Capacity

Old school bank training – The 3 C’s of Credit:

Character – Show past history of meeting obligations of all kinds

Capacity – Demonstrate capability of business under new owner to throw off sufficient cash flow to service the debt.

Capital or Collateral – Fall back position for lender if first two C’s do not materialize

 

Capacity – Demonstrate capability of business under new owner to throw off sufficient cash flow to service the debt.

Are you doing annual budgets of revenue and expenses? How long have you been doing them? Have you been meeting them? If your financial system is a historical document prepared only for purposes of filing your tax return, now is the time to start creating a track record of meeting profit objectives that were set in advance. Don’t try to get too detailed with the first one. It will ugly and likely full of gross assumptions and rough estimates. Only in the second and third years will you be able to fine tune this process into a reliable business planning tool. Add additional detail and sophistication each time it is redone.  Make sure you are tracking separately any crucial expense lines.

Revenue projections should not be taken verbatim from the sales staff. Let them set their own goals first and then corroborate that with outside analytics. If you are fortunate to be in an industry where a trade group or a quasi-governmental agency makes long-term trend forecasts, by all means take advantage of that. It doesn’t take a rocket scientist statistician to look backward and find correlation matchups.

Once you are comfortable with detailed annual budgets, start doing summary 5-year and 10-year projections. Spend the largest part of your time here validating and second-guessing your assumptions about market share, pricing strategy, competitive changes……  This is an excellent place to do a thorough review of your customer base to check for out of balance concentration of revenue in a few accounts. Balance is key, especially if the departing management has been the handler for the large accounts.

Finally, do a modification of your 5-year projection (Let’s call it a pro forma) where you adjust status quo to reflect conditions under the new owner. If you are serving as sales manager, how is that function going to be replaced? If you are counting on the new owner filling that role you will limit the marketability of the company to a sub-set of the potential buyers available. Do you look at contract position or employed? Will one of your sales staff be able to be promoted? This is just one example of the type of analysis that needs to get done. Get help. It will be worth the effort.

Jim Peters
Peterspective
(317) 372-2304

 

Character

Old school bank training – The 3 C’s of Credit:

Character – Show past history of meeting obligations of all kinds
Capacity – Demonstrate capability of business under new owner to throw off sufficient cash flow to service the debt.
Capital or Collateral – Fall back position for lender if first two C’s do not materialize

Character – Show past history of meeting obligations of all kinds
Do you know what your credit report says about your character? It is worth the cost to find out. It may take several years to remedy any shortcomings you might find.

Mend fences. Make sure there are no lingering disputes or disagreements with vendors, past or present, that may derail future plans. Reach out personally if necessary; don’t “delegate” this to the purchasing agent.

Get with HR and discuss all former employees from the past several years to uncover any potential disgruntlement.  Are you routinely doing exit interviews with all exiting employees? Do you do that personally? If not yourself, is it handled by a trusted (trusted by the employee)  confidential consultant?

Get your best techno-geek and have them do a thorough online search for social media posts, DIS-board postings. Check out industry forums for reference to your company and its dealings.

Bankers don’t like surprises. And trust me, you won’t like these kind of surprises either if they chase away a ready buyer with money in hand.

Jim Peters
Peterspective
(317) 372-2304

 

How Will You Pay Those Green Fees?

How?                                  Will the transfer be funded

The answer to that depends upon several other factors:

How involved (at risk) to you want to be in the future direction of the enterprise?

Will the transfer be to family members or outside?

Do you have other funds to golf and travel with?

What is the health condition for you and your spouse?

Assuming you want out completely and have positioned the other components of operations in such a way that the new owner will be comfortable releasing you from any contingency, the preparation centers around the requirements for the financial institution that is going to fund the liquidation. This preparation may take several years depending upon your current state of affairs.

Old school bank training – The 3 C’s of Credit:

Character – Show past history of meeting obligations of all kinds

Capacity – Demonstrate capability of the business under a new owner to throw off sufficient   cash flow to service the debt.

