this analysis: debt repayment, capitalization, and cash required to keep employees.) Step Seven Wealth Preservation Planning Review proposed estate plan and income-, gift-, and estate-tax consequences. Suggest income tax–minimization strategies. Project income-tax consequences of various possible asset transfers to children and others. Analyze both pre- and post-ownership transitions.

CPA FEES Most accounting firms charge by the hour. None in our network require a retainer. Flat annual fee (retainer) N/A Hourly fee $150 to $400 Per-plan fee $5,000 to $25,000 OWNERS WEEK | 30

Chapter 1 Made By Hand

Role Of The CPA In The Creation Of A Successful Exit Plan As an insurance professional and member of the owner’s Exit Planning team, you have three primary responsibilities when working with your business-owner clients: • Inform and educate the owner about the Exit Planning Process. • Facilitate the Exit Planning Process by coordinating your activities with those of the owner and his or her other advisors. • Provide the services necessary to ensure the owner’s successful transition from the business. Step One Setting Exit Objectives Establish income needs for the owner and his or her family during the owner’s lifetime and upon the owner’s death or permanent incapacitation. Step Two Determining Value And Price Determine the business’ value for estate and gifting purposes. Based on the current income of the owner and his or her family, determine whether an income deficiency exists should the owner die or become incapacitated now. Step Three Preserving, Protecting, and Promoting Value Educate the owner about key-employee retention/motivation techniques. Determine the appropriateness of a retirement plan—in particular, a defined benefit plan—to provide for the owner’s future income needs post-exit. Design and fund Non-Qualified Deferred Compensation plans for key employees and the owner. Consider key-person insurance on the owner’s life and the lives of key employees. OWNERS WEEK | 31

Owners Week Guide to Buying A Small Busines

Step Four Converting Business Value Cash: Sale to A Third Party Introduce the owner to the appropriate transaction advisor (investment banker or business broker).

Does the owner’s family achieve its financial security Exit Objective if the owner dies today?

Determine whether the owner’s financial needs/Exit Objectives can be met by expected net sale proceeds.

Make modifications to and fund the estate plan as determined above. Engage the owner in ongoing estate planning activities that meet other estate planning objectives, such as transferring wealth to family members now.

Step Five Transferring the Business to Insiders: Children, Key Employees, or Co-Owners Review the owner’s financial Exit Objectives—specifically, the impact of using the lowest defensible value when transferring the business to insiders — with the owner’s income needs at the time of death.

Review estate-tax issues in light of Step Two valuation ranges.

In light of realistic business value, fund for payment of estate taxes

Analyze the need for life insurance to replace lost income if the owner dies before the inside transfer is completed. Provide key-person insurance on the lives of insiders who ar e acquiring the business. Design and fund a Buy-Sell Agreement between the existing owner and new (insider) owners. Step Six Contingency Planning for the Business Review the existing Buy-Sell for consistency with the Exit Plan. Suggest modifications as necessary. Sole owners: Explain the need for continuity plans and Stay Bonus Plans. Co-owners: Discuss the need for business-continuity planning. Coordinate continuity planning with estate planning. Step Seven Wealth Preservation Planning Review the existing estate plan at the outset of the Exit Planning Process to ensure consistency with Exit Objectives and existing resources. Discuss the following with the owner and advisors:

INSURANCE PROFESSIONAL FEE Most popular among business owners General Liability Insurance With $1 - $2 million of protection.

Is ownership under the existing estate plan consistent with the owner’s Exit Planning Objectives?

Expect to pay around $1283 per year.

Does the estate plan need to be modified to meet business-continuity issues addressed in Step Six?

Additional Fees Broker will expect between 2% and 8% of premiums

Chapter 1 Made By Hand

Role Of The Attorney In The Creation Of A Successful Exit Plan As an attorney and member of the owner’s Exit Planning team, you have three primary responsibilities and opportunities:

Owners Week Guide to Buying A Small Busines

to ownership.

Negotiation of sale of business.

Step Two Determining Value And Price Support the need for a professional determination of business cash flow and value, as well as personal financial planning

Preparation and review of all transaction documents.

Step Three Preserving, Protecting, and Promoting Value Preserve Value: Conduct a fiscal year– end planning meeting with all Advisor Team members present. Review entity status (C vs. S). Determine the applicability of a Charitable Remainder Trust. Determine the applicability of an ESOP. Discuss the use of lowest defensible value for ownership transfers to insiders. Protect Value: Conduct fi scal year– end legal audit. Discuss entity protection and review existing entity. Discuss and create, as necessary, asset-protection tools. Discuss covenants not to compete and non-solicitation agreem ents with key employees. Discuss and review removal of personal guarantees (and of personal assets as collateral for business debt). Discuss and use lowest defensible value in all business-planning instruments.

• Inform and educate the owner about your role in the Exit Planning Process. • Facilitate the Exit Planning Process by working with the owner’s Exit Planning Advisor to coordinate your activities with those of the owner and his or her other advisors. • Provide services necessary to ensure the owner’s successful transition from the business. Step One Setting Exit Objectives Meet with the owner regarding Exit Planning Objectives. Review existing legal documents related

Step Five Transferring the Business to Insiders: Children, Key Employees, or Co-Owners Participate in creating a written plan to transfer company to insiders. Draft documents affecting the transfer (purchase agreement, notes, security instruments, employment, and buyback agreements). Draft documents providing incentives to key employees not receiving ownership. Design and draft Buy-Sell agreement among (new) owners. Step Six Contingency Planning for the Business Prepare Buy-Sell agreement. Prepare Stay Bonus agreement. Step Seven Wealth Preservation Planning Review and revise owner’s estate plan to reflect Exit Goals. Discuss and incorporate family business–transfer considerations and wishes into owner’s planning. Create related entities to be partly owned by children as ap propriate.

Discuss and create multiple entities for liability protection.

Discuss and design charitable income and estate tax–planning techniques and tools.In light of realistic business value, fund for payment of estate taxes.

Promote Value: Implement Value Drivers and create, as appropriate, the following types of documents and plans:

ATTORNEY FEES

Incentive-based plan to motivate and keep key employees. Non-Qualified Deferred Compensation plan. Equity-based, stock-bonus and stockoption plans, as well as buyback agreements. Step Four Converting Business Value Cash: Sale to A Third Party Tax analysis necessary for owner’s sale of company. Due diligence required for owner’s sale of company.

The cost for an exit lawyer will depend on can range from $150 per hour for junior lawyers to over $1,000 per hour for senior partners at large firms in major cities. Hourly fee $150 to $1,000 Per-plan fee $5,000 to $25,000

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