Capital or Collateral – Fall back position for lender if the first two C’s do not materialize

Each of these will be covered in following articles.

 

Jim Peters
Peterspective
(317) 372-2304

Why Did You Start?

Why?             Did you start this business

Did you only want to make a living until you retired? If so, what were you going to live on during retirement? How much do you have set aside for that retirement so far, separate from your business?

If you started this business in order to provide for your living expenses through retirement, how much will it take for you to enjoy that retirement? What is that enjoyment going to cost in today’s dollars? What are you doing now to insure that your business can be sold for that amount? Do you know what a prospective buyer will need to see demonstrated in your business? Do you know what the financier will want to see when the time comes?

Was your vision to leave behind a legacy that was bigger than yourself? Did you establish the proper balance and boundaries when your children were small to insure the children don’t hate their parents first love: the business? Have you taken steps to convey not just the finances and operational knowledge but the vision and passion?

Stephen Covey’s second habit is “Begin with the end in mind.” Did you? If not you can start that process now. Better late than never.

Jim Peters
Peterspective
(317) 372-2304

Show Me the Money

Where?           Will you find the next owner

Was / is your vision to have your children take ownership and manage the business you founded?

If you are still at the start up phase and have children who may some day be candidates, make certain that you establish appropriate balance between business and family. Far too many founders started down the ownership road so their children would have the benefit of having a successful business of their own, only to find out that they sacrificed so much of their own time to the business that those children want nothing to do with it. Then get the children involved in small ways early on; don’t make it slave labor but enjoyable time with you. Gradually expose them to all aspects of the operation and let their natural skills lead them into areas of strength. Don’t commit anything too early; this is a major issue that takes considerable thought. And don’t force them into a commitment that they may make only because you are THE PARENT.

Transferring knowledge of the operational, financial and marketing aspects of the business is no assurance of success. Your offspring must sense your passion for the business and catch that if they are going to get from it what you wanted for them.

Are you planning on selling to a third party to fund your retirement plans? (See previous post) The economic reality of the past 5 years is this – the younger people who might have been buyers have not been able to accumulate the funds necessary to do that. The next 5 to 10 years are going to be a buyer’s market. Those businesses that do get sold will be the ones that have the best package of promised success. Is your business one of those?

Jim Peters
Peterspective
(317) 372-2304

Golf – St. Andrew’s or public course?

When?               Are you planning to retire

Stephen Covey in The 7 Habits  gives as Habit 2: Begin with the End in Mind.

We are coached by our investment advisors to have an exit strategy at the time we buy into a particular investment vehicle.

So why do fewer than one in eight family business owners have a management succession plan in place, especially in light of the fact that 65% of these owners are a part of the boomer generation?

What’s your next passion?

            Golf?                In Scotland?
           Grocery shopping with your spouse? (That’s likely NOT their dream!)
             ???

What has to happen at the business?
What interrupts your vacation? When did you take your last vacation?
How critical was WiFi at the hotel?
What mess did you have to clean up when you came back?
How extensively is your spouse involved in daily operations of the business?
Are you the peacemaker among the siblings employed in the company?
Have you transferred the vision and passion as well as the ground rules?
Is the “Secret Recipe” known by someone other than you?

Jim Peters
Peterspective
(317) 372-2304

 

What Makes You Competitive?

What? Makes your business competitive

Pop quiz. If you answered “quality products and great customer service” you get an “F” for the course. “Best value” might get you a “D-“ if I am feeling generous.

Have you asked your employees why the company is successful? If you choose to, that survey has to be a confidential survey of production people, not a sales meeting poll.

Have you asked your customers? That should also be done by someone other than your sales staff. Consider a focus group, perhaps at a trade show where you have a booth.

Have you asked the customers of your competitors? There are creative ways to find them and get their opinion.

As Dr. Phil says, “Let’s get real and honest.” ARE you competitive? Have you done any research comparing your sales growth to the industry as a whole? How are your margins? Maybe you are only maintaining sales by underpricing your product.

What are you designing for tomorrow’s sale? Do you watch your competition and follow their lead or do you analyze the needs of your customers and prospects and respond appropriately? Either might be acceptable in certain circumstances.

Quality of earnings and sustainability of revenue stream are major concerns of both buyers and those funding the buy out when it comes time to sell your business. Be prepared with good answers in order to get top dollar.

Jim Peters
Peterspective
(317) 372-2304

Who Matters?

Who? Is critical to your success

I challenge you to track everything you do that is important to your business for one week. Then write down the name of the person who would have done that were you not there.

Do you have labor agreements? Who makes those work – both on your staff and at the union hall? Write down the names.

Are your products price-sensitive? Who does your purchasing? Who are your major vendor reps? Write down those names.

What was the latest major change at your company? Who was the Instigator? Who was the Implementer? Who was the Enabler? Write down those names.

I get very anxious when _____________ calls in sick. They haven’t been able to take a real vacation for years. Fill in the blank.

Who’s responsible for maintaining the relationship with your largest customer? Write down the name.

Who would do the most damage if they went to the competition? Write down the name.

Who have you thrown money at each year for fear they might leave? Write down the name.

All of these people are critical to the continued success of your business. What can you do to make sure they would continue with the company under new ownership? Hint: Money alone is not the correct answer.

Jim Peters
Peterspective
(317) 372-2304

BCP – Say What?!?

The next CEO of your company should not be selected at the funeral parlor.

Have you asked these questions? If so, are you comfortable that you received candid answers?

Who?                                       Is critical to your success
What?                                      Makes your business competitive
When?                                      Are you planning to retire
Where?                                     Will you find the next owner
Why?                                       Did you start this business
How?                                       Will the transfer be funded

Two-thirds of family businesses in the United States are owned by the Boomer generation. They account for nearly three-fourths of all net new jobs created over the past 10 years. Only one in eight has begun the planning process to assure continued success for their business under new leadership.

This is not new, nor is it unique to this country. A few selected sayings:
Padre bodeguero, hijo caballero, nieto pordiosero. (Father merchant, son gentleman, grandson beggar.)
In China, Fu bu guo san dai. (Wealth never survives three generations.)
In Italy, Dalle stalle, alle stele, alle stalle. (From the stables to the stars and back to the stables.)

In the United States, only 15% of family businesses survive to the third generation.

Is that what you had in mind when you founded this enterprise or did you intend to create something bigger than yourself, a legacy for your family?

What’s holding you back? You can create and/or protect your legacy today.

Jim Peters

Peterspective

(317) 372-2304

Engage Your Prophet of Doom

Can Do attitude

Glass half full mentality

Look for solutions, not for problems
And a new one for me: “Stop being afraid of what could go wrong and focus on what could go right.”
These are all good things to look for in your sales, marketing and customer service people. But if you have picked your IT Manager because they understand social media marketing you have a train wreck coming your way.

To do contingency planning right, you need to seek out and embrace the person whose favorite phrase is, “We’re all going to die!” – your very own Prophet of Doom. This person will be easy to find. They are sitting alone in the lunch room, with lots of napkins. They will be the “but” in the brainstorming session. They will volunteer to be the designated driver on Thirsty Thursday. They will check out the current passengers before boarding the elevator.

Approach your prophet of doom carefully. You dare not encourage them too much or your business will grind to a halt. Focus their energy in those projects where you absolutely, positively have to get it right the first time.  The last few months’ news headlines have commonly contained multi-billion dollar horror stories where the CEO is likely now wishing they had sought out their prophet of doom. Those giants will likely survive that oversight – could your family business survive the same   mis-step?

Jim Peters

Peterspective

(317) 372-2